The 1st April has been and gone so all eligible businesses must now comply with the final phase of MTD for VAT by implementing digital links from their source data through to the submission of the return. In practice, this means the soft landing period comes to an end from the day before your next VAT return is due. At that point, you can no longer claim to have made a conceivable effort to comply: you must have done so successfully.
Compliant is not always correct
At this point, many businesses will now be feeling secure in the knowledge that they’ve put the necessary links in place, have eradicated any manual transposition, and have met the compliance criteria. What may not have occurred to them is that being compliant is not necessarily synonymous with being correct. It’s perfectly possible to have a digitally linked compliant VAT process that still contains errors, leading to the submission of an inaccurate return.
To reduce this risk, you need to have the capability to error check your digitally linked process; some means of flagging potential anomalies for investigation. A provision for these kind of “nudges and prompts” was originally envisaged in early proposals for MTD software but were dropped along the way. But there are solutions out there that provide this type of capability in the form of automated error correction. This helps to reduce the time dedicated to preparing and reviewing data as well as ensuring your return is right first time.
Digital Audit trail
In the event that HMRC does query your return, you’ll need to be able to track back through your digitally linked process, potentially all the way to the transaction layer. Once again, a digitally linked process won’t necessarily give you this capability. You could, for instance, have a process where you perform certain calculations outside of the process which are then put into the return. This is perfectly legitimate and still makes you compliant but it does make it very difficult to track any errors.
Ideally, you would want to have the entire process digitally linked but also to have a mechanism that time-stamps your calculations. This digital audit trail then enables you to not only submit the result but to ‘prove your workings’ so that in the event of an audit, you have the evidence to hand that shows when and how a calculation was made.
The need to prove such diligence is likely to increase given a number of factors. Firstly, HMRC will be under pressure to improve its compliance yield given the high national debt incurred from the pandemic. The government is taking a cautious approach to any tax rises in the absence of which the focus will be on decreasing the tax gap.
If there was ever any doubt that this will be the modus operandi for HMRC in the near future, this was quashed by Chancellor Rishi Sunak restating in the last budget that HMRC will have a “Taskforce of 1000 investigators as well as new measures and new investment in HMRC to clamp down on tax avoidance and evasion”. So we can almost certainly expect a crackdown on compliance. “Failure to take reasonable care” is the top contributor to the tax gap and so there may well be some obligation on the business to prove it has used some form of due diligence and that can only be achieved through the use of a digital audit trail.
Secondly, HMRC is clearly committed to its ten year plan for the reform of the tax administration system, of which MTD for VAT is just a part. At the heart of the government’s digital strategy is real-time information (RTI) which will “enable taxpayers to have a more up-to-date understanding of, and certainty over their tax position and remove opportunities for error; ensuring the right tax is paid” but it will also allow HMRC to make targeted interventions much earlier in the process or before losses occur. This is significant because it suggests we can expect to see RTI used as a magnifying glass with which to more regularly scrutinise the VAT process. Tax teams will therefore need to be able to readily draw upon the data needed to answer any resulting queries.
In response to these drivers, it’s worth considering the viability of your own digital tax strategy. For instance, how will you increase accuracy and efficiency? Make RTI work for you? Or accommodate the move to a single digital account as proposed under the ten-year plan?
Using an MTD compliance platform can help you do all of these. In addition to providing you with the error checking and digital audit trail capabilities outlined above, automation can also reduce workloads and improve efficiency. For example, by including complex calculations such as group consolidation and partial exemption in the digitally linked process, you can reduce the propensity for error associated with spreadsheet-based processes,
You can also harness RTI in the form of tax data analytics that provide real-time insights. These allow the tax team to interrogate and use data to make period-on-period comparisons, for instance, or to predict future liabilities. Such information would usually be locked-in until the return had been filed but with tax data analytics these can be accessed at any time during the process. Analytics can also be used to identify upside tax claims and reliefs that may well have been missed, reducing the overall tax liability.
Finally, a compliance platform can pave the way for digitalisation of the other taxes. It’s likely that some of the same principals, such as digital linking, will be applied to the other regimes when they are digitalised during the next five years. Having a single solution in place that can cater for these taxes means the business will be in a better position to more easily interact with HMRC’s single digital tax account.
To find out more on how a digital compliance platform such as our AlphaVAT platform, can help provide you with a more accurate, efficient and resilient MTD process, please arrange for a one-to-one technical consultation or contact us at firstname.lastname@example.org or phone 01784 777 700.