In the second part of this six part series, in conjunction with Tax Journal magazine, we look at how you can pre-test the Making Tax Digital for VAT submission process before committing to the pilot thereby enabling the business to avoid reporting errors and familiarise the finance team with the process.
The Making Tax Digital for VAT (MTDfV) deadline is looming. In mid-January, HMRC opened up the MTDfV pilot to those businesses required to meet the April 2019 deadline, and futher planned updates will open the pilot to the majority of deferred customers later this month. MTD signals the start of the transition to digital tax but numerous delays and amendments have caused some businesses to question when and how they should commit. What should they be doing to prepare the business? Is it better to join the pilot now or wait until the mandated deadline? And how can they mitigate any risk of non-compliance?
First of all, it’s worth recapping the roadmap:
- Timeline: The majority of businesses exceeding the £85,000 VAT threshold need to comply from 1 April 2019 (a six month deferral applies to certain complex businesses)
- Requirements: The business must keep its prescribed VAT records digitally, must retain them for 6-10 years, and the return must be prepared from the digital records and submitted using recognised third party software
- Digital links: There must be a digital journey from record to submission, with minimum manual calculation/amendments allowed for tax adjustments such as partial exemption
- Soft landing The digital links from the digital records to the VAT calculation software/spreadsheet are subject to a 12 month soft landing period
- Penalties: New penalty systems for late filing and late payment come into effect in April. Where businesses have made reasonable efforts to comply with MTD the late filing penalty will be subject to a soft landing. It’s important to note the digital record keeping is not.
The late filing penalty system will become a points-based system. When a threshold of four points (representing four compliance failures) is reached, a penalty will be charged for each late submission. The clock resets once the business has made four compliant submissions. Penalties for late payments are charged at 2.5 percent after 15 days, doubling to 5 percent after 30 days, with daily penalties charged thereafter.
Given the complexity of the changes and the impact of any failure to comply, businesses need to do their due diligence today by road testing their processes. This involves evaluating where there are gaps and determining where processes or systems need to be changed and doing this ground work now will help ensure a smooth transition.
So should businesses sign up during the pilot to identify these weak elements? Not necessarily because once the business signs up there is no going back. Instead, look to implement a solution ahead of mandation to allow time for change management on the new systems and processes. If possible, use a simulation environment within the MTD software to replicate the look and feel of uploading return data and performing the submission process. Within the safety of this simulation environment, the business can then familiarise and train their team and review data collection processes and requirements. This will allow the business to introduce automation where necessary to improve efficiency and reduce risk ahead of the digital links mandation in 2020.
Moreover, the business can also explore how it can become fully MTD-compliant. The implementation of digital links will see the external data source become the primary source for the tax return. It’s a step that will introduce more complexity initially because the business will need to integrate back-end systems with the submission software to create a fully digital end-to-end process. Exploring the source-to-submission process now will provide valuable insight into what steps need to be taken to move away from spreadsheet dependency.
Automation not spreadsheets
Some businesses have already begun embracing digitalisation by automating their data collection. For example, in the corporation tax world, there’s been a move away from tax packs (spreadsheets disseminated and collected via email) and the online equivalent (spreadsheets shared via the Cloud) towards a data extraction process that uses software to connect directly to accounting software or ERP packages. Data is then pooled and drawn into a tax compliance engine, effectively eradicating the need for spreadsheets. These businesses are ahead of the game as they can then use this same data pool as the source for the transaction data required to form the basis of VAT returns.
So, in answer to those questions…
What should you do to get ready for MTD?
Road test processes and do it now.
Should you join the pilot or wait it out?
Get software in place today and road test the new process, emabling the business to commit when ready. It’s also worth noting that those that wish to pay by Direct Debit must sign-up at least 15 days before the deadline and must have a software solution in place.
Can you mitigate against risk and non-compliance?
Yes. Road testing is a form of due diligence which can prepare the business and its staff for MTD requirements.
Road testing provides the ability to determine where and how processes need to be changed, to trial a VAT return, and provides a training resource. Armed with this ability, the business can then fully commit to the MTD with confidence.
To find out more about how to road test your processes, sign up to one of our Demystifying MTD for VAT webinars. Or to gain insight into how automated data collection can assist you in gaining more from MTDfV, view our whitepaper on The Evolution of Data Collection.