As with any form of transformation, Making Tax Digital for VAT (MTDfV) needs to focus on maximise business benefit. Any solution chosen should not only seek to confer compliance but also enhance productivity, reduce costs, mitigate risk associated with non-compliance, minimise change management, and provide support for further compliance regulation (eg Corporation and Income Taxes).
There are typically three avenues open to the business when it comes to MTDfV:
- Outsource: this is an easy option, as it entails the least amount of change internally, although handing over the process to an advisor also means the business has less control over its data, reducing oversight. Back office integration will still need to be considered in order to comply with digital link requirements. Over time this option could well turn out to be the more expensive as borne out by our 2018 Customer Survey which found almost three quarters of businesses saved over 50 percent in compliance advisor fees per annum when they brought corporation tax processing inhouse
- Develop inhouse: businesses with larger IT teams may wish to explore developing their own MTD solution perhaps by bolting on a bridging capability to their existing ERP system. Yet this may be a complex option as it needs to address integration with and data collection from back end systems. Moreover, the solution will have to compete with other internal projects for product support which may cause challenges in keeping up to date with regulatory change
- Off the shelf software – this will require an initial outlay but businesses will then be able to recoup spend by running compliance processes inhouse. Businesses also stand to benefit from increased efficiency and productivity gains associated with the new processes that make it easier to collect, analyse and submit data. These same processes prepare the business for further regulatory change, improving resilience.
Navigating the choices
There’s a very wide choice of MTDfV solutions to pick from, from vertical and compliance specialists, to ERP and accountancy solutions with bolted on bridging software, to whitelabelled SaaS. This has created a market that is “difficult to navigate”, according to a House of Lords report, while HMRC is at pains “not to recommend or endorse any one product or software provider”, making it hard to assess the virtues of over 100+ approved products. The report outlines concerns expressed by businesses over data retention (digital data only needs to be retained for two years but VAT data for six) and the level of product support on offer.
Additionally, many MTDfV solutions have been designed to meet only minimum requirements greatly limiting their value. Some are not equipped to meet the digital link requirement of April/October 2020 and almost certainly won’t deliver additional functionality that can confer “productivity, efficiency and modernisation [gains]… rather than just tax compliance”.
Interestingly, the original remit for MTD was far more wide ranging and foresaw the use of “nudges and prompts” to reduce errors with “spreadsheets being replaced by integrated bookkeeping and reporting packages”. Thankfully there are solutions out there that do include these benefits. Some also offer dashboards displaying historic, existing and future obligations so that the user can be alerted to imminent deadlines or erroneous calculations, pre-empting audits, while those with direct data capture provide the capability to analyse and query data, aiding decision making.
So how can businesses pick the right solution? We recommend the following criteria:
- Road-testing: check to see if the solution has the functionality to perform simulated submissions to test the process before formally committing to MTDfV
- Go for purpose-built: only purchase software that is recognised on the HMRC website as VAT compatible. Look for evidence it is designed to evolve with MTD requirements
- Proven expertise: pick an existing expert in tax compliance who is committed to serving the market long-term – don’t be tempted to just go with an advisor’s recommendation – and look for a vendor with a strong track record in support.
- Compatibility: look for a wide range of plug-ins enabling the solution to interface with existing ERP and accountancy systems to facilitate data collection and digital linking
- Feature rich: ask about additional functionality. Does it deliver visibility, deadline management and reporting? Can it manage VAT entities, with real-time information from HMRC’s systems on payments historic returns, summaries and future liabilities, making it easier to perform audits or carry out tax planning?
- Complex needs: if you have large numbers of records or complex requirements, establish if the solution or its family of products can report on VAT groups, carrying out standard and special method exemption, debt relief, reverse charges and capital goods scheme calculations etc. Error reporting and audit trail capabilities are also a must
- Think long-term: pick a solution that will be able to leverage the same data and processes for future obligations. Spending the time now on a digital end-to-end process will ensure the business remains compliant to 2020 and beyond, helping prepare the business for MTD for corporation tax, for instance.
Like any decision, MTD investment should be determined by ease of use (additional functionality), efficiency gains (automation of processes), and the ability to scale to meet future compliance needs. At Tax Systems we’ve designed our AlphaVAT compliance family from the ground-up to exceed MTDfV requirements today and support needs for tomorrow. To find out more sign-up for one of our Demystifying MTD webinars or take a look at our AlphaVAT Compliance Family.