In their report on Making Tax Digital (November 2018) the House of Lords Economic Affairs Committee stated MTD for VAT (MTDfV) should be motivated by “productivity, efficiency and modernisation reasons rather than just tax compliance”. Why? Because MTD has not been conceived in a vacuum: it’s a part of a wider global movement, fuelled by OECD initiatives such as BEPS Country by Country Reporting and Common Reporting Standards, which is only going to grow. Consequently, businesses should view MTDfV as the start of a journey.
HMRC are modernising their systems and may well follow the example of tax authorities in countries such as Spain, Poland and Brazil. This would see the MTDfV compliance requirements extended to include the provision of electronic transaction data, enabling HMRC to electronically audit the underlying data and perform data analysis.
Yet despite the prospect of future change, almost 70 percent of organisations today are only seeking a stop-gap solution. They have no immediate plans to scale to meet the MTDfV digital links requirement for 2020 and are ill prepared for further digitalisation. These businesses run the risk of losing out on potential benefits and failing to maximise investment.
Deciding a route
Today there are three paths open to the business:
- Outsource to an advisor. Passes the problem of MTD compliance to the advisor but control and oversight of the compliance process may be compromised and can be costly in the long run.
- Develop in-house by building an MTD solution. May be complex to achieve and risks high initial costs and recurring maintenance costs as compliance requirements change.
- Off the shelf software sees an initial outlay which is offset by efficiency and productivity gains over time and the provision of product support.
Many decide to select a solution from the HMRC approved supplier list only to face the task of sifting through hundreds of vendors with solutions that differ widely. Some meet only the minimum requirements and are not equipped for the digital link requirement of April/October 2020. Few offer additional functionality such as dashboards displaying historic, existing and future obligations so that the user can be alerted to imminent deadlines or erroneous calculations, for example.
Best long-term choice
The House of Lords report stresses businesses need to choose the “best long-term choice” for them. This means assessing solutions for ease of use, efficiency gains, and the ability to scale. Other considerations include how much experience the vendor has in the compliance space, how compatible the solution is with existing back-end systems, whether it can manage multiple VAT entities and incorporate complex VAT calculations, as well as its capacity to support future compliance demands.
The business should also seek to roadtest its processes using a simulation environment. This will allow it to replicate and perform the submission process, train the team, review data collection processes, and explore full MTD compliance ahead of 2020 (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 digital end-to-end process). It will also head-off one of the major risks associated with MTDfV compliance: change management.
A gradual transition using a four step process can keep costs and complexity down while boosting efficiency:
Step 1: Satisfy the 2019 requirements by adopting a solution that creates a digital bridge between the existing VAT calculation and the HMRC API for submission.
Step 2: Implement a solution that provides digital links from relevant source data and seamlessly integrates with the VAT calculation spreadsheet or compliance engine, satisfying the 2020 requirements.
Step 3: Deliver business benefits by implementing a comprehensive end-to-end compliance solution which provides detailed calculations, data analysis, diagnostics and the benefit of purpose comprehensive audit trail.
Step 4: Implement a solution that integrates with your existing systems to provide a data connector designed to run autonomously in the background converting the stored data created by your accounting system into a single unified form for integration with your VAT and CT compliance solutions. This ensures the business is well placed to meet future compliance requirements e.g. MTD for corporation tax.
Both corporation tax and income tax will also be brought under the MTD banner after 2021 which could cause further upheaval. This is because VAT and corporation tax come from very different starting points and have differing complexities. While MTDfV will see the VAT compliance process transformed, the reporting frequency is unchanged. Corporation tax, on the other hand, already has mandatory online filing of accounts and the computation in iXBRL format, but digitalisation will see the frequency of reporting increase to quarterly submissions.
Many businesses already have corporate tax software, often referred to as a compliance engine, for preparing and submitting their corporate tax computations and iXBRL accounts, with some solutions providing the compliance team with a range of data upload tools to automate the data collection process. But digitalisation will increase the need for further systems integration. Data will need to be aggregated from numerous native data sources and linked through to the compliance engine.
Automated data extraction and integration will therefore be of fundamental importance. Such data extraction should be a prime consideration for businesses looking to lay the foundations for MTDfCT compliance but organisations don’t need to start from scratch. The digital links aspect of MTDfV can be used to create this data pool, as shown below.
Planning for current and future regulatory change in this way can shield the business from the risks associated with change. At Tax Systems, our AlphaVAT family provides a four step path to MTDfV and beyond. To see how to prepare for MTD, see our ‘Digital as a Destination’ whitepaper or sign up to one of our Demystifying MTD for VAT webinars.