The delay to the digital links mandate under MTD for VAT to April 2021 presents us not only with some breathing space but also the time to deliberate on our MTD strategies and to decide on what we are trying to achieve.
Much has been made of the benefits of MTD – not least by HMRC that has stated it presents an opportunity for businesses to use technology to “drive profits and growth” – yet this has not been the chief motivating factor. While many appreciate and want to capitalise upon the automation afforded by MTD, our research found 69% of MTD projects were driven by the need to meet the minimum compliance requirements.
Path of least resistance
That’s perhaps not surprising. After all, the restrictiveness of the deadlines has undoubtedly made it difficult for finance and tax teams to assess the options open to them and to secure budget within the given timeframes.
It’s not been easy to determine the nature of the software on offer, prompting HMRC to consider improving its software choices page and even issue guidance to “help businesses understand what they should consider when choosing software”.
Rather than using MTD to improve data management, mitigate errors, create efficiencies and reduce the risk of queries from HMRC, many teams have had to scale back their ambitions and look for the least disruptive path to compliance. As HMRC testifies to in its evaluation of the VAT service published in March, this has often resulted in “businesses purchasing bridging software, seeing it as a safer option [which has] exacerbated feelings that the software was not meeting expectations or providing tangible benefits”.
For digital links, bridging software is not an option. Instead, spreadsheets represent the path of least resistance. In our survey conducted between February-March 2020, we found over 70% planned to use spreadsheet-based processes despite the fact that 80% did not trust their accuracy. What that means in reality is, that while these businesses will achieve compliance, the problems of broken macros, corrupt formulas and manual input errors may persist while the potential to gain operational efficiencies will be lost.
Delay buys time
Thankfully, the delay to the digital links mandate now buys these businesses some much needed time. The additional 12 months grace for small to medium businesses and six months for larger more complex enterprises will give them the time to reassess and re-evaluate their strategies and the compliance options available to them. It’s liable to prove welcome, too, given that a CIOT survey conducted at the start of the year revealed that nearly half (44%) either didn’t know or would not be able to digitally link their records in time.
Rather than simply continuing to use spreadsheets, businesses can now consider how they will achieve the nirvana of the “single, fully-integrated software package” which HMRC states has proven most effective in its evaluation of MTD for VAT. The tax authority states that those with “fully integrated software manage their finances in real-time, with the relative simplicity of having automated processes motivating them to do so. These businesses now only enter information once, making it easier to spot and correct mistakes at source… [using] intuitive and easy-to-use navigation and dashboards”.
This doesn’t mean these need to ditch their spreadsheets, however. Instead, MTD compliance platforms can be used to integrate processes with spreadsheets, effectively augmenting them and de-risking the process. MTD software can be used to add incremental value through checking the accuracy of data, flagging potential anomalies and tracing and justifying adjustments and, crucially, can create the digital audit trail needed to prove compliance.
Links not the end goal
While it’s important to meet the compliance requirements, implementing digital links in and of itself will not benefit the business. Compliance within the basic requirements will simply see the standardisation of record keeping and, because the mandation includes provisions that allow the user to step outside the process to perform manual processes, the danger is that the business can be considered compliant and still be susceptible to error and at risk of investigation.
So if compliance isn’t the end goal what is? The answer has to be automation. MTD can be “the catalyst for a business to consider its wider approach to technology” according to HMRC, with its own research revealing that those who have embraced automation experience the following benefits:
- Reduced input errors
- Single data input/automatic data input through automation and digital linking
- More accurate returns due to daily software uploads
- Reduced miscalculation errors due to automatic data feeds
- Errors detected quickly and corrected easily due to frequent input, automatic bank reconciliation and easy to use software
These businesses “spend less time overall dealing with their tax affairs” and are then able to devote this time “to maximising business opportunities and helping to foster good financial planning”.
Constrained by compliance
The delay to the digital links mandate therefore provides not just a temporary reprieve at a time when businesses are struggling to stay afloat during the COVID-19 outbreak, but an opportunity to take a breath and review how we plan to use MTD for VAT to automate the tax function. Rather than being constrained by compliance deadlines, we now have the opportunity to review, reassess and reinvent our approach to the digital links mandate in a way that not only ensures compliance but also streamlines and improves tax processes and does so in such a way that it improves operational efficiency, benefiting the business as a whole.