There is still a great deal of confusion over the MTD for VAT process, particularly when it comes to phase 2 – the mandation of digital links. This is because there are a number of areas within VAT Notice 700/22 that seem to contradict one another. No, you can’t cut and paste (and HMRC really don’t advise it) but oh, wait, you can do some manual actions. You’ve signed up to MTD? Then you’re committed. But, hang on, if you drop below the threshold you can opt-out. It’s these mixed messages that are generating myths and misinformation which I’ll attempt to set right here.
1) MTD just replaces the HMRC portal with an API
Many people don’t realise there is a second phase and will think that their previous efforts will suffice. In fact, there are three elements to MTD for VAT. The software needs to be “capable of keeping and maintaining the records specified in the regulations, preparing…VAT Returns using the information maintained in those digital records and communicating with HMRC digitally through [its] Application Programming Interface (API) platform”. So it’s not just about the end piece.
Use case: Getting the data right
Company X has a VAT group and a number of separately VAT registered entities
What the second phase reveals is that the quality of your source material is paramount. This is why we’re now seeing companies commit to some very large-scale projects that focus on digitally linking the raw data. They’re looking to ensure their ERP generates reports without manual manipulation and that third parties produce data that is ready and prepared. These companies recognise they need to get their data in the right place and digitally linked before they even start.
2) I need to record all my data as digital records
Under MTD for VAT some of your ‘business records’ will have to be digital but not all. For example, you must still keep the original of the C79 import VAT certificate. Original invoices should also be retained if that data is typed into the MTD software but if it is scanned the original invoice can be destroyed. Records that must be kept digitally make up your “electronic account” and include designatory data, supplies made and received, supplier statements (in some instances), petty cash transactions, reverse charge transactions, summary data, and adjustments.
3) All my VAT records have to be on the same system
You do not need to keep your digital records all on the same system. Indeed, for many businesses this would be impractical. HMRC states the records do “not all have to be held in one place or in one program”. They don’t even need to be in the same format but can be in “a range of compatible digital formats”.
4) I can opt out due to my company culture
You can only be exempt if it’s not practical for you to use digital tools to keep digital records e.g. due to your lack of internet connectivity or a disability/you or the business are insolvent/your business does not use computing systems due to religious reasons. Citing your age, lack of familiarity with digital tax software or the disruption and cost of going digital are not acceptable.
5) I don’t have to file digitally if my threshold drops below £85k
Once registered you must continue to submit digitally unless you deregister or can be classified as exempt. If you are under the threshold and sign-up voluntarily, you can, however, go back to paper/online filing provided you notify HMRC and they agree to take your next return in the format you previously used.
6) My advisor will do it all for me
You’ll still need to give the advisor access to your data and that means your digital records must be in order and can be sent securely. Your agent must have MTD software of their own or have access to the software that holds your digital records. Agents will not necessarily have access to all of your source data so they may not always be able to make corrections to your digital records. So, they may need to advise you of any corrections to be made to your digital records.
7) HMRC won’t be able to detect my broken links
During the soft landing period HMRC did accept copy or cut and paste so you may well have done this and still been compliant. That will not be the case after April 2021 when the soft landing period ends. At this point HMRC will not consider “the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link”.
8) I’m not allowed to make any manual adjustments
You do not have to digitally link everything and can make manual changes outside the process as long as you link back in. BUT there are disadvantages to doing so as this increases the opportunity for error and makes auditing more complex and HMRC states that “using a digital link for these processes, rather than a manual transfer, reduces the chance of errors.”
HMRC recognises there are points when “calculations will have to be made outside of any software you use to keep the digital records, or there may be a need to enter data into your software from particular sources” although in the case of a dedicated compliance solution, changes can be made within the software.
When it comes to adjustments, “only the total for each type of adjustment” are required to be kept in the MTD software “not the details of the calculations underlying them” so calculations do not need to be recorded. You also do not need to amend the digital record of a supply where the input tax claimed or output tax due on a supply has been changed as the result of an adjustment or error.
9) I can just swap over to an API-enabled spreadsheet
Yes, you can become compliant using an API-enabled spreadsheet but this will continue to expose the business to the errors synonymous with this form of record keeping and therefore the risk of investigation and penalties. Spreadsheets are notoriously risky with 88% found to contain errors and as spreadsheets grow so too does the propensity for error through incorrect data entry, incorrect use of formulas, broken macros, and mismanagement. While HMRC advocates the use of either API-enabled spreadsheets or API-enabled software, the tax authority originally wished to move businesses away from spreadsheet use due to these risks.
10) I’m going to be penalised because I can’t make the deadline so I might as well carry on as I am
HMRC will expect you to make every effort to comply. Provided you can demonstrate you are attempting to comply and give a good reason for your inability to do so, you can apply for an exemption. Exemptions will be considered on the basis of you having complex or legacy IT systems that will take time to adjust or if you have acquired another business, for instance. However, even if HMRC awards you a “specific direction” i.e. an alternative deadline, you will still need to actively demonstrate you intend to comply while awaiting their decision and during the extended period.
Many of the examples given on the HMRC website won’t resonate with businesses. Their company structure combined with a variety of accountancy systems mean that many will have a unique architecture that will need to be adapted for digital linking. So, the focus has to be on how to simplify this process. To do that, you need to create a straight-forward digital journey that minimises the need for manual intervention by performing calculations, amendments and adjustments within the process. To see how AlphaVAT, our compliance engine, can do just that, contact us today for a demo.