Will 2019’s MTD bridging software be able to meet the demands of digital linking?
It’s a question many will be asking as they consider the requirements of the digital links mandate under MTD for VAT: Can I use my original Making Tax Digital software to comply? The answer, however, doesn’t just depend upon the capabilities of the software but rather the VAT process that your business has.
First of all, let’s take a quick look at the evolution in requirements. Bridging solutions were originally developed to digitally submit the VAT Return using HMRC’s API, effectively replacing the online submission process, and this came into effect from April 2019. But from April 2021, businesses will need to satisfy the digital links requirement. This means you will need to digitally link from source data all the way through to the Return and will no longer be able to carry out manual procedures such as cut and paste.
Where bridging software will work
As bridging software solutions were mainly developed purely for the submission process, you could be forgiven for thinking they won’t meet the new requirements. In fact, if your MTD solution is an API-enabled spreadsheet there’s no reason why you can’t use this to be compliant. Exporting data from an ERP or accountancy system into this spreadsheet and then digitally linking from those cells into the Return will qualify.
But this type of scenario is mainly applicable to businesses with simpler VAT environments. ‘Simpler’ means that, typically, you’ll have a straightforward process that sees digital records taken directly from your ERP system into an API-enabled spreadsheet. Any adjustments are made prior to the results being input into the Return but you may not need to perform any manual intervention.
In this kind of scenario, both API-enabled spreadsheets and MTD bridging solutions are all you need to meet the digital linking requirements.
Where your existing software might not work
If your business has a more complex process, the chances are you’ll be evaluating how easy it will be for you to comply using your existing software.
A ‘complex’ process in this context is where your VAT process has multiple aspects. You may need to export and collate data from multiple sources, make manual adjustments and manipulate data. You’ll typically have multiple trading entities and/or VAT Groups and may use VAT schemes. The need to perform adjustments across numerous spreadsheets can see errors creep in and so there’s a real danger that a digital link may be broken.
When assessing their processes for MTD phase 2, these businesses will need to check if their vendor has extended the capabilities of their original solution sufficiently to safeguard against the risk of non-compliance.
If this sounds like you, you’ll need to assess if your processes are sustainable in the long term and if your original bridging solution is the best way to meet the demands of the digital links mandate. If the answer to either is ‘No’, you’d be well advised to consider alternatives, such as an MTD compliance platform.
If you do decide to look at a new solution, the good news is you stand to benefit in numerous ways. You’ll may well be better placed to withstand further regulatory change and able to achieve operational efficiencies, for example, as automation effectively streamlines processes and reduces workloads, freeing up time and resource.
Where reinvestment is required
Finally, let’s consider those we would define as ‘very complex’. These organisations might also have multiple trading entities/VAT Groups but where they differ is that they’ll also tend to handle large volumes of data and need to perform numerous sometimes bespoke adjustments such as Partial Exemption/s. They’ll be heavily dependent on multiple spreadsheets but the ban on transposition means this won’t be viable under the digital links mandate.
While these businesses can continue to carry out complex calculations such as Partial Exemption standard or special method as its possible to perform such calculations outside the digital links process, it’s worth cautioning that this does increase the risk of error. Some fully compliant MTD solutions can instead automate the PESM and include it in the digitally linked VAT process.
These ‘very complex’ businesses will undoubtedly need to invest in a robust compliance platform that can accommodate all the nuances of their VAT environment because the risk of breaking a digital link is just too high. However, doing so is likely to confer real operational advantages due to how convoluted their manual process was. They can expect significant time reductions in automating their VAT process and may even benefit from more opportunities to recover VAT that were previously missed.
Regardless of which type of business you are, migrating to an advanced compliance platform ensures you are fully compliant with MTD phase 1 and 2 and can also add value to the process in other ways. This is because the technology will commonly have additional features such as anomaly detection to flag potential issues for investigation, automatic error correction, data analytics that facilitate trend analysis so you can compare periods and forecast liabilities, and the creation of digital audit trails so that you can track back through the process to check your workings and prove compliance.
Our AlphaVAT compliance platform offers all of these and ensures you are 100% compliant with all MTD for VAT requirements.
To help you assess where you come on the compliance spectrum, why not contact us for a free consultation?