Making Tax Digital: challenges and timescales

In December 2015, HMRC produced its Making Tax Digital (MTD) roadmap, outlining the overall objectives for the initiative, namely, to be one of the most advanced digital tax administrations, to make the tax system easier for taxpayers, and to increase efficiency. The aims for the first phase of the project are to have digital record-keeping; to provide a single, seamless digital journey with minimal manual manipulation of data; and for the VAT returns to be sent from the software used to store records via an Application Programming Interface (API). Clearly there will also be a potential financial benefit to the Exchequer, with over £3.5bn lost revenue in 2014-15 as a result of mistakes in VAT returns.

According to HMRC, “This change means that no business will need to provide information to HMRC under Making Tax Digital for business more regularly than they do now. VAT has been online since 2010 and over 98% of VAT registered businesses already file electronic returns.” Whilst this statement is true in terms of the frequency of reporting, it does not acknowledge the significant challenges that businesses, both large and small, are facing in order to be compliant for reporting periods after 1 April 2019.

The impact of the challenges was reflected in July 2017 when Mel Stride, Financial Secretary to the Treasury and Paymaster General announced that, although there was agreement that digitisation is the way forward, business had expressed concerns about the scope and pace of the changes. In response, the scope of the first phase of MTD was restricted to VAT only and it will not be extended to other taxes until 2020 at the earliest.

Despite this announcement just over a year ago, there has been an increasing level of concern about how ready business will be by the deadline. With only seven months to go, what are businesses doing? We have seen an increase in interest in the last few weeks but a significant number of businesses are still failing to make the necessary plans and investment to ensure they will be compliant, leaving themselves open to the risk of penalties. The time to act is now.

In June, we held a client webinar with HMRC to discuss the limited information available at that time (the public notice was published several weeks later). We included some polling questions and the results confirmed our suspicions about a general lack of awareness and/or planning, as only 25% of respondents were confident or very confident that they would be ready by 1 April 2019.

By far the biggest areas of concern were understanding the HMRC requirements and concerns around the reliability of internal processes – both key components in complying with the new regime. Part of the challenge and a stated cause for not taking action was a lack of clarity around what would be required to be compliant both from a process technology point of view; an example being what constituted a “digital link” and how would fundamental VAT concepts be dealt with such as partial exemption adjustments. Expectations around the Public Notice were high. Its publication on 13 July caused a spike in interest but while it has addressed some key questions, there is still a lack of information and understanding around a number of key areas – and this needs to be addressed.

So, what are the challenges that businesses are facing and what are we seeing?

Timescales

Making Tax Digital for VAT is a significant step in the digitisation of tax for HMRC and part of wider global trend for tax authorities. The same applies to businesses who should be developing a digital tax strategy – particularly bearing in mind that the intention is that MTD will extend beyond VAT some time after 2020. Ideally any solutions need to be future proof as the scope is extended and we should not forget the potential impact of Brexit.

To be compliant, businesses need both time and budget to upgrade their existing processes and systems. But to secure the backing and support of management to invest appropriately, the tax and finance teams will often have to develop a strong business case to underline why this is business critical. At our webinar, over 50% said there was low or very little awareness of MTD at the C-suite level. With seven months to go, it is critical that these discussions are underway so the necessary changes can be implemented. A key first step is typically a gap analysis or readiness assessment to identify where risks of non-compliance.

Technology

As noted above, data has to be stored and transported digitally in the new regime and the impact of that requirement will depend on where the business is currently. So for smaller businesses we see that they are typically more reliant on manual processes which will have to be digitised. For larger businesses, typical challenges are around the digital journey, so for example where there are multiple sources of data and ensuring that the digital links are created.

What needs to be done now?

Businesses need to act now to determine what they need to do to be compliant by 1 April, but also to develop a plan to make any future expansion of MTD as seamless as possible. Many businesses we talk to want to develop a digital strategy for tax but for that they need to know HMRC’s longer-term plan so they can invest to make wholesale changes to their systems and plan, knowing the end game. If HMRC is to bring business along on this journey, we urge them to share the end goal, rather than adopting this piece meal approach.

Fiona Campbell is an EY associate partner, indirect tax.