Making Tax Digital: A time of transition before transformation
While Making Tax Digital is encouraging firms to transcend into being a fully digital practice, it’s essential that businesses walk before they run
It’s the end of the VAT return as we know it. Making Tax Digital (MTD) and, more specifically, MTD for VAT is a HMRC initiative that aims high. Designed to transform the UK VAT system, MTD endeavours to do what it says on the tin by making tax digital, more efficient and simpler for taxpayers and advisers alike.
It is a compulsory digital tax system that will initially apply only to VAT registered businesses with turnover exceeding the VAT registration threshold and will ultimately transform the filing of VAT returns into a seamless, end-to-end digital experience. HMRC’s current online VAT filing service accounts for 90% of all VAT return submissions made today but, for VAT periods beginning on or after 1st April 2019, this service will be removed for businesses that meet the MTD criteria above. These businesses will be compelled to either use an adviser able to submit on their behalf using HMRC approved software, or to use an ‘API-enabled’ bookkeeping solution that will allow them to perform such submissions themselves.
Some firms are concerned that they will struggle to make the transformation to a fully ‘digital’ practice, as expected of them by HMRC, in time for the impending deadline. While most firms already file VAT returns online, the journey taken to compile the correct VAT figures is typically more analogue than digital and frequently relies on spreadsheets, the use of which has been hotly debated as MTD worked its way through the legislative process.
Bridging the Gap: Spreadsheets and MTD
Simply put, when MTD states that VAT return data must be kept and filed digitally, it means the software used must be capable of providing information to HMRC digitally via their Application Programming Interface (API) protocols.
HMRC have always maintained that spreadsheets exist outside their vision of an end-to-end digital environment. However, on July 13th, after significant pressure from trade and industry bodies and the accountancy profession alike, HMRC released its final addendum to the VAT notice which states that spreadsheets can continue to be used, providing they are used in conjunction with a solution that can submit information digitally to HMRC.
This allows the transition to digital using appropriate ‘bridging’ software, rather than transforming to a completely new digital environment.
Transition Before Transformation
It is great news that spreadsheets can continue to be used in the VAT process as this will allow a more straightforward transition to digital, with advisers being able to maintain their existing VAT processes should they wish to do so.
The fact is, spreadsheets are still widely regarded as an essential accounting tool, particularly when it comes to calculating VAT, thanks largely to their flexibility in accommodating the needs of businesses large and small. Advisers, even within the same firm are, in many instances, using multiple styles and versions of spreadsheets for a diverse range of clients and to migrate all these businesses to new systems and processes ahead of MTD would be a huge undertaking.
While MTD is encouraging firms to transcend into being a fully digital practice, it’s essential that businesses walk before they run, and advisers will need support with how they can take advantage of bridging software to digitally link their spreadsheets to HMRC’s API protocols.
It is also worth noting that while the vision of an end-to-end fully digital filing journey is on the horizon, many advisers have significant legacy Making Tax Digital processes dependent on spreadsheets, the migration of which, for more complex scenarios, may require considerable thought and planning. This is where we’ll begin to see ‘spreadsheet-aware’ products, which can monitor and file VAT submissions from multiple bookkeeping solutions, meaning that advisers can keep using existing systems and processes with minimal disruption.
Overall, whilst it’s great news that spreadsheets can continue to play an important role in the MTD digital journey, advisers should still be thinking about how MTD will impact their practices and their clients. Ultimately, MTD is a great opportunity for firms to make a step-by-step move to digital in order to improve efficiency and offer clients a better service. If the transition is handled correctly, firms can expect MTD to transform the business landscape over time, with increased efficiencies giving advisers valuable time to grow their client base and capitalise on new revenue opportunities.