MTD for VAT: Nine steps to ensure preparation success
The moment has arrived: as of 1 April, the majority of companies that are VAT registered must comply with Making Tax Digital (MTD), the new system whereby businesses must keep records digitally and use software to submit their VAT returns. It is a seismic upheaval in the industry, aimed both at making HMRC one of the most digitally advanced tax administrations in the world, while at the same time introducing new standards of efficiency that will benefit both accountants and in-house teams.
The Government is trying to make the transition as painless as possible, introducing a “soft landing” in which they guarantee problems with the new systems that result in late filings will not incur fines for lack of compliance, provided any tax owed is paid, a state of play that will last until April 2020, or October 2020 for those deferred business types. It is nonetheless imperative to be aware of what is required and to put new systems in place.
There are already many positive signs that the industry is transitioning. Following the Spring Statement, Theresa Middleton, HMRC Director, Making Tax Digital Programme, said, “Our VAT pilot service is progressing well, with over 46,000 businesses in the pilot and over 200 MTD compatible software products available, including some free products, and over 140 existing subscription products being updated at no cost at all… [HMRC] continues to listen to feedback from business, and recognises the importance of supporting businesses through the transition to MTD.”
And so clearly, for the businesses that are successfully embracing the new regime, the future is bright, but for those still to do so, the following nine steps will ensure that their preparations are successful…
Start preparing as soon as you can. It is human nature to put off change. In our recent survey (February 2019), Tax Systems found that 50 per cent of tax professionals have either developed plans for MTD but had not yet started implementation or hadn’t started the process at all. Implementation is now a necessity.
Work out when the new rules apply to your business and ensure you sign up for MTD in advance of your first mandated MTD submission due date.
MTD came into effect on 1 April 2019 for businesses with taxable turnover above the threshold of £85,000 and applies to obligation periods starting on or after this date. A minority of businesses, deemed to have more complex needs, have a six month deferral to 1 October 2019. These include trusts and unincorporated charities, local authorities and some public sector entities, public corporations, overseas businesses which are UK VAT registered but are not physically present in the UK and businesses with one of the following VAT profiles: VAT group registration, divisional VAT registration, those required to make payments on account and those who use the annual accounting scheme.
Therefore, for those for whom the new rules apply from April, depending on their VAT stagger, the first quarterly MTD filings are due from 1 July 2019, while in the latter case the relevant date is 1 January 2020.
Ensure that all relevant staff know and understand the requirements, why processes are changing and what the impact will be on their day-to-day work. Involve tax and IT technical staff in the review of current processes, performing the requirements assessment, vendor selection and implementation. In the short term, it might be necessary to deploy additional staff onto this project and for staff to receive increased training. This should be incorporated into the firm’s strategy and business plan, both in the case of the accountancy firm itself and businesses dealing with compliance in-house.
Despite initially adding to the compliance cost, MTD is expected to cut costs in the longer term through increased efficiency, not least when it is extended to corporation and income tax (after MTDfVAT has proven successful, no earlier than 2021). There should also be ongoing benefits. The Tax Systems Customer Survey 2018 found that bringing tax in-house and automating the corporation tax process resulted in a 50 per cent saving on adviser fees equating to between £15,000 and £78,000 per annum. Embracing MTD may have a similar effect for businesses’ VAT processes, especially those with disparate systems, high transaction rates or more complex VAT reporting requirements (VAT Groups, Partial Exemption, bad debt relief etc.).
Advising clients of the coming changes and going through their individual needs should also be well under way. Depending on many different aspects of the business, such as size and the nature of the undertaking, every client will have different needs so a one size fits all approach won’t work. There is a massive education piece and clients are turning to their advisers for help. With a broad spectrum of awareness and readiness, from clients who might not have fully understood the impact of MTD and the necessary changes they must make (perhaps grappling with the digital link requirement and what adjustments are permitted) to those struggling with moving to digital records instead of paper to record their business operations, there is still some way to go before all 1.1 million businesses are successfully transitioned to MTD. This may take time so it’s a good idea to phase in the changes over a period of weeks with regular webinars, reminders and updates about the requirements, timelines and changes that have to be made.
An absolutely crucial part of the process is choosing and installing MTD-compliant software. HMRC has compiled a list, regularly updated, of recognised software that meets the MTD compatible software requirements. While HMRC will not recommend or endorse any particular supplier, their site provides a search tool to allow businesses and their agents to filter the list based on certain criteria. Additional considerations to take into account are whether the supplier has a strong track record in compliance and availability and quality of customer support.
Compliance can be achieved as a two-part process. If the client is still using spreadsheets for record keeping and/or the VAT calculation, they could implement “bridging software” to digitally link the VAT calculation results to the software performing the API submission. Bridging software allows the client to communicate with their HMRC business tax account, enabling a two-way flow of information, so that VAT return can be sent to HMRC and HMRC can send obligation, payments and liabilities information back to the client.
The second part of the process is digital linking between the source data and the VAT calculation. This puts in place solutions to automatically take data from accountancy and ERP systems and integrates the data into the VAT return calculation, removing the need to manually copy and paste or enter this information. To facilitate this the linking solution should have a wide range of plug-ins for support the various different record keeping systems.
This investment also has the potential to deliver productivity and efficiency gains. For this reason, it’s worth looking closely at the functionality on offer. Does the solution work with disparate accountancy and ERP systems, reducing the need for complex systems integration? Does it provide ease of use by bringing all reporting obligations – past, present and future – into one place in a single dashboard? Is it able to maintain consistent record keeping, report errors and provide a clear audit trail?
To start with, the business should seek to perform an end-to-end compliance dry run, ideally culminating in a simulated submission, before signing up to MTD. This will allow the business to identify any potential issues and familiarise the team with the new process, minimising the potential for problems at a more critical time when deadlines could be looming. Throughout the whole process agents and their clients should continue running checks and quality control programmes. HMRC might have promised a soft-landing for those experiencing initial problems and delays, but these problems are best avoided as they will waste precious time and might cause stress. Nevertheless, any VAT due must be paid on time to avoid penalties.
MTD has the potential to change the relationship between client and agent, providing the latter with the opportunity to adapt services on offer and include more value-add advisory work. Complying with the 2020 full digital link requirement delivers automation of data exchange from the sales and purchase records into the VAT compliance worksheet or software. This process naturally sits on the client side rather than with the agent, however MTD may see a rise in the co-sourcing model where the adviser can review technical queries in relation to the VAT calculations.
In the latest Tax Systems Customer Survey, 63 per cent of respondents said that the manual data collection process was arduous, while the data itself could be difficult to use for analysis due to its timeliness and reliability. Moreover, manual data collection took up 70 per cent of the time spent on compliance processes. For this reason, many clients will be looking to take the work in-house to reduce costs, but they will still be looking to external accountants for advice in the form of advanced level tax planning. This represents an opportunity for accountants to adapt and seize market share by transforming their service offerings to add value.
Another change on the horizon, possibly accelerated by MTD, is the billing arrangement between advisers and clients. Clients have been leaning heavily on their advisers as they grapple with MTD. There have been many more interactions and this, plus the general trend to subscription-based billing, is leading advisers to consider whether or not a similar arrangement will provide mutual benefits of a closer relationship and predictability.
MTD is also potentially useful as a marketing tool. The accountancy firm that is ahead of the game, and is prepared for change, is going to be a more attractive choice for future clients than one which is not. So firms should be doing all they can to promote themselves on the grounds of their knowledge, readiness and efficiency. This can be done through social media and through branding, but it can also be done via the use of the new software itself, which will sometimes provide badges to use on the agent’s website. Many larger firms who send regular newsletters to clients are putting out communications on channels such as LinkedIn and are submitting articles to tax and accounting periodicals.
The key throughout all this is to keep an eye on the bigger picture and how MTD will make business more efficient across the board. From the point of view of the Revenue, it will help tackle the tax gap (estimated to stand at £33 billion at the end of 2017) but from the tax professional’s point of view it represents a hugely positive and welcome leap forward.
Efficiency improvements will be available across the board, from using tools that can identify and extract data from multiple sources, to such simple tasks as the correction of spelling mistakes. Additionally, as the data source rather than the re-keyed or copy-and- pasted data in the spreadsheet becomes the primary source for computation, it will greatly reduce the problems caused by human error. In that latest tax gap figure, £5.9 billion was put down to “failure to take reasonable care” with £3.2 billion attributed to “error.”
Further, MTD will be extremely attractive to a millennial workforce which is tech-savvy and has higher technical expectations around automation than previous generations with the risk of boredom and disillusionment if there were to be too much manual data inputting. The industry was alarmed at a recent ACCA survey, which found that 40 per cent of the people they spoke to would leave their job within two years if there were insufficient career opportunities, while 84 per cent said that technology would allow them to focus on more demanding value add activity. With this increased ability to apply themselves to other activities, it is envisioned that different types of career path can develop, with for example, the growth of the role of the “tax technologist.”
Ultimately this is really only the beginning of a fundamental reform of increasing business efficiency through digitalisation. MTD for VAT can be viewed as something of the canary in the mineshaft: if all goes well this is the harbinger of much greater change. As mentioned above, plans are afoot to extend the mandate of MTD to corporation tax in the future, and although Chancellor Philip Hammond recently confirmed this would not happen before 2021 at the earliest, further digitalisation is inevitable.
Anything that improves the efficiency of British business across the board will soon impact on the bottom line, while at the same time it opens up whole new vistas for the accountancy industry. Until now there has been a danger that accountants have mainly worked to provide compliance or maintain a historical record of a company, whereas these new developments will allow them to be far more pro-active. We are often told that in the age of increased automation, new types of jobs will arise to replace the old ones. Thanks to MTD, this is happening before our eyes.