Myths and misinformation around MTD Phase 2
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. It’s these mixed messages that are generating myths and misinformation which I’ll attempt to set right here.
Many people don’t realise there is a second phase and think 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] API platform”. So, it’s not just about the end piece.
What the second phase reveals is that the quality of source material is paramount. 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-party data that is readily prepared. These companies recognise they need to get their data in the right place and digitally linked before they even start.
Under MTD for VAT some of your ‘business records’ will have to be digital but not all. Original invoices should 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.
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”.
During the soft landing period HMRC did accept copy or cut and paste so you may well have done this over the past year and still been compliant. That will not be the case after March 31, 2020 (when the soft landing period ends for the majority) or September 30, 2020 (for deferred businesses). 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”.
HMRC haven’t yet firmed up how they will penalise you but it’s safe to assume that if they do find something wrong the penalty will be high because they have explicitly stated how and when businesses should comply. Expect the tax authority to conduct analysis of your spreadsheets or MTD software as part of the audit process to determine if digital linking has been observed.
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.
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 percent 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.
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.
Few of the examples given on the HMRC website will resonate with businesses. The 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 at [email protected] or on 01784 777 700.