The decision to delay the digital links mandate under MTD was not unexpected. Many organisations are struggling to remain operational and HMRC has over 60,000 staff working remotely from home, making it challenging to oversee the implementation and enforcement of the mandate.
The deferral effectively sees the compliance deadline extended by twelve months for the majority of businesses, and by six months for those large businesses caught under the original deferral period. In practice it is simply an extension of the soft-landing period for all businesses until April 1, 2021. Just how this will impact businesses will depend on the frequency of their reporting, be it monthly or quarterly, and their stagger period, as shown below:
| Filing frequency | Quarterly stagger | First period mandated for digital links | Filing deadline |
| Monthly | N/A | 1 April – 30 April 2021 | 31 May/7 June 2021 |
| Quarterly | Stagger 1 | 1 April – 30 June 2021 | 31 Jul/7 Aug 2021 |
| Quarterly | Stagger 2 | 1 May – 31 July 2021 | 31 Aug/7 Sept 2021 |
| Quarterly | Stagger 4 | 1 June – 31 August 2021 | 30 Sept/7 Oct 2021 |
HMRC has, however, stressed that organisations should make the most of this opportunity, advising businesses should use the time “to ensure their administration and processes are ready for their business ramping up again and future requirements” and “that there are digital links in place between their software components.” So, while the tax authority acknowledges the disruption caused by the pandemic, MTD should not be shelved.
Take a pause
The delay will enable businesses to review how their MTD strategy and to focus on extracting more value from the time and effort invested. The good news is that organisations are already recognising that they can use MTD to “drive profits and growth” (according to HMRC’s Making Tax Digital: An evaluation of the VAT service and update on the Income Tax service report) while our own research reveals that the software choices around MTD can help resolve a range of issues, such as process efficiency, data management, error mitigation and risk reduction.
Long-term choices
In our report, Future of Tax, produced with Accountancy Age in April 2020, we found that 69 percent of businesses have been implementing MTD to achieve basic compliance, rather than using MTD as a catalyst for change. This is at odds with marketplace priorities and aspirations. The majority readily admit automation improves data quality, increases accuracy, brings efficiency gains and reduces the risk of queries from HMRC. Their hesitance perhaps stems from lack of bandwidth and the time needed to secure budget.
MTD is also regarded by many as disruptive. Over 70 percent of businesses are still using spreadsheet-based processes to comply despite the fact that 80 percent don’t trust their accuracy. Finance and tax teams are reluctant to dispense with spreadsheets altogether, but the reality is they don’t have to. It’s possible to use MTD compliance platforms to augment and de-risk spreadsheet compliance processes. MTD software can add incremental value around areas such as checking the accuracy of tax data to ensure correct submission, tracing and justifying adjustments and, crucially, can create an end to end digital audit trail to prove compliance.
Time for us to improve
The deferral to April 2021 will also provide technology providers with the time needed to build new capabilities into their platforms. These include the ability to automate special tax methods such as PESM, validated data cleansing through advanced data handling features, fully automated digital audit trails and time-stamped evidence of adjustments and calculations.
We can also expect to see the thorny issue of data quality addressed. MTD is not just about creating digital records but about making sure source data is accurate and accessible. Today, errors tend to be detected by comparing the return generated against previous reporting periods. This offers limited insight. But, using tax logic, it becomes possible to assess the values in the return with those expected using a range of parameters so that the system can automatically flag any anomalies. We also expect tax to become more autonomous, with help built into software to reduce the dependency of the tax team on IT teams.
Balancing the books
When we emerge from the coronavirus crisis, the UK government will need to balance the books to support the national debt estimated to top £337bn and collect every penny it is due. MTD is still regarded as a primary means of closing the tax gap, with MTD for VAT already forecast to generate additional tax revenue of £1.2bn by 2023 to 2024 with steady state savings of around £300m each year.
Chancellor, Rishi Sunak, stated in the Budget that “The government is investing in additional compliance officers and new technology from HMRC… enabling HMRC to further reduce the tax gap”; an investment that will equip the tax authority with more resources to assess and enforce compliance.
So the likelihood is that HMRC will come down harder on those that have not used the time wisely. We can expect more scrutiny and penalties for those who have failed to comply because the argument will be that we’ve all had more than enough time to get our houses in order.
The delay to the mandate is just one of the impacts of the coronavirus outbreak. To find out more about how it is affecting compliance with digital links, please register for our Digital Links 2021 webinar or to learn how the events of this year are reshaping the industry, register for our Tax Automation & the Lockdown webinar.
Andy Mills is commercial director at Tax Systems