The tight timeframes we saw under Making Tax Digital (MTD) Phase 1 saw many businesses adopt a “compliance first” approach to MTD software.
Focused on satisfying the immediate minimum requirements, the initial aim was to digitalise records and submit the tax return electronically. There was no real focus on how the business could use MTD to its advantage.
From April, businesses will need to comply with Phase 2, requiring them to digitally link from the source data all the way through to the tax return, and they will no longer be able to carry out manual procedures such as cut and paste.
So should they seek to comply with their existing software and is this the best long term solution? The answer doesn’t just depend upon the capabilities of the software but also the VAT process of the business and its ambitions.
Who should use Phase 1 software?
If your MTD solution is an API-enabled spreadsheet there’s no reason why you can’t use this to be compliant with Phase 2. Exporting data from an ERP or accountancy system into this spreadsheet and then digitally linking from those cells into the tax return will qualify.
It’s an approach best suited to businesses with simpler VAT environments i.e. those with a straightforward process that sees digital records taken directly from your ERP system into an API-enabled spreadsheet. Any adjustments are made prior to the results being input into the tax return but there’s typically no need to perform any manual intervention. Because of this the risk of introducing error is low. However, what happens if the business grows and with it it’s VAT process? Or how will it cope if regulatory demands increase?
Who needs to evaluate?
If your business has a more complex process, you’ll need to evaluate how easy it will be for you to comply using your existing software. A complex VAT process has multiple aspects. You may need to export and collate data from multiple sources, make manual adjustments and manipulate data. You’ll typically have multiple trading entities and/or VAT groups and may use VAT schemes.
The need to perform adjustments across numerous spreadsheets can see errors creep in and so there’s a real danger that a digital link may be broken. This means you’ll need to ascertain if your vendor has extended the capabilities of the solution to safeguard against the risk of non-compliance.
Looking ahead, you’ll also need to assess if your processes are sustainable in the long term. If you do decide to look at a new solution, the good news is you stand to benefit in numerous ways. You may well be able to achieve operational efficiencies, for example, using automation to streamline processes and reduces workloads, freeing up time and resource.
Who should upgrade?
The final group are those who have very complex processes. These organisations might also have multiple trading entities/VAT groups but where they differ is that they’ll also tend to handle large volumes of data and need to perform numerous, sometimes bespoke, adjustments such as Partial Exemption(s). They’ll be heavily dependent on multiple spreadsheets but the ban on transposition means this won’t be viable under the digital links mandate.
While these businesses can continue to carry out complex calculations such as Partial Exemption standard or special method (PESM), as its possible to perform such calculations outside the digital links process, it should be noted that this does increase the risk of error. Some fully compliant MTD solutions can instead automate the PESM and include it in the digitally linked VAT process.
These very complex businesses will undoubtedly need to invest in a robust compliance platform that can accommodate all the nuances of their VAT environment because the risk of breaking a digital link is just too high. Doing so is likely to confer real operational advantages due to how convoluted their manual process is. They can expect significant time reductions in automating their VAT process and may even benefit from more opportunities to recover VAT that were previously missed.
Looking ahead
These advantages aren’t unique to complex businesses, however. Every business can use the mandation to adopt a “digital first” rather than a “compliance first” approach. That is, they can use MTD to justify automation that makes the tax process more accurate and operationally efficient. So, while you can comply with your Phase 1 software, you might want to think about your long-term objectives and if MTD could be the catalyst you need to extend automation across the enterprise.
A digital compliance platform can provide you with more visibility and control. Additional tools significantly reduce the potential for error, such as anomaly detection which flags potential issues for investigation, and automatic error correction. Checks can be scheduled that look for duplicates, unusual VAT rates, or out of period transactions as well as other criteria unique to your business. And because you digitalise the entire process – not just those areas considered in scope – you have at your disposal a complete digital audit trail. This is invaluable in proving your compliance as it allows you to track back through the process through transactions to the source data.
Finally, armed with a complete set of reliable data, you can perform data analytics. This allows you to compare periods and perform trend analysis so that you can gain insights and can forecast future liabilities.
Our AlphaVAT compliance platform offers all of these capabilities, ensuring you are 100% compliant with all MTD for VAT requirements. To help you assess where you come on the compliance spectrum, contact us for a free consultation.