After the initial announcement of Making Tax Digital (MTD), multiple extensions of deadlines, Brexit and a global pandemic, MTD for VAT will finally take full effect from 1 April 2021 for those above the VAT threshold. With MTD for Income Tax Self Assessment (MTD ITSA) and MTD for corporation tax (MTD CT) due to be introduced within the next five years, it may be time to consider a long-term approach to modernising tax processes and data storage within your organisation.
What is MTD?
MTD is a key part of the Government’s drive to shift towards a connected tax ecosystem through digital record keeping, automated calculations and integrated submission. MTD specifically targets the tax gap due to transcription error; the data required to be kept and submitted remains the same, but it will need to be in a digital format and have a digital audit trail from invoice to return.
MTD for VAT digital links soft landing period over, full compliance required for all VAT-registered businesses with turnover above £85,000
Eligible businesses can begin to voluntarily prepare and test the systems for MTD ITSA
MTD for VAT applies to all VAT-registered businesses
MTD ITSA applies to unincorporated businesses and landlords with total business or property income above £10,000 per year
Proposed date to commence the voluntarily pilot for MTD CT
MTD CT will not be mandated prior to this date
MTD for VAT
Since 2019, the majority of businesses have been required to keep VAT business records digitally and submit VAT returns using MTD-compatible software. The soft-landing for digital links requirement will come to an end in 1 April 2021. Except for partial exemption calculation and certain manual adjustments made within an MTD-compatible software, all manual intervention of data during the preparation of VAT returns will no longer be allowed under MTD.
Based on the results from MTD readiness assessments conducted by Smith & Williamson in January 2021, the majority of respondents have not started the work to put in place digital links within their VAT compliance processes. Many are still deciding between implementing a tax compliance system and continuing with spreadsheet-based workbooks. While spreadsheets are an acceptable form of MTD-compatible software, it is hard to achieve a full audit trail and maintain digital links for complex businesses as mandated under MTD. Specialist tax software has more robust controls and may be easier to maintain as the scope of MTD continues to expand.
There are other options to achieve digital links, such as data manipulation software and database queries. These can be a good compromise between cost and auditability, but they require specialist software and expertise to configure. The number of source systems, data volume and transactional tax treatment are all factors to consider when deciding on your MTD solution. Regardless of your chosen approach, now might be an opportune time to undertake a thorough review of your current processes and data infrastructure. Ultimately, a review could lead to more stringent internal controls and improved efficiencies, benefiting the business beyond being MTD compliant. The time required to configure solutions can range between a couple of weeks to several months, so decision time is now. It will be the beginning of a digital revolution for many.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.