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Making Tax Digital (MTD)

WHAT IS MTD?

Making tax digital (MTD) has been a long-anticipated technical initiative from HMRC, as we see the increased integration of information management and exchange systems across industries and between stakeholders of organisations needing to share data. Enhanced, secure data sharing systems are an inevitable development in our digital age, because as HMRC say, reporting system enhancements will simplify the process of tax reporting, eradicate risks of error and help businesses and organisations “… keep on top of their affairs.”

 

HMRC’s explicit aim is to “…become one of the most digitally advanced tax administrations in the world.”  They claim that MTD will significantly improve tax administration, making it:

  • “more effective
  • more efficient
  • easier for taxpayers to get their tax right”

In the 2020 tax year the UK government will require VAT reporting bodies to be MTD compliant. For those readers somewhat confused or even fearful of what could be involved technically speaking, this article is one of a series from that clarifies some areas of confusion around what MTD involves for companies and organisations seeking to undertake their VAT returns in future.

The Benefits of MTD

To some extent, MTD will automate the process of VAT reporting.  Automation via MTD bridging software creates not only business efficiency, but ensures greater accuracy of shared data, timeliness of information sharing, as well as guaranteeing high standards of security for all involved.  

The API allows for digital links that cuts out the manual administration.  For instance, a digital link may include linked cells in spreadsheets, where a formula in one sheet mirrors the source’s value in another cell, linking data between formats and resources. Interlinking of data allows for greater transparency of VAT reporting companies and tracking back of data by HMRC.

Awareness of the latest VAT reporting system functionality and MTD compliant criteria are key to understanding this latest addition to HMRC reporting obligations and to implementing appropriate systems in time for the MTD deadline.  

Interoperability and MTD System Compatibility

HMRC’s latest regulatory MTD obligation eliminates options for traditional ‘cut and paste’ information sharing methods, which can be subject to error or tampering. ‘Hands-on’ administrative management is eradicated with functional integration via a digital link that is compatible with HMRC’s MTD API – their tool that has embedded computer code to facilitate data transfer from reporting bodies . This software code requires compatibility of systems between HMRC and VAT registered organisations.

 

Such interoperability requires rolling out ‘functionally compatible software’ by companies, which allows for two options.  Thus MTD compliance means:

  1. investing in a compatible accountancy software program, or set of software packages, platform products or applications, that are able to:
  • record and preserve digital records in tact
  • provide information and returns to HMRC from recorded digital data by using the API (data storage and sharing protocols) platform
  • receive information from HMRC via the API platform

 

This latest digital link up with HMRC is required where the data to be included in any of the boxes of the VAT Return has been prepared within a software program, product or application and this data is then transferred to another program, product or application in order to submit a VAT Return to HMRC via the API platform.

  1. Alternatively, for those organisations with legacy systems, such as data spreadsheets, there is an option to invest in custom code to be embedded into current IT systems which acts as an ‘intermediary’ that talks to HMRC’s API, in readiness for data transfer.

VAT Notice 700/22

From 1 April 2019, if your VAT taxable turnover is above the registration threshold VAT notice 700/22 sets out HMRC’s updated obligations for becoming MTD compliant. The 2019 deadline applies to companies currently using proprietary accountancy software packages, where updates will include the appropriate software code that makes for platform compatibility with HMRC’s new API.

From 1 April 2020, for those companies currently using data spreadsheets, there must be a direct digital link via some kind of bridging software between stored data in order for any transfer or exchange of that data to HMRC.  Simply cutting and pasting from such record formats into the VAT return pages will no longer be possible.

All VAT registered businesses are already obliged to maintain specific records and accounts. Under the new ‘Making Tax Digital’ rules, some of these records must be kept digitally, within functionally compatible software, as described above.  Any records not specified in VAT Notice 700/22, or not required for VAT Return completion do not need to be maintained with appropriate MTD bridging software that links to HMRC’s digital API software tool.

What Kinds of Data Sources Are Covered by MTD?

HMRC will accept the following kinds of digital sources in future:

  • emailed data spreadsheets, containing records either via a third party agent or directly from a reporting company.  An agent acting as a company accountant can import their client’s data into their own software platforms in order to carry out a calculation (e.g. a Partial Exemption calculation).  Their data can then be forwarded to HMRC.
  • digital records transferred onto a portable device, such as a pen drive, memory stick, or flash drive, where this physically given to an agent to import that client’s data into their software programs
  • XML, CSV import and export, and download and upload of files
  • automated data transfer e.g. via an off-the-shelf accountancy software package
  • API transfer

What will no longer be permissible as a ‘digital link’ to HMRC is the use of ‘cut and paste’ to select and move information, either within or between software programs.

While the new HMRC reporting requireme nts will be implemented as of the new 2019 VAT reporting year, they will be staged until 2020, to allow organisations currently using traditional spreadsheets to implement the necessary technical upgrades for integration with HMRC’s MTD API.

Of course, VAT registered organisations should also invest in training of their staff in appropriate functionally compatible software.

What Kind of Information Needs Digital Links for MTD?

  • ‘Designatory data’, i.e.: business name and address, VAT registration number and accounting schemes
  • Supplies made and received
  • Reverse charge transactions
  • Summary data

For more detail on Making Tax Digital, also see the following Meer & Co. article:

How To Be VAT MTD Compliant

Alternatively, to ensure your business or organisation is MTD compliant in time for your deadline, speak to an MTD Consultant at Meer and Co today to transition in good time, ensure business continuity, minimise disruption and have peace of mind of remaining compliant.

Making Tax Digital (MTD)

How To Get MTD VAT Ready

VAT preparation in accordance with the latest VAT 700/22 regulations has been available as a pilot service for around half a million businesses, so long as their reporting and accountancy operations have been “up to date and straightforward”. This has allowed for testing of ‘Making Tax Digital’ (MTD) readiness for both HMRC and those bodies wishing to ‘dry run’ their own upgraded systems.

From 2019’s VAT reporting deadline for companies using third party accountancy services or proprietary software, being MTD ready is applicable to most other business types over the coming months. There is, however, a transition period for organisations employing traditional accountancy methods, involving spreadsheets from which they previously may have copied and pasted data into HMRC’s VAT reporting system.

Nevertheless, ICAEW research results published in September of 2018 claims that over 40% of businesses affected by VAT MTD obligations are not yet aware that they have to be ready imminently.

So who needs to get MTD VAT ready fast?

Who Is Affected by MTD in 2019-2020 by the VAT 700/22 Notice

Since October 2018, being MTD compliant has been possible for:

  • Sole traders or companies that are up to date with their VAT records. Exclusions include those who are part of a VAT group or VAT Division
  • Companies and partnerships trading with the EU, based overseas, who submit VAT Returns annually, make payments on account, or use the VAT Flat Rate Scheme
  • Newly VAT registered organisations who are unable to join at this point are not subject to HMRC liability
  • Customers with a default surcharge within the last 24 months were able to join the pilot

From early 2019, roll out will continue to:

  • sole traders and companies who are not up to date with their VAT records
  • Flat Rate VAT scheme users
  • Newly VAT registered businesses who have not submitted returns previously
  • Partnerships and E.U. customers
  • In Spring the pilot HMRC MTD VAT preparation project will be available to MTD customers who have been deferred and is mandated for all others from April.

From October this year, the latest HMRC MTD system becomes mandatory for customers that have been deferred.

HMRC states that the 6-month deferral applies to the following categories:

  • trusts
  • ‘not for profit’ organisations, not set up as a company,
  • VAT divisions and groups
  • public sector bodies required to submit a VAT return ( e.g. Government departments, NHS Trusts)
  • local authorities
  • public corporations
  • overseas based traders
  • those required to make payments on account
  • annual accounting scheme users.
    While this deferral “will apply to around 3.5% of mandated customers”, this could leave thousands of entities who are not MTD compliant and subject to financial penalties.

Getting MTD Ready Yet?

For quarterly VAT returns, many businesses use their GOV.UK website portal. However, from April 2019, qualifying VAT registered businesses, as described above, will have to use accounting software that is HMRC MTD API compatible.

In other words, relevant bodies will have to invest in new accounting software that includes code that communicates with HMRC’s API software tool.  This could mean an upgrade of standard accountancy software packages, so that there is inclusive code that ‘speaks to’ HMRC’s gateway, or investment in bridging software that allows data to be submitted from spreadsheets and paper-based systems, including any digital links to source data. Companies outsourcing their accounts management to professional accountancy firms needs simply check their agent is MTD ready.

38% of UK businesses are now using the appropriate, compatible accounting software, according to Accountancy Age.  However, given that many have not started preparation, time is of the essence given the need to review existing accounts management and reporting systems, then evaluate, purchase, implement and test new software packages in time for their MTD deadline.  The later companies leave this process, the more rushed they will be, leaving them open to greater risk of purchasing inappropriate software, lack of adequate staff familiarisation and late submissions.

One fifth of organisations who have purchased software, says ICAEW, who need to implement their accounting software have not yet made any preparations to do so.  This is worrying and no doubt somewhat explicable in terms of not having a handle on technical aspects of the software they have at their disposal. While the debate still rages over delaying mandatory roll out, businesses should seek to avoid any penalties, should HMRC fail to listen to the House of Lords requests to do so and the many tax professionals appealing the deadline.

Two Routes to Getting MTD Ready

  • For companies that use an existing proprietary accountancy software package, (e.g. Quickbooks, Oracle, Sage, etc.),a simple upgrade to the latest version will have ‘bridging software’ that can communicate with HMRC’s MTD API.

For companies who use spreadsheets and paper-based accountancy systems, all data needs to be collated into a specific VAT reporting spreadsheet and software be invested in that acts as a bridge to the HMRC API.  This bridging software will have functional compatibility and be MTD API enabled, such that the two organisational interfaces can transmit and receive information as necessary

5 Steps To MTD Readiness

1. The first step to being MTD ready is to review your current IT systems and their platforms, before evaluating potentially compatible software. You may need to liaise with your IT partner to check if they can offer programming code to drop into current software to open the communications with HMRC’s VAT reporting system.

2. If your IT systems are all managed in-house, as are your VAT submissions, then your IT leadership will have to review the API in order to design functionally compatible code and implement this, or outsource code design and then integrate to your accountancy software systems

3. Next, having bought your bridging software, MTD ready accountancy package, or having outsourced software programming to a consultant, is to sort your new HMRC VAT submission login. You will of course, need to share this with your accountancy partner, where appropriate.

4. Where data is stored and managed at different locations or in a variety of formats, this will need centralising and importing to your software, or collating into a VAT reporting spreadsheet, which is then used to populate your software, prior to HMRC submission. Ideally, this should be ahead of time in order to test for problems

5. Successful submission should be followed up with staff training and guidance documentation updates.

If your VAT filings are complex, we recommend you hire an MTD Consultant for your VAT preparation.  While we obviously have an interest in making this recommendation, we also recognise the potential costs of late submissions and non-compliance for businesses concerned with keeping their costs down.  If you have any doubts or questions on this, Meer and Company’s provide more information in other MTD articles, here: What is MTD and MTD Compliance . Alternatively, call our friendly, efficient MTD accounting team to ensure your VAT submission goes ahead in good time and without the headache.

For more detail on Making Tax Digital, also see the following Meer & Co. article:

How To Be VAT MTD Compliant

Updates

Holiday entitlement

Now is the time of year when many of us turn our thoughts to holidays and it is important to get holiday entitlement and holiday pay right.

The June 2017 acas newsletter includes links to useful guidance on calculating holiday and holiday pay entitlements as well as guidance on hot weather working.

The GOV.UK website includes a useful calculator.

If you would like help with payroll matters please contact us.

Internet links: GOV.UK calculator acas newsletter

Corporation Tax

Simplifying corporation tax

The Office for Tax Simplification has published their recommendations on simplifying the corporation tax computation.

This report sets out some significant steps towards creating a 21st-century corporation tax system in the UK, responding to calls from businesses of all sizes to make the calculation of corporation tax simpler, with fewer changes and more time to plan. The report looks at four broad themes:

  1. simpler tax for smaller companies
  2. aligning the tax rules more closely with accounting rules where appropriate
  3. simplifying tax relief for capital investment
  4. a range of further issues affecting the largest companies.

We will keep you informed of developments in this area.

Internet link: GOV.UK review CT