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:
- 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.
- 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:
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.