Phase two of MTD will require digital links and an uninterrupted digital journey
HMRC’s Making Tax Digital (MTD) impacts corporate VAT reporting processes in organisations with operations in the UK. If your enterprise is affected, it’s essential to make sure you’re ready to comply with the MTD requirements for digital links by the April 2021 deadline.
This initiative is about more than just introducing new rules. It’s about the digital transformation of tax, in line with the broader global trend for tax authorities to move towards a more digital relationship with customers, and increased regulatory guidance from the OECD for transparency in tax data.
MTD is designed to achieve a number of key aims for HMRC, including a reduction in the perceived tax gap – estimated at £34 billion in 2015/16, of which £12.6 billion relates to VAT. Key to this is the belief that a significant amount of this gap is less to do with fraud than the lack of quality recording of transactions, and mistakes caused by manual process such as the incorrect keying in of data.
This agenda is creating a new, digitalised tax environment beyond indirect tax that all businesses will need to navigate going forward. It presents many opportunities for management through a new line of sight across the entire business, and automation plays a key role in making it a success.
The deadline for digital links is upon us
One the key requirements of MTD is ensuring all systems that contain digital records (any transaction data) are linked together in a digital way. While businesses were given an opportunity in year one to ensure their systems and processes met this standard before penalties are enforced, the soft landing period is coming to an end.
Although businesses can continue using Excel spreadsheets after the MTD April 2021 deadline, they will need to ensure that there is a digital link in place from the accounting software into the spreadsheet to provide an uninterrupted digital journey from the bridging software to HMRC. And, as we’ve previously discussed, HMRC has made it clear that there will be no further extensions to the April 2021 deadline for phase two of MTD for VAT. For businesses that should have started to comply in April 2019, compliance will be expected.
In a recent webinar, “How indirect tax technology can shape tomorrow’s tax departments,” we asked the audience how their tax organisation has changed their strategy in response to the challenges of 2020, given the looming deadline. A total of 34% responded that they are currently undertaking a review of their existing processes, and 20% said that they are embracing new technology in order to give their department more flexibility, including a continued shift to cloud. Worryingly, nearly 30% believed that they would require an extension beyond 1 April 2021, and over 8% recognised that they will struggle to meet the MTD requirements at all.
According to our recent 2020 European Corporate Tax Managers Survey, tax managers are certain that the ability to embrace technological innovation is vital to be a leader in the sector. As newer technologies, such as robotic process automation (RPA), artificial intelligence (AI), and blockchain advance new use cases for the indirect tax department, the profession will increasingly need to understand how to best utilise available technologies.
The time for indirect tax automation is now
By adopting automation through indirect tax technology, there is an opportunity to transform the way the business operates. Tax data analytics can give insights into the business from a different perspective that will be valuable to a range of stakeholders, such as cashflow forecasts, volume of business processes, and profitability per country. The more sophisticated your tax technology, the greater the benefits, including greater control over taxpayer data and enhanced fraud control.
By automating routine indirect tax tasks, such as those related to VAT, a team can spend more time on strategic activities. Businesses are increasingly automating the manual extraction of data from their source systems, generating significant time savings and enabling data to be verified, manipulated, and shared between processes for better accuracy and fewer delays. This allows indirect tax professionals to focus on strategic and value-add work that can improve those processes, operating models, and financial performance.
Digital links – Successfully meeting MTD requirements in your indirect tax department
Automation can play a key role in enabling the digital links that are so important to MTD for VAT, but it is essential to understand what constitutes a digital link. Let’s start with what won’t meet the requirements:
- HMRC states that noting down details from an invoice in one ledger and using that handwritten information to manually update another part of the accounting system will fail to satisfy the digital link requirements of MTD.
- Transferring data manually within or between different sets of software programs that the business uses for MTD compliance will not be acceptable. This includes copying and pasting – HMRC emphasises this point in its definitions.
HMRC also gives examples of what is acceptable in terms of digital links. This includes:
- Emailing a spreadsheet containing digital records to a tax agent, who will then import the data into their own software, is acceptable.
- Transferring a set of digital records onto a portable device – such as a pen drive, memory stick, or flash drive – and physically giving this to the tax agent is acceptable.
- Similarly, the use of XML or CSV import and export, as well as the download and upload of files, constitutes a digital link.
- Automated data transfer where a VAT calculation spreadsheet is directly linked to the accounting software and accesses figures directly every quarter is also acceptable.
Indirect tax automation in action
If you consider the example of a VAT group involving multiple companies, each of which is using a different accounting system, then the consolidated VAT liability will be calculated using a spreadsheet containing relevant information from each company.
Under MTD, that spreadsheet must be digitally linked to each of the group company accounting systems. Manual data entry based on information from PDF reports, for example, will not be acceptable. However, an Excel-type format that enables the direct transfer of data (e.g., through linking cells in different spreadsheets) would be acceptable under MTD with onward submission through bridging software.
The important thing to consider is that while “acceptable” might get you over the line, is it really efficient, a good use of time, and adding value outside the basic requirements of the legislation?
Deciding your approach
Determining what level of change is required, and how far you wish to go is a critical step during this next phase of MTD. You need to understand what level of risk you are comfortable with to ensure compliance; and ask whether you want a fully robust compliance process from the outset, or you’re comfortable to meet minimum requirements.
There are solutions available to meet each gap of MTD for VAT compliance, however piecemeal solutions should be put in context of the general trend towards a digital tax agenda, and their long term suitability.
The right MTD software solution can help to keep your organisation abreast of tax rates, tax rules, and apply tax logic all while adhering to your company policy and meeting auditing requirements. You will not only meet the “acceptable” MTD requirement but also gain so much more through the automation of tax technology.
Reviewing the options with internal and external stakeholders such as IT, software providers and external consultants will ensure that the best solution to meet operational needs is selected. This could include considering:
- Data security policy
- Compatibility with existing systems (e.g., ERP)
- Tax technology strategy
While MTD for VAT is a UK initiative, it is also worth considering the growing impact on tax teams of similar reporting requirements in other jurisdictions, and how greater efficiencies can be made to reporting and accessing data. Businesses that take the leap to integrate and automate with the right tax technology will save time, money, gain new insights, and probably reduce stress for their indirect tax teams.
How we help
Thomson Reuters ONESOURCE Indirect Tax Compliance fully supports the core requirements of MTD and automates your VAT processes end-to-end. A robust risk management framework ensures fully compliant automated data collection; fast, reliable, intelligent reporting and easy to manage submission. ONESOURCE also provides all the required digital links, and incorporates an underlying process control and digital audit trail of any manual adjustments from review to sign off, allowing you to file your returns directly from the application with confidence.
If your company goes beyond borders, the move by tax authorities globally to digital reporting will require a scalable solution that meets a range of requirements. ONESOURCE can support indirect tax filings in over 50 countries.
At Thomson Reuters, we heavily invest in content and technology that powers ONESOURCE Indirect Tax Compliance. Our focus on technology development and continuous content improvement means that our customers always have the latest version of our software. Any changes needed to comply with the constantly evolving tax landscape are tested and applied by us and, most importantly, are instantly available to all. It means our software is fast, streamlined, and capable of much more than making your MTD for VAT filings, such as analytical tax reporting – all with 24/7 customer support.
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UK MTD: Future-Proofing Tax
As you make the necessary changes to achieve MTD compliance, it is worth considering the growing impact on your tax teams of similar reporting requirements in other jurisdictions. Watch the pre-recorded webinar to know how you can gain the most out of this structural change.