By Alex Baulf, Senior Director of Global Indirect Tax, Avalara
HMRC’s flagship tax administration initiative, Making Tax Digital, is set to come knocking for 1.1 million additional organisations from 1 April 2022. In this article, Alex Baulf, Senior Director of Global Indirect Tax at Avalara, outlines the motivations, benefits and requirements that companies need to consider ahead of the deadline.
The latest phased implementation of Making Tax Digital, known as MTD for short, is now just around the corner.
Having been deferred because of the COVID-19 pandemic, the HM Revenue & Customs (HMRC) ruling is set to be extended to all UK registered businesses come 1 April 2022, regardless of their size and adoption of VAT registration on a voluntary basis.
To achieve this, the Finance Act 2021 made a minor amendment to paragraph 6 of Schedule 11 to the Value Added Tax Act 1994, removing the exemption for businesses with a taxable turnover below the VAT registration threshold.
The initiative stems from a variety of different motivations.
On the side of HMRC, it is a goal that MTD will help to make the tax administration one of the most digitally advanced in the world, fundamentally transforming the UK’s current tax system for the better. Geared towards simplifying processes for individuals and businesses alike, the initiative has three key goals: To make tax administration more effective, to make tax administration more efficient, and to make it easier for taxpayers to get their tax right.
Understanding MTD and its benefits
In essence, all businesses will be required to submit their VAT return to HMRC using MTD-compatible software. They will also be required to maintain digital records at a transaction level. Finally, when the VAT return is produced, there should be a clear digital link between the digital records and the final VAT return produced and submitted to HMRC. In practical terms, this means an end to “copy and paste” within spreadsheets, no re-entering of data manually, and a clear audit trail in relation to any adjustments made.
While the changes will be mandatory, they shouldn’t be viewed as a burden for businesses. Rather, they present an opportunity for companies owing to the numerous benefits that digital tax returns can unlock for firms themselves.
So, what are these benefits?
MTD will help, or is already helping businesses reduce errors and save time, freeing them up to focus on other tasks such as strategic advisory work that can contribute to overcoming wider challenges, cost cutting and growth.
Further, firms have also benefited from greater transparency over tax data, with a focus on the underlying digital records at a transactional level and the digital journey this data goes on before the final 9 Box VAT return is submitted. For banks, insurance companies and other financial service providers, one of the large impacts has been the requirement to apply the reverse charge in an automated fashion rather than seeing this purely as a manual adjustment when the VAT return is prepared. This change has led many businesses to consider automating tax determination on the AP side, accurately determining whether the reverse charge needs to be applied and if so, at what rate.
Navigating the legislative changes
Despite the benefits, the introduction of MTD in the spring will see many small firms undergo an adjustment period in order to become compliant – something that will require time, investment and effort.
While a quarter of VAT registered UK businesses trading below the £85,000 VAT threshold have already voluntarily chosen to join MTD, it is estimated that as many as 1.1 million businesses that are not already obliged to meet MTD requirements for VAT reporting and record keeping will be affected.
It is a sharp shift, with MTD having previously been implemented with a ‘soft-landing’ period to provide businesses with a timeframe in which they could gradually adopt the compliant software required.
Back in June 2019 – two months after the initial MTD for VAT rollout – HMRC conducted research showing that 16 percent of businesses mandated to comply with this initial phase had failed to do so.
To prevent such a scenario repeating itself, and with this soft-landing period ending, many of the remaining 1.1 million firms are being contacted and notified by HM Revenue & Customs, with 326,500 receiving a letter in the first phase to highlight the new obligations.
It is easy to see why HMRC is taking these measures.
At Avalara, we have seen first-hand that many businesses are still not yet entirely compliant. Every company is different, and this compliance gap is therefore not down to any single factor. From ERP upgrades and data quality issues to recent M&A activity, organisations in many cases have simply had other priorities, particularly given the adaptations that have been necessary for companies to continue operating effectively during the pandemic period.
However, with that said, it is now clear that MTD compliance will be considered when looking at the cause of VAT errors and the extent to which penalties are levied or mitigated.
Therefore, with just a few months to go before the deadline is reached, now is the time to revisit and implement a compliant process and solution to ensure readiness for 1 April 2022.
Companies will need to consider the options, tools and support available to them, each of which will be critical in ensuring that they can achieve compliance in a timely, cost effective and holistic manner. Furthermore, this is really only the beginning of Making Tax Digital, and the current changes and requirements are only small baby steps getting all UK businesses on a level footing in terms of data and process, before new digital reporting requirements are introduced in the future. The direction of travel across Europe is clear and it is a move to transactional level reporting, submitted digitally and in as close to real-time as possible. The financial services sector will need to consider how it can meet changing VAT compliance requirements across Europe including mandatory e-invoicing. Now is the time to start considering a wider digital tax strategy in terms of technology, data and process and thinking strategically and global rather than tactical and local.