Outside of Brexit and the upcoming election, it is easy to forget some important day to day requirements for 2020. With this in mind, it is easy to forget that a number of key day-to-day requirements still need business attention as we move into 2020.
HMRC introduced Making Tax Digital (“MTD”) for VAT in 2019. This applies to organisations that are VAT registered, as they have a turnover of more than £85,000, and aims to help make tax processes more efficient and effective and support the digital transformation. The level of success of this roll-out can be debated elsewhere, but it is fair to say that there remain key challenges for organisations to address.
The three main elements of MTD include:
- Digital submissions of VAT returns, via Application Programme Interface (API) software;
- Digital links in systems and core processes; and
- The maintenance of Digital Records.
The majority of VAT registered businesses had to ensure their VAT returns were submitted to HMRC via API software from April 2019, with some organisations granted extensions to comply. Now, the focus of the conversation is moving away from the API compliance position (commonly referred to as the first stage of MTD for VAT) to what is required in the background for overall compliance with the MTD initiative.
Looking ahead to 2020
HMRC will expect businesses to make progress in 2020 with the digital link requirement. A digital link is an electronic or digital transfer or exchange of data between software programs, products or applications. For MTD, you need digital links between the software programs, products or applications you use during the process of calculating your VAT liability.
In theory, all software must be digitally linked to other pieces of software to create a ‘digital journey’ with a clear digital audit trail from the transactional data recorded in your accounting systems through to HMRC VAT submissions.
By removing the need for manual intervention, HMRC anticipates less errors in VAT submissions. This is an essential requirement for creating a digital audit trail and reducing the risk of error, together with the wider digital tax transformation piece.
However, HMRC have now recognised that for some organisations it may not be easy to create the digital link journey, for example due to legacy IT issues. Further extensions to the initial 12 month soft-landing period (from the start of period from initial API submission) may be possible. While every effort should be made, subject to qualifying conditions, additional time may be available to assist with this journey. In order to apply for an extension, it will be necessary to:
- Submit a formal application to HMRC before the end of the soft-landing period;
- Explain the reasons for the problems faced in creating a digital journey within the allotted period;
- Provide details on the system challenges, together with legacy system details;
- Outline a (reasonable!) timetable for compliance; and
- State the controls that will be, or are, in place to manage manual intervention in the VAT return process in the meantime.
HMRC will review applications on a case by case basis. It is worth noting that this is not merely a VAT issue, VAT teams should be working closely with IT and software teams, together with external providers to ensure a joined-up approach to MTD. BHP is working with a number of organisations across the region in this area.
What else should be considered for VAT technology in 2020?
The way VAT and tax is managed in organisations continues to evolve and develop at pace. To align with the MTD initiative, we are also seeing businesses reviewing how they manage the interaction of VAT with the rest of the business in some of the following ways:
- Focusing on eliminating manual processes across the organisation, not just in VAT processes. This will improve data quality and ensure the whole organisation is incentivised to assist with the digital journey;
- Improving the quality of master data across the organisation, including in relation to suppliers, customers, materials and tax codes;
- Embracing the switch to e-invoicing;
- Aligning VAT and technology departments – particularly on the MTD journey; and
- Reviewing use of current IT and legacy data systems – the major ERP players are now focusing on cloud based, innovative and efficient solutions.
There is clearly much to do, but the right focus on MTD in 2020 and the above key strategic priorities, will assist in the transition into the digital age for VAT.
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