Russell Gammon, Chief Solutions Officer at Tax Systems 

Evolution of MTD for VAT

We’ve reached the home straight for this April’s regulations for HMRC’s Making Tax Digital (MTD) for VAT, which now applies to all UK VAT registered businesses, regardless of taxable supplies. And with many companies still in planning to address the implications for VAT registered businesses including UK subsidiaries, it’s worth a recap on the key issues and to explain how the broader business benefits of MTD extend beyond the tick-box of compliance.

Since smaller businesses who make under £85,000 in taxable supplies a year, but have voluntarily registered for VAT, have now also been invited to the party, this affects around 1.1 million businesses. Many of these businesses will be small and include landlords and the self-employed. For affected businesses, they will no longer be able to key figures into HMRC’s portal, but must, instead, submit values to HMRC via their API. Key priorities for finance teams include minimising risk, increasing accuracy and control, and driving efficiencies in other areas. Digitisation has brought benefits to many industries – the tax system is no exception.

The key benefits MTD delivers to the overall business

Compliance should be the minimum requirement, but it’s not the benchmark. There are many advantages of implementing specialist MTD for VAT software. In fact a qualitative and quantitative research report by the UK Government demonstrates that MTD-compatible software can improve the accuracy of returns by removing opportunities to make certain types of mistakes when preparing and submitting tax returns – resulting in a net increase in tax revenue known as additional tax revenue.

Aside from compliance, key benefits for all businesses include:

Mitigating risk:

• Accuracy and efficiency in VAT processes eliminates spreadsheet errors, flags anomalies, and enables more time to derive business insights
• Reduce your risk profile with HMRC and increase control with dedicated MTD-compliant technology
• Reduce the likelihood of audit and minimise disruption if it occurs
• Pay the correct amount of tax -reducing the risk of compliance audits and penalties

Creating opportunities:

• Identify repayment opportunities through better treatments and make complex processes such as partial exemption easier to manage
• File your tax return earlier – on average 3 to 5 days each period
• Reduce compliance workloads by 70% – streamlines processes and reduces work

Generating insights:

• Better business intelligence – going digital also means better business intelligence which can inform tax planning. Identifying critical gaps and assessing whether business strategies are too conservative / aggressive.  Data use can be shared beyond the tax department.
• Access to huge amounts of data – this can be powerful outside tax compliance.  For example, accurate and consistent VAT data can help with insight into profit margins in different areas of a business

The time-saving benefit of dedicated software can free up tax teams from laborious and lengthy VAT reporting. In transforming the way finance teams use technology, they can repurpose this time for more valuable business activities.

Stepping-stone approaches to digital tax requirements don’t work

Initially, some businesses looked to adopt a bare minimum level compliance offering, with Excel rather heavily featuring as a tick box exercise.  This might not be enough to cover for all eventualities and it isn’t future-proof. Like security, compliance is not an area that works well if you do the bare minimum – it’s a complex area with consequences in terms of fines and penalties if compliance isn’t adhered to in the right way. The right software correlates to wider business benefits – and revised approaches are hurriedly being made to ensure the correct investment options to protect the business, and its reputation from breaching new regulations.

Implications/advantages for UK subsidiaries of international companies

If an international business has its headquarters in another country, it may have a VAT registered UK subsidiary, which could now be in the spotlight of this MTD extension. Potentially these businesses have the most to gain by being included in MTD for VAT.

Because these UK subsidiaries may be small, relative to their parents (being less than the £85,000 taxable supplies threshold), the organisation may simply decide to accept VAT as a cost to the business. i.e., the VAT amount may not have been significant enough on its own to justify adopting a more automated or digital process. With the extension of MTD for VAT, these organisations now need to ‘do something’ to be compliant. This could simply be a basic bridging solution to connect spreadsheets to HMRC, or specialist VAT software that’s been designed to produce accurate calculations and deliver efficiency gains through automation.

Since we’re now two and a half years into MTD for VAT, some of these organisations will be aware of so-called “bridging solutions” as the bare minimum to be compliant. However, since a bridge doesn’t address the accuracy of VAT returns, some have re-strategised to implement a dedicated VAT software solution. An automated solution is superior to manual VAT processes based on spreadsheets, which are prone to errors. Tax Systems’ own research of the VAT processes of 250 enterprises found that nearly 80% had errors; half of which had a meaningful impact on the accuracy of submissions, exposing them to a risk of penalties and HMRC audit.

Size doesn’t matter

Smaller-sized subsidiary businesses can have just as complex processes and data as their larger counterparts. For instance, foreign banks with a presence in the UK may be managing complex VAT requirements such as Partial Exemption Standard or Special Method, which can add significant time and greater potential for error to an already heavily manual process.

It’s necessary to factor in these complexities when choosing HMRC MTD-compliant software to specify a solution that is purpose-built to navigate your business through the complexities of VAT.  Now included under the extension of MTD for VAT, small subsidiaries must examine their VAT processes and they, just as larger businesses, can make clear gains beyond simply becoming compliant.

First steps businesses can take today

The first and most important step a company can take towards MTD is to look within, to its pain points. All companies have their pain points, such as time-consuming reporting, formatting data, and the number of steps it takes from data entry to reporting. Much of this is manual and – with the right technology – can be automated.  Knowing your challenges can help the software work its magic to address these.

Organisations which fall under the extension of MTD for VAT must merely become compliant with April’s regulations. But building a robust compliance posture means more than this – choosing the right MTD for VAT software solution won’t just optimise compliance and increase the comfort of a business in its tax position, it will minimise your risk profile, as well as improve the efficiency of the entire finance team and department to focus on more valuable business activities.