With the introduction of Making Tax Digital (MTD) for VAT in April 2019, businesses should now already be complying with the new requirements, or at least or be well underway with their planning and preparation. However, there are new, additional steps required as we approach the next phase of this journey.
As of 1 April 2019, most affected businesses should now be maintaining digital records and a digital VAT account and you should be submitting your VAT return data digitally, using software compatible with HMRC’s Application Programming Interface (API) platform.
HMRC have allowed additional time for businesses to comply with some aspects of MTD, known as the ‘soft landing period’. Now that the initial phase has been dealt with by most businesses, it is now time to focus on phase two, the ‘digital links’ requirement. Depending on the way you maintain your digital records, this may prove to be more time consuming and complex.
With effect from 1 April 2020, most businesses will be required to maintain a clear digital ‘journey’ or ‘digital links’ between your accounting systems and the software you use to prepare and submit your VAT returns.
A ‘digital link’ is one where the transfer or exchange of data is made electronically without manual intervention. This means transferring data manually (including by copying and pasting) within or between different software products is not permitted. Once data is entered into the digital records, any transfer of data between software programs must be done using ‘digital links’. Each piece of software must be digitally linked to other pieces of software to create an integrated digital journey.
However, HMRC recognise that some adjustments (e.g. capital goods scheme or partial exemption calculations) may need to be performed separately outside of the software that keeps the digital records.
It is important that you now review your VAT accounting processes to establish to what extent your existing systems and any relevant software meet the stringent MTD requirements. It will also be necessary to review the quality of the accounting data, to ensure that all necessary VAT information is captured by the reporting systems.
HMRC have recently announced that, in certain situations, businesses may be granted an extension to the deadline to implement digital links. If you believe your business requires more time to comply, you should make a formal application to HMRC (including a process map of your existing VAT systems) as soon as possible and by no later than the normal deadline for implementation.
Your application should explain why it is unachievable and not reasonable for you to have digital links in place by the end of the soft landing period. For example, this may be due to your business having complex or legacy IT systems, or because you have acquired another business. If your business qualifies, HMRC may grant you additional time to comply.
With this array of additional obligations, businesses should consider their MTD readiness with their professional advisors, given MTD should be seen as a ‘first step’ towards real-time tax reporting and increasingly detailed HMRC audits.