Over the next 18 months HM Revenue & Customs (HMRC) will roll out ambitious plans for making tax digital (MTD). Whilst all businesses will be required to make returns “digitally” by 2020, implementation will be phased on a tax by tax basis.
VAT filing obligations are to be implemented by 1 April 2019 and it is expected that the transition will require significant investment in time and resource by business owners. With 2019 also expected to see the commencement of Brexit, businesses need to start planning for digital tax filing now if they are to stay ahead and prepared for all the changes that will arise.
Under MTD and depending upon the level of detail required by HMRC, it will be important for businesses to ensure that the data submitted to HMRC is free of error before submission. The data will likely be submitted in a format that HMRC can interrogate for errors. Once submitted, it will not be possible for tax payers to make an unprompted disclosure of any errors identified. The penalties for ‘prompted’ disclosures of errors identified by HMRC are of course significantly higher than for ‘unprompted’ disclosure of errors by tax payers.
Having the right financial software in place will be critical to complying with the MTD requirements. Currently most VAT and accounting software packages do not facilitate the preparation and submission of digital returns. Whilst many well-known brands of accounting software already have the facility to file a return electronically, that functionality does not extend to the other data that HMRC will require for the ‘summary’. Businesses will need to invest in software that ‘talks’ to HMRC and those new systems will need to be prepared, tested and integrated.
Off-the-shelf software packages may not cater for some of the more complicated VAT requirements such as partial exemption calculations and Capital Goods Scheme, or indeed for businesses that have multiple legacy systems or who need to make manual adjustments to their VAT returns. The investment in additional or bespoke technology is likely to be more significant.
Any change to systems and software will need a budget and an implementation strategy. With the average cost per small business estimated at £2,000 (and much more for complex or large businesses), plans need to be made now to ensure that budgets are set, are adequate and that an implementation plan is agreed.
At this stage, businesses should start reviewing the quality and granularity of their tax and transactional data, to understand what data is currently available and where it currently resides.
The plan should consider the impact of any change in software or filing on established processes, which will more than likely require training and changes to manuals and guidance. Under MTD, the two step authorisation process currently in use for Self-Assessment is being rolled out for all taxes. Businesses also need to consider who should be authorised to submit the VAT return and to strike the correct balance between the practicalities of multiple authorisations and the internal controls to ensure accuracy and consistency.