MTD for VAT – The Next Step

Whether your business was one of the majority of VAT registered businesses required to file via HMRC’s new MTD platform with effect from 1 April 2019, or you were granted a deferral until 1 October, the first phase of Making Tax Digital (“MTD”) is now a reality for all businesses. This first phase, digital submission, was the easy bit… provided that you had functional compatible software or had access to a bridging solution, submission of the 9 box VAT return information to HMRC was straight forward. 

It is the next phase where the real challenge will lie for many businesses.  HMRC applied a “soft-landing” period for each business’s first 12 months under MTD.  This meant, provided the digital submission was made, there did not need to be a full digital audit trail within the VAT records.  From April 2020 (or October 2020 for those granted the digital submission deferral), transfer of data between functional compatible software must be done using digital links. This means no manual inputting, including manipulation, consolidation or error corrections in spreadsheets. That includes the ending of the ‘cut and paste’ concession allowed for the soft-landing. 

If all of a business’s records are on a single accounting system, this may not create too many problems.  However, for those businesses with multiple accounting systems or group accounts, the normal solution is to manually consolidate the VAT return information into a spreadsheet. Such businesses will have to either invest in new software or adopt new processes.  The solution may be integrating all systems or investing in a VAT reporting software that digitally extracts, merges, allows digital adjustments and then files via the MTD API. If the current summary spreadsheet option is maintained, it may need the development of complex Excel macros to consolidate this information without human intervention. 

HMRC understand that many businesses will still have difficulty meeting this requirement at the end of the soft-landing period.  As a result, HMRC has announced that businesses with complex systems can apply for additional time to put digital links in place. 

To apply for an extension to the soft-landing period, businesses will be required to make a formal application to HMRC as soon as possible before the end of their soft-landing period.  HMRC does not accept that cost is a suitable reason on its own to warrant an extension. 

In order to obtain HMRC’s approval, any application will need to address the following points: 

• Details of why it is not possible or reasonable to have digital links in place by the end of the soft-landing period; 
• Details of why commercially available software does not meet the business’s digital link requirement;  
• Details of the systems that are unable to be digitally linked including diagrams of the existing VAT systems, highlighting the exact areas that cannot be digitally linked;
• A clear explanation and timetable for when and how the business will become fully MTD compliant; 
• Details of the controls the business has put in place to ensure any manually transferred data is moved accurately and without error.

The other post–soft-landing aspect to consider is the penalties that will apply.  A new regime for penalties for the late submission of returns and late payment penalties has been proposed by HMRC.  Moving away from the current flat–rate surcharge, the proposed regime adopts a penalty point system and applies variable charges depending upon how late a payment is.   

However, the current default surcharge rules are expected to apply until April 2021.  Under the current regime, charges for late submission or payment of VAT returns are calculated on a cumulative basis.  Starting with a warning letter for a first offence; surcharge levels of 2%, 5% and 10% apply for 2nd, 3rd and 4th offences respectively.  5th and all subsequent offences are charged at 15% of the VAT due.  Surcharges do not return to nil until after there has been 12 clear months without a late VAT return.  In addition, further penalties of up to 100% of undeclared VAT can be levied on errors and inaccuracies on returns.   

AAB’s Indirect Tax team has experience of assisting businesses with their MTD responsibilities, including:  

• The provision of an MTD compliant bridging solution;  
• A review of their existing processes to identify MTD gaps; and 
• Assistance with amending existing VAT reporting processes to make them MTD compliant. 

For more information contact Alistair Duncan, or your usual AAB contact.