A technical overview of Making Tax Digital for VAT
Currently, the HMRC’s online service accounts for 90% of all VAT submissions, but in a few short weeks, this service will be removed for those over the threshold, and all businesses will be driven to either use an advisor (who must use software) or use software that is API-enabled to perform the submissions.
It’s all part of the Making Tax Digital (MTD) for VAT initiative, but many businesses are still unclear as to how MTD for VAT really differs from the current VAT submissions processes. There are also many firms looking for information around how MTD interfaces with accounting systems, and how exactly accountants will need to change their systems to accommodate MTD for VAT while supporting their clients.
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Here are some of the key questions we’re being asked more and more frequently by practices as the April deadline approaches:
Will we need to become more engaged with the technical side of accounting applications?
When MTD states that VAT return data must be kept and filed digitally, it means that the software that businesses use must be capable of providing information to HMRC and receiving information from HMRC digitally. The emphasis should not be on the ins and outs of the technical side of the applications as software suppliers should be making this easy.
However, what practices will need to focus on is understanding what they do today – how do you currently process VAT returns on behalf of clients? For example, do you use spreadsheets, do you take figures from one place and type them into another?
Practices will also need to understand whether they can continue to process their client’s return in the same way, or whether they need to make changes to their processes or even look to use a new solution. HMRC has a clear guide that all businesses should read which clearly sets out what can and cannot be done.
What about bridging applications? Stopgap or real alternative?
It’s no secret that the journey to filing via the HRMC online portal can often involve spreadsheets, and you will have seen this debated in discussions surrounding MTD for VAT compliance legislation. While the vision of an end-to-end fully digital filing journey is on the horizon, many advisors have significant legacy calculations and formulae within spreadsheets for specific clients that may require some thought and planning.
Spreadsheets are usually used in instances of complexity, where bookkeeping software could require manual adjustment, or in situations where requirements are so straightforward that it’s simply cheaper and easier to use spreadsheets. Either way, when companies or advisors have been using spreadsheets for some time, it’s because they are efficient.
So, it’s good news that in mid 2018, the government gave notice that spreadsheets can still be used in MTD for VAT on the basis that they are used along with software that can be submitted to HMRC digitally. How will it work? A transition to bridging software or API-enabled spreadsheets will be used to digitally submit VAT return data to HMRC when using Excel in the VAT process.
So, Excel can still be used for calculations as long as bridging software or API-enabled spreadsheets are used for submission. Therefore, bridging software is not to be seen as a stopgap, but an important part of the process that will allow companies and advisors to maintain VAT processes as closely as possible with the transition to MTD.
While MTD is encouraging firms to move to fully digital accounting software, which may in many instances be cloud based software, it’s essential to walk before you can run, and advisors will need to understand how the digital link from these spreadsheets to the VAT filing tool will work in practice as they make the transition to MTD.
Are the new technical requirements going to change the business/accountant relationship?
MTD for VAT should be seen by advisors as an opportunity to offer new services, to strengthen their relationships and attract new clients.
It’s a great opportunity for advisors to discuss the services on offer, and very importantly, to customise these services to support the differing needs of the client. For example, in some cases clients may want to file themselves, however they may want advisors to provide a validation and checking service before they do so.
Overall, it’s recommended that advisors get familiar with the solutions they’ll be using to file VAT returns well ahead of the first submission deadline in order to make sure everything is set up correctly. The digitalisation of the UK tax system is a real opportunity for businesses and practices alike to streamline filing, and to improve accuracy and save time. With the right technology in place, the transition to MTD for VAT should making filing more straightforward for all concerned.
Phil Thornton, Senior Product Manager at Wolters Kluwer
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