Digitization of government tax compliance processes has been a trend in the UK for a while now with most of the tax filing and payment processes moving online. This move aims at bringing tax online where everything from bookkeeping, accounting, reporting, filing, and more will move to online platforms in a phased manner over the years. Hence in effect, not just tax compliances but the entire record-keeping and accounting processes need to go digital.
Reasons why the HMRC wants to make the process digital
- Prevent frauds and errors in VAT payments that cost many billion pounds each year to the revenue department
- To accelerate the process of tax return processing, tax payments and tax refunds since the tax system will now work more in real-time where all records will be available online
- To reduce human error in VAT compliance processes, be it administrative or procedural, miscalculations or typos
- To ensure online marketplaces are held liable for VAT compliance of businesses who sell on their sites
- Increase transparency and communicate effectively with the taxpayers through technology to send alerts, updates more directly through HMRC rather than through some office and admin staff
- To bring maximum tax systems on digital platforms and increase transparency in the manner taxes are paid and refunds are processed
The VAT which has been collected in the UK since a long time now has moved to the digital platform since April 1, 2019, for certain businesses. The APIs for this was launched in July 2018 but the businesses were supposed to move to MTD only from 1 April 2019.
Businesses whose annual taxable turnover exceeds £85,000 are supposed to mandatorily shift to MTD to file their VAT returns. MTD requires you to keep digital VAT business records and file returns using Making Tax Digital (MTD)-compatible software. This means that practically all your records need to be maintained in a digital format and the information needs to be passed on to the tax systems using registered APIs. This requirement has been deferred for some small businesses by another six months to give them time to test it on the pilot before they shift entirely on the new system.
What does it mean to move to MTD
There are certain things that need to be understood that what does it mean to be a part of MTD. Here are a few things that businesses will have to follow as a part of MTD:
- All records and accounts need to be maintained digitally in a format that can enable you to pass on data to HMRC using APIs and are compatible with the HMRC systems
- All return submissions to the HMRC must be done through digital systems using APIs too
- No manual transfer of data to happen from any system to another since everything needs to be digitalized
All these factors contribute to the digitization of the tax systems and the aim of HMRC to bring the tax systems online and digital platforms. The VAT is the first of the tax systems to go digital.
Things that businesses require to be MTD ready
- Use software that is MTD-compatible and if you already use one then check whether it is so and make sure that the software is capable of recording data in a compatible format
- You must use spreadsheets to record all the details of VAT transactions and to arrive at the return information that needs to be submitted to HMRC as well as to receive information back from HMRC. The thing to make sure is that there is no manual entry of data in another software/systems and that all data is transferred through digital platforms from one system to another. The software must also be capable of exchanging data with the HMRC
- The records that need to be maintained digitally are for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also include information about your business, including business name and principle business address, as well as your VAT registration number and details of any VAT accounting schemes you use
- An MTD compatible software is a software that supports the MTD obligations to keep records digitally and exchange data with the HMRC through the software. Maybe all the records need not be in the same software but all the different formats used need to be compatible with each other so that data may flow between them digitally. Along with this, it should also be capable of exchanging data with HMRC.
- The HMRC has given businesses until March 31, 2020, to shift to the digital platforms however there are certain businesses that need to transfer return information to software-enabled for an API and needs to submit returns using a bridging software
- HMRC has also described bridging software that helps businesses transfer data from their spreadsheets or digital software to HMRC. This bridging software is essential to businesses that need to mandatorily use digital platforms to transfer data i.e. those with taxable turnover more than £85,000.
HMRC has defined software that approved and can be used to file VAT returns digitally. These are published by them and new ones are being added to the list.
R7VAT is an HMRC approved VAT return filing solution that can integrate with your systems and help you file your VAT returns and also maintain VAT records in a format that is HMRC compliant and in sync with law.