The European Financial Review | Matthew Smith
Making Tax Digital – first introduced in April 2019 – is the most significant change to the UK tax system we have seen in many years.
Of course, change on this scale doesn’t come without teething problems, and as various phases of MTD continue to be delayed and pushed back, confusion is common.
Businesses must be prepared, and software which ensures a smooth transition into the new tax regime has an important part to play.
The vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are mandated to keep digital VAT records and send returns using Making Tax Digital-compatible software.
Since the 1st November, businesses have been unable to use old Value Added Tax (VAT) online accounts to submit VAT returns, and must, by law, have signed up to Making Tax Digital (MTD).
MTD-compatible software has replaced the old system, and the online VAT return has been closed (other than to those who are annual filers or have agreed an exemption).
While some businesses may choose to use ‘bridging software’ (which allows data to transfer through to HMRC from spreadsheets via ‘digital links’), these are ultimately only interim solutions.
HMRC-recognised software capable of generating VAT returns and submitting to HMRC directly on behalf of businesses and agents is a more effective, efficient solution – helping to eliminate unnecessary errors, ensure punctual reporting, and reap the benefits of the move to digitisation.
Increasingly, and across numerous sectors, the benefits of digitisation have become abundantly clear. Millions of businesses are already banking, paying bills and interacting with both customers and suppliers online – and many have moved accounting work onto online software.
HMRC’s stated ambition is to become one of the most ‘digitally advanced tax administrations in the world’, and MTD is a cornerstone of that ambition.
Fundamentally changing the way the tax system works, MTD aims to increase effectiveness and efficiency, as well as remove a burden from taxpayers and make it easier for them to get their tax right.
This move to digital integration will eliminate outdated paper-reliant processes and allow businesses and agents to spend more time focusing on maximising business opportunities, encouraging growth and fostering good financial planning.
This is where HMRC-recognised software can play a key role. The benefits an online, powerful system bring to a property portfolio have never been greater.
Commercial software developers are able to utilise the Application Programming Interfaces (APIs) provided by HMRC to keep records digitally and integrate with HMRC.
Combining this accounting software functionality with a general property management system leads to greater ease of mind, a more agile business, and increased efficiency.
As an HMRC MTD recognised application, accounting systems are able to connect to the HMRC gateway to automatically retrieve the VAT Obligation Period for the entity that one is reporting for.
Once the VAT Return has been produced for that reporting period, the system connects back to the HMRC Gateway and submits the VAT Return.
Crucially as part of this process, the VAT Return is not only stored in the accounting system but also has a permanent date and time stamp record of when the Return was submitted because as part of the submission process, HMRC passes back confirmation of the submission details.
This creates a more reliable, straightforward process, with returns stored online and confirmation of receipt provided.
Furthermore, the new MTD process is very secure – HMRC MTD recognised applications have unique identifiers which allows connection to the online portal, cutting out the need for multiple steps and ensuring first-hand information is uploaded directly to HMRC.
Making the change to MTD software may, to those having previously used paper or legacy systems, have seemed like an onerous task.
However, for businesses of all size, accounting software can help optimise processes, facilitate growth, catalyse greater digitalisation across business functions, and improve cash flow. It’s a boon, not a burden.
However, the journey thus far has not been smooth. Initially, Covid-19 caused delays in the rollout of VAT MTD. Similarly, while MTD for Income Tax Self-Assessment (ITSA) was originally intended to be introduced in April 2024, the Government announced in December that the mandatory use of software would instead be phased in from April 2026.
Furthermore, at the November 1 deadline, data from tax compliance firm Avalara showed that 832,000 businesses remained unregistered for MTD – a number that represents nearly 33 percent of UK VAT-registered businesses.
With fines a likely result of non-compliance, and a deep recession predicted to lie ahead, those 832,000 businesses need to move fast (if they have not already) to rectify the situation, and make use of HMRC-recognised software. This January, a new VAT penalty regime entered into force, which will only worsen the blow for businesses.
The choice to use a functional, efficient HMRC-recognised software system is perhaps made more likely by the potential penalties faced.
For example, penalties of up to £1,600 per year could face businesses who fail to file their VAT return using functional compatible software. Sloppy accounting and disorganisation – for instance if a business doesn’t have clear digital links in the VAT compliance process – could result in a penalty of £5 -£15 per day.
Non-compliance is not just a nuisance, but a cost, and a cost that businesses cannot afford in a period of economic downturn.
The transition of the UK’s tax system into the digital era is an exciting one, but it requires care and attention. Choosing the right software system to help is essential to ensure that businesses in the UK are keeping up with change.
Source: The European Financial Review
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