By Stephanie Smyth, Manager, Tax at Grant Thornton
With the introduction of Making Tax Digital (MTD) for VAT in April 2019, businesses should now already be complying with the new requirements, or at least be well under way with their planning and preparation.
However, there are new, additional steps required as we approach the next phase of this journey.
As of 1 April 2019, most affected businesses should be maintaining digital records and a digital VAT account, and should be submitting their VAT return data digitally, using software compatible with HMRC’s Application Programming Interface (API) platform.
HMRC have allowed additional time for businesses to comply with some aspects of MTD, known as the ‘soft landing period’. Now that the initial phase has been dealt with by most businesses, it is time to focus on phase two, the ‘digital links’ requirement.
Depending on the way you maintain your digital records, this may prove to be more time consuming and complex.
With effect from 1 April 2020, most businesses will be required to maintain a clear digital ‘journey’ or ‘digital links’ between accounting systems and the software they use to prepare and submit VAT returns.
A ‘digital link’ is one where the transfer or exchange of data is made electronically, without manual intervention.
This means transferring data manually (including copying and pasting) within or between different software products is not permitted.
Once data is entered into the digital records, any transfer of data between software programs must be completed using ‘digital links’.
Each piece of software must be digitally linked to other pieces of software to create an integrated digital journey.
However, HMRC recognises that some adjustments (e.g. capital goods scheme or partial exemption calculations) may need to be performed separately, outside of the software that keeps the digital records.
It is important that you now review your VAT accounting processes to establish to what extent your existing systems and any relevant software meet the stringent MTD requirements.
It will also be necessary to review the quality of the accounting data, to ensure that all necessary VAT information is captured by the reporting systems.
HMRC has recently announced that in certain situations, businesses may be granted an extension to the deadline to implement digital links.
If you believe your business requires more time to comply, you should make a formal application to HMRC (including a process map of your existing VAT systems) as soon as possible and no later than the normal deadline for implementation.
Your application should explain why it is unachievable and unreasonable for you to have digital links in place by the end of the soft-landing period.
For example, this may be due to your business having complex or legacy IT systems, or because you have acquired another business.
If your business qualifies, HMRC may grant you additional time to comply.
With this array of additional obligations, businesses should consider their MTD readiness with their professional advisors, given MTD should be seen as a ‘first step’ towards real-time tax reporting and increasingly detailed HMRC audits.
For further information or advice, Stephanie Smyth can be contacted at firstname.lastname@example.org
Grant Thornton (NI) LLP specialises in audit, tax and advisory services.