24 Mar 2021
By Stuart Clark, Managing Director of Glasgow-based Russell & Russell, which serves owner-managed businesses throughout the west of Scotland.
Making Tax Digital (MTD) reaches its second birthday on April 1 this year, and whilst there was a lot of grumbling from businesses before its implementation the first couple of years seems to have gone by reasonably trouble free.
Most businesses were already completing their VAT returns online, if not directly through their software. So, what was all the fuss about and why the need to move over?
It is all about the transposition - inputting numbers in the incorrect order, for example, £685 rather than £658 - which HMRC says is costing £9bn in year in lost VAT revenues. Hence the reason you can no longer type your VAT return in to the HMRC online portal; instead, you need to upload it directly.
But surely these small errors in the VAT return boxes cannot cost £9 billion a year I hear you ask – well that’s where the next phase of MTD comes in to play.
With digital till systems in place you need to ensure that these are digitally linked to your accounts software. Rather than manually posting your sales, and possibly creating a transposition error, your systems need to be digitally linked.
Technically this was due to come in to force in April 2019 but was delayed to April 2020 before being pushed back again due to COVID. HMRC had previously issued a “soft landing period” for digital linking, however, this appears to have gone under the radar and most businesses are totally unaware of the requirement.
Also no longer accepted from next month is the cut and paste option, which was similarly allowed during the “soft landing period”, but will not, in future, meet HMRC’s definition of a digital link.
A limited number of further extensions have been granted to those businesses able to prove that they are dealing with complex or legacy IT systems that make 100 per cent digital linking genuinely impossible. But for the vast majority who make up the rest, failure to meet the new rules could incur potentially costly penalties.
Furthermore, it is becoming increasingly less likely that those who try to fudge around the rules will continue to slip under the radar. HMRC’s drive towards automation is leading to higher numbers of enquiries as software algorithms automatically flag up discrepancies that previously had to be uncovered through human detection.
So that is the stick, something else being forced upon business owners; but let’s talk about the carrot, the benefits of implementing these systems and controls.
The tax collector is clearly keen to get everything he or she is due, but it would be unfair to say that HMRC is pushing digital linking because it wants to make things more difficult.
For even innocent mistakes resulting from human error, there is the potential of penalties. Through automation, firms can dramatically cut down on the likelihood of these types of costly mistakes.
There’s also the productivity of your business to consider. Eliminating repetitive and unnecessary administration frees up staff to spend time on more constructive tasks that will grow your company.
The more your accounting is automated, the more your advisors can focus on helping you with the strategic planning that is required to build your operations. And access to real-time information allows you to make better business decisions, know your tax liabilities in advance and plan accordingly.
That is why we have built our business around regular contact - quarterly meetings, unlimited calls, year-end tax planning - well before MTD was a glint in the Chancellor’s eye. The benefits far outweigh the negatives.
Similar reforms covering income and corporation tax are going to follow as part of MTD and embedding this first stage into your systems of operation will pave a smoother path for more changes to come.
So yes, there is some upfront pain and cost with Making Tax Digital for VAT. But there are also are tangible benefits that will be reaped for years to come.
