Making Tax Digital
Making Tax Digital
A guide to digital record-keeping and bridging solutions ready for Making Tax Digital (MTD)
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Which MTD solution is better for you?
Lack of user feedback means that AccountingWEB’s 2019 comparison table for MTD for VAT software is an embryonic starting point for any software searches. With just a few thousand organisations participating in the MTD for VAT pilot scheme, there are not many user reviews to draw on. There are nearly 200 products jockeying for business around the new filing opportunity – but not all of them will be relevant for most users.
This buyer’s guide does not cover all of the developers on HMRC’s list of “available now” or “coming soon” MTD for VAT software, only the once we’re aware of so far that have responded to our approaches. This category is likely to grow rapidly during 2019 and our objective is to make it easier for accountants to find the solutions that best meet their needs. Ultimately we will filter the selection down to those that do most of the work.
Basic requirements of MTD software
If you have not already done so, it’s a good idea to familiarise yourself with VAT Notice 700/22 Making Tax Digital for VAT. This explains all the main rules governing the digital record-keeping and submission requirements for the new system. When considering a potential MTD for VAT software solution, the main points to bear in mind are:
- A VAT-registered business must keep digital records of its transactions in “functional compatible software”
- All the existing VAT record-keeping requirements still apply – for example the need to retain import certificates – and be available in digital form for the mandated period of six years
- VAT return data for the nine current fields must be derived from those digital records and passed via “digital links” from the transaction record through adjustments to the submission of the VAT return to HMRC. Cutting and pasting data between spreadsheets is not permitted
- The VAT submission to HMRC needs to go into the MTD system via digital programming links (APIs) from either the bookkeeping system or bridging software
Start closest to home: What does current supplier offer?
Where to start? For most businesses and accountants using commercial bookkeeping systems, this is simple: ask your current software provider what they’re doing to handle MTD for VAT.
Will it be ready in time and does it meet your needs? You should expect the answers to be yes to both and this is likely to be the case for most affected businesses. This guide, however, is designed for those who need or want to make other arrangements.
Just because the government wants businesses to keep up-to-date computerised records doesn’t make it a bad thing. Some organisations may use the MTD for VAT situation to review their wider accounting processes and software needs – for example to capture transactions digitally as soon as they occur.
Some of the most interesting products on the official MTD listing are specialist programs catering for farms, property managers, tyre outlets and accountants. Businesses in these vertical sectors should be on the lookout for programs that could do more for them than just handle their VAT returns.
How much is it going to cost?
At the outset of the project, Chancellor George Osborne promised that “free software” would be available for the smallest organisations affected by the new regime. Such products do exist, including QuickFile and the Avalar Filer bridging software, but commercial software developers need to eat too. They have all spent a lot of money building the required tools and will have to find some way to recoup their investments.
Most common is the “freemium” approach, where there is an initial free offer that goes up next year, or a limit on the number of returns can be handled in each period. And professional advisers who handle scores of returns are unlikely to benefit from trawling the MTD bargain bin for free programs.
Also be aware that having upgraded their programs to handle MTD, many developers will only include those facilities in their latest versions. If you are running an old desktop product, you will probably need to fork out for the new edition.
If you really want to avoid additional costs for MTD, there’s nothing to stop you outputting a CSV spreadsheet report and using a bridging tool to link to that for filing the return. But ask yourself whether saving the sums involved will justify the extra effort. A few minutes (and extra complexity in your process) every quarter could add up in the long term, and you will be missing out on any other new efficiency features that may have been added to the core product.
Filing, bridging or more?
If you’re a VAT business that already maintains digital records and the only additional requirement is to file quarterly returns under the new system, you should be in the majority group that can rely on your existing supplier.
But as the government and HMRC discovered during the extended MTD consultation process, not all businesses fit the template that was envisaged. Many businesses that do not sell goods or issue large numbers of invoices have maintained adequate spreadsheet records for years.
Other, more complex organisations may rely on bespoke and customised systems that do not have built-in MTD filing engines. To complete the picture, large groups that consolidate multiple subsidiaries into a single VAT return or organisations using particular VAT schemes or that make other adjustments invariably use spreadsheets to do these calculations, because there are few viable commercial alternatives.
To cater for all these different situations, HMRC conceived the idea of “bridging software” that can import the nine key VAT values that need to be filed from the underlying records (or spreadsheet workings). This option is the emergency escape hatch that accountants and organisations that do not have MTD-compliant bookkeeping systems will be able to use to file their returns from April 2019 onwards.
In HMRC’s mind, the bridging solution is a stop-gap and the department would dearly love to move beyond spreadsheets to a full smartphone-to-return transaction chain. There will be many more developments to come from MTD, so just looking to comply with the 2019 VAT requirements may be somewhat short-sighted. Keep in mind that income tax, corporation tax and other services will all eventually migrate to the new MTD gateway.
If you are having to upgrade one part of your accounting infrastructure for MTD, might this not be a good opportunity to look for other areas where you could improve your accounting productivity? Some of these extra features are covered in the sections that follow.
Learn how APIs work to access HMRC data
Under MTD for VAT, business taxpayers can view their previous returns in their Business Tax Account and when their next return and payment are due. Agents acting on their behalf, however, will need to rely on commercial software products that share data between HMRC’s MTD system via application programming interfaces (APIs).
HMRC’s MTD for VAT API page sets out the basic API pieces that are currently in place to let advisers:
- Create an agent services account, and get clients to authorise the agent to act on their behalf
- Sign clients up for MTD
- Submit VAT Returns and amend previously submitted data
- Retrieve VAT data within the agent’s software system
- Set up and alter Direct Debit payments
- Edit standing business data or notify HMRC of changes in circumstances
More APIs will be added as the system evolves. Have a look at HMRC’s customer journeys document to see some of the features that will be coming over the next year or so.
Accountants in practice will have lots of clients to look after and support through new process. Many clients may take care of VAT filing themselves (as they may have done in the past), but how will the adviser track their compliance or the accuracy of their returns?
MTD will also force practitioners who currently file on clients’ behalf using their taxpayer IDs to rethink how they do it. HMRC is stamping out the practice and has ID checks in place to monitor agents who attempt it. Any adviser in this situation will need to redesign their workflows around software systems that do the same tasks from your own agent services account.
Changing the filing sign-in and submission process for VAT may have other impacts on internal processes. Rather than just looking at bookkeeping or bridging solutions to get your clients into MTD, consider whether you need more something more sophisticated. Specialist practice solutions will offer a wider set of tools to administer the agent service account and track client progress through their VAT periods.
And do you have a robust VAT data gathering, return preparation and authorising process in place? Who is going to manage the single ASA – or will you need software that can administer access controls for staff working with different groups of clients?
Don’t forget the need to train staff and clients on the requirements and quirks of the new system. All of these tasks will take time and need to be factored into your MTD transition plan.
What’s next for MTD?
The whole point of MTD is to go whole hog with online filing. Income tax and corporation tax are in the frame for going into MTD in the next few years, and we are still waiting to hear from HMRC what its plans are for complex corporations, LLPs and partnerships.
The income tax MTD pilot is already up and running, and thanks to the government’s gung-ho initial plans a lot of the software groundwork has already been set out. Killing off annual batch filing of self assessment returns and replacing them with quarterly income/expense updates plus final year submissions was not a trivial undertaking for tax and practice software developers, or for HMRC.
All of these moves will pose further challenges for all concerned and will have significant effects on internal processes within businesses, accounting firms and HMRC. Bear in mind that the VAT transition is the first step and make sure to question your software providers on their roadmaps for future stages of MTD.