MTD digital link rules delayed by COVID-19
With just two days to go, HMRC announced a one-year delay to its enforcement of rules specifying the digital transmission of MTD for VAT data.
With just two days to go, HMRC announced a one-year delay to its enforcement of rules specifying the digital transmission of transaction data through the Making Tax Digital (MTD) for VAT return filing process.
In a letter to professional bodies and software developers on Monday, the tax department explained, “We understand that the impact of COVID-19 is creating extremely difficult times for all, and we are committed to helping in every way possible all those businesses facing unprecedented challenges.
“Therefore, we are providing all MTD businesses with more time to put in place digital links between all parts of their functional compatible software. This means that all businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.”
The concession extends the soft landing period put in place for digital links when MTD was made mandatory for registered businesses above the VAT threshold last April.
The digital links criteria specify that data must be imported or exported between programs without manual intervention. The prohibition extends to cutting and pasting cells from a spreadsheet as opposed to pulling them in via a formula or application programming interface.
In spite of the examples provided by HMRC in its VAT Notice 700/22, the precise definitions have been the source of multiple debates for the past year. The stricture also spawned an entire industry of bridging tools to enable non-compliant applications to transfer data into the MTD pipeline.
The extension of the digital link soft landing inevitably casts a shadow on plans for “MTD 2.0” – the rolling out the regime to income tax to create a quarterly calendar for expense and income updates. If VAT mechanisms are not fully functioning and enforced, then questions would have to be asked about whether all the project elements are in place the next, more complicated phase of MTD.
And other issues may have overtaken MTD on the tax department’s list of priorities.
All going swimmingly
The virus-shaped question mark over the future timetable for MTD is at odds with a rose-tinted policy review released alongside the Budget into how MTD has been working.
By 9 March 2020 more than 1.4m businesses had joined the new service and more than 4m VAT returns had been submitted successfully with MTD-compatible software, the review noted. Drawing on a survey of 60 businesses undertaken by Ipsos MORI, HMRC’s review bolstered the rationale that helping businesses to eradicate data entry and transposition errors would help close the £9bn tax gap.
“The vast majority of businesses and agents have proved able to meet the requirements of the first phase of MTD. Many businesses and agents had already recognised the benefits of going digital, so for them, MTD is a natural extension of the way they were already choosing to run their business,” the review noted.
There was some recognition of the effort and difficulties some businesses and tax advisers agents had experienced with the move to MTD.
There were costs and burdens for businesses in selecting and implementing new systems, while many agents had issues setting up their Agent Services Account (ASA) and acting on behalf of their clients for MTD.
“Action has already been taken on priority improvements to agent services,” the review stated. “HMRC recognises there is still more to do and intends to continue its engagement with agent professional bodies.
The business study relies heavily on anecdotal quotes rather than statistical data to substantiate the conclusions, while the agent perspective is explored in a separate project, supplemented by a raft of further studies on the needs of complex businesses, penalty options and nudging letters
From the 60 interviews with businesses undertaken, the study concluded the new regime had seen “a reduction in scope for error and perceived an increase in the overall accuracy of their record-keeping and VAT returns, potentially increasing tax revenue”.
Businesses that opted for fully integrated software were able to manage their finances in real-time, by entering information once and correcting mistakes at source more easily, the study found.
One business person who had switched from paper to integrated software commented: “Initially you have to take it on which is a little overwhelming but once you’ve gotten past the first month or two, you suddenly realise that the process of doing it is so simple, and if you have questions there are people to ask. Once you’ve done it once or two quarters, or a year in you’re just completely in control.”
Another software user enthused about being able to reconcile as you go. “It shows you all the money that goes in and out of your bank account automatically and prompts you to reconcile which means that the task at the end of the quarter is less onerous.”
Users of bridging software and those with atypical or complex business structures didn’t offer such happy experiences: “It took more time trying to sort the problems out than just doing it manually,” said one.
“We tried it that way for several months and there were too many anomalies. It wasn’t a one-off. It was very clunky. It took longer to fix, and then we weren’t 100% confident. You had to check it anyway.”
Perhaps for those with idle time on their hands to consider the progress of MTD, the report collection would make for an interesting day’s study. But just now it feels like those debates come from a completely different era.
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