Making Tax Digital: More time for digital links?
HMRC has announced that some businesses may qualify for an extension to their MTD for VAT ‘soft landing’ period. However, the Revenue is taking a strict line on who qualifies. Emma Rawson digs into the detail.
Under the Making Tax Digital (MTD) for VAT rules, any transfer or exchange of data between software programs, products or applications has to be done digitally rather than manually.
However, a soft landing period of one year applies, meaning that businesses have until their first period starting on or after 1 April 2020 (or 1 October 2020 for deferred businesses) to get these digital links in place.
On 17 October, HMRC announced that some businesses may qualify for an extension to this initial soft landing period.
As set out in new paragraph 18.104.22.168 in VAT Notice 700/22, businesses with complex or legacy IT systems can apply for additional time to put the required digital links in place, subject to meeting certain qualifying criteria. If a business qualifies then the additional time will be granted as a specific direction from HMRC.
However, it’s important to note that there is no blanket extension of the soft landing period and it appears that HMRC is taking a fairly strict line as to who does, and doesn’t qualify.
Why is an extension being offered?
In recent months, both businesses and professional bodies have highlighted to HMRC the difficulties some businesses will face in getting digital links in place by next year.
This is a particular problem in industries that use specialist software, which can often be difficult (or even impossible) to link to accounting and VAT return systems.
For example, veterinary practices often use specialist practice management systems to manage bookings, keep records, manage drug stocks etc, as well as to bill their clients. It is quite common for them to then manually post totals from these systems into accounting software on a weekly or monthly basis. Such manual transfers won’t be allowed once the soft landing expires, but replacing them with a digital link has proven difficult in some cases.
Similar problems have been reported in the hotel industry, with hairdressers and beauticians, and at universities. Whilst some of these businesses may fall within retail schemes, which allow daily gross takings to be recorded rather than individual transactions, this is not clear in all cases, and may not solve the problem of the digital links completely.
Other businesses that may benefit from an extension to the soft landing period are those with internally developed systems and software that will take time to update. Those that have just acquired another business may also need additional time to get different software packages to talk to each other.
How generous is HMRC likely to be?
Although businesses struggling to get digital links in place will be pleased to hear that an extension might be available, they may not want to get their hopes up too much.
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It’s important to note that businesses have to apply for an extension, and they will only get one if HMRC agrees it is needed.
HMRC is very clear that cost alone will not be sufficient grounds for an extension, and that businesses are expected to make every effort to comply with the 'digital links requirements'. Instead, they state that an extension will only be issued in ‘exceptional circumstances’.
The VAT Notice sets out various criteria which need to be met. Key amongst these is that it must be ‘unachievable and not reasonable’ to have digital links in place by the end of the normal one-year soft landing period.
HMRC give some examples of what might be considered ‘unachievable and not reasonable’, including:
- Part of an IT system is not capable of importing and exporting data to another part, and it isn’t possible to update or replace it in time.
- The business is in the process of updating or replacing its IT system and the planned implementation date is not before the end of the soft landing period.
It should be noted that, even where an application is successful, all HMRC will grant is an extension to the one-year soft landing period and not a permanent relaxation of the rules on digital links.
Businesses still have to consider how they will put digital links in place and will need to set out a clear explanation and timetable for when and how they will do this in their application to HMRC.
The length of any extension will be decided on a case by case basis, though HMRC has indicated they do not expect that this will ordinarily be more than a year.
What should businesses do?
If any business thinks they may benefit from an extension they should first look at the detail in the VAT Notice and consider whether they meet HMRC’s criteria.
If they believe they do, then a formal application has to be made to HMRC. The VAT Notice sets out the information which this must contain, including an explanation of why it is ‘unachievable and not reasonable’ to have digital links in place by the end of the normal soft landing period, a map of current VAT systems, a timetable and plan to put digital links in place and details of controls for manual transfers of data in the meantime.
Applications have to be submitted before the current soft landing on digital links expires. Given the amount of information required businesses may want to make a start on their applications sooner rather than later, especially if they are in stagger 1.
It will be interesting to see how HMRC approaches applications in practice. If you, or your client, apply for an extension we would be interested to receive any comments or feedback at [email protected]
Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining...