Three key takeaways from HMRC’s MTD programme

As a key part of the government’s Tax Administration Strategy, HMRC’s Making Tax Digital (MTD) programme has understandably been top of the agenda for many organisations. VAT requirements and penalties in particular have been in the spotlight, but it seems that many are still not ready for further incoming policy changes that MTD is set to deliver. However, compliance, accuracy and effective data management, along with cloud platforms, will enable more ease of use than ever before, and will set a standard for collaboration, argues Russell Gammon, Chief Solutions Officer at Tax Systems.

MTD Corporation Tax

With MTD having been successfully rolled out for VAT, MTD for CT is expected to be coming down the track at some point. While at this stage it is unclear exactly what MTD for CT will look like, the requirements will likely be similar to those for VAT. We can expect an emphasis on digital records, compatible software and online returns and can also expect penalties for non-compliance. Digital links and submissions are challenging, which leads many to use Excel. However the Excel method, whilst technically compliant, is no longer fit for purpose – it is well known for being error-prone, has limited control, puts compliance at risk, and lacks seamless integration with other finance systems.

MTD for CT also has the potential to entirely change how corporations file their returns and will force a much closer alignment between CT and VAT, which have traditionally been siloed. Businesses will need to submit key accounting data points every quarter, in addition to the existing annual return. The processes which apply to both will become much closer, upping the possibility of a totally new approach to tax.

This development promises to shake up and consolidate internal tax teams while driving the adoption of new comprehensive tax software solutions that can automatically perform the necessary calculations at a granular level, ensuring compliance. It will also require a change in behaviours and processes that will need careful maintenance to stay in line or you will face penalties.

VAT Penalties

As of the beginning of the year, VAT-registered companies must be aware of crucial compliance checks relating to MTD to avoid penalisation. Businesses and individuals with a taxable turnover above the VAT threshold are required to keep digital records and use compatible software to submit their VAT returns. While the financial impact of penalties doesn’t, on its own, make a significant difference to most companies, those that consist of a group of entities can easily and quickly build up penalties if just one component is out of line.

These penalties for non-compliance with MTD for VAT can be severe and are designed to encourage businesses to take the requirements seriously. Some of the common penalties include:

• Late submission penalty: A penalty of £100 may be imposed if the VAT return is submitted after the due date. This penalty can be reduced if the return is submitted within 30 days of the due date.
• Late payment penalty: Interest is charged on any VAT debt outstanding after the payment due date, usually 30 days after the VAT return is due.
• Record-keeping penalty: A penalty may be imposed if the business does not keep sufficient records to support their VAT return, or if the records are not kept in a digital format as required by MTD.
• Non-compliance penalty: A penalty may be imposed if the business fails to comply with the MTD requirements, including failing to register for MTD, failing to submit their VAT returns using compatible software, or failing to keep digital records.

Companies should therefore take the necessary steps to reduce non-compliance risks by performing rigorous checks to ensure tax returns are 100% correct before filing. Although this can be done manually, the risk of human error and the time it takes makes this a weak option. Instead, businesses should look to specialist tax software solutions that automate the process, based on their own unique datasets, processes and operations.

Partial VAT Exemption

Partial exemption is perhaps the most complex aspect of VAT, requiring specialist advisors with sector-specific skills and experience. Whether it is complicated Special Method (PESM) calculations, businesses only partially engaged in taxable activities, or because they are exempt from paying VAT on certain supplies, it is a tricky path to navigate.

Thankfully, the past few years have seen an explosion in affordable, reliable software to tackle the task. These often cloud-based solutions provide fast, accurate and pain-free ways to calculate your partial exemptions without having to rely on Excel processes. And this remains the case, regardless of the status of the oft-delayed MTD for CT. MTD or not, there are plenty of great reasons to digitally accelerate and automate your tax business.

By transitioning manual processes to intelligent automated systems, tax and accounting team leaders can allocate their resources to more important and strategic areas while enhancing team motivation. At the same time, the elimination of tedious manual tasks that can cause burnout and stress leads to a significant reduction in time and monetary expenses, allowing accounting teams to focus on delivering substantial value to their organisation.

As more and more tax functions migrate to the cloud, it will enable more ease of use than ever before, setting a standard for collaboration and more seamless data management throughout other areas of the finance function. 2023 looks set to be another year of evolution for the tax professional. Now is the time to make sure your business is ready.