The Making Tax Digital for VAT magnifying glass

Making Tax Digital (MTD) for VAT entered phase two as of 1 April, 2021. And that’s good news – or it can be – for businesses that grasp the opportunity to improve systems and processes for VAT.

Since 2019, UK businesses have been required to store VAT records digitally, and submit VAT returns to HMRC via Application Programming Interface (“API”) enabled software. In this next phase, businesses must have digital links between their digital records and submission of their VAT return.

With the 2021 required regarding digital linking now live, it’s a great time to look at where your business is in terms of your MTD obligations and how you can set yourself up for compliance and continued benefits. Without action and continued focus on these regulations, your perceived behaviours as a taxpayer will be impacted, which may in turn lead to increased scrutiny and penalties.

Getting ahead, getting by or falling behind?

When working with businesses on their MTD initiatives, we’ve seen they tend to fall into three different groups. The first is well-positioned after an overhaul of its tax processes, and our support is generally to review end-to-end processes in light of the long-term guidance issued by HMRC, but the heavy lifting has been done.

Then we see companies that are currently compliant with the new regulations but may have processes that are inefficient, lead to errors or potentially breach regulations.

The third group is not yet compliant – some have agreed deferrals with HMRC, others have struggled to reach compliance in time. This group will need support (both internally and externally) to achieve compliance.

Where is your business?

You can probably identify which group you fall in and that should inform the next steps you focus on. Whether you’re group one and need testing to confirm your implementation is fit for purpose, group two and need to introduce efficiency and resilience into your system, or group three and need to achieve compliance before your deferral is up, it’s a good time to put forward your business case for systems and process enhancements. Take your plans to the powers that be and get the budget you need while the issue is still top of mind.

Regardless of which group your business is in, there are likely still opportunities for improvements.

For example, there can be issues with the systems landscape, making it hard to access data when it’s needed. Whether it’s legacy systems or a quirk of your IT estate, now would be a good time to clean this up.

Or, if you can access records, the data must be usable. If it is in the wrong format, poorly structured, missing fields or poorly labelled, now is the time to fix it.

While you can employ manual steps, such as using spreadsheets to prepare your VAT data, and remain technically compliant, manual processes that rely on individuals knowing what to do and when are potential points of failure – and teams could be doing higher value work than data preparation. However, you shouldn’t blindly trust in automation either. Review your end-to-end processes to ensure that there are no steps that breach compliance, and make sure that your automated solution is fit for purpose for the years to come.

Now is the time, not just to comply with MTD’s VAT requirements, but to prepare for future success. Getting your tax systems and data in order means you’ll be better placed when MTD for corporation tax becomes a requirement in 2026. And integrating tax data into your systems as a key component of any current or planned transformation means that you unlock more data to drive better decision making. If you’re not sure how to start, we’d be glad to discuss your needs.