Through Alex Baulf, Senior Director of Global Indirect Taxation, Avalara
HMRC’s flagship tax initiative, Making Tax Digital, is expected to reach an additional 1.1 million organizations as of April 1, 2022. In this article, Alex Baulf, Senior Director of Global Indirect Taxation at Avalara, describes the motivations, benefits and requirements that companies need to consider before the deadline.
The latest phased implementation of Making Tax Digital, known as MTD, is just around the corner.
After being postponed due to the COVID-19 pandemic, the HM Revenue & Customs (HMRC) decision is expected to be extended to all businesses registered in the UK from April 1, 2022, regardless of size and location. adoption of VAT registration on a voluntary basis.
To achieve this, the 2021 Finance Law made a minor amendment to paragraph 6 of Annex 11 of the Value Added Tax Law of 1994, removing the exemption for companies whose taxable turnover is below the VAT registration threshold.
The initiative stems from a variety of different motivations.
On the HMRC side, MTD will help make tax administration one of the most digitally advanced in the world, fundamentally transforming the UK’s current tax system for the better. Aiming to simplify processes for both individuals and businesses, the initiative pursues three key objectives: to make tax administration more efficient, to make tax administration more efficient and to make it easier for taxpayers to obtain their tax.
Understanding MTD and its benefits
In essence, all businesses will need to submit their VAT return to HMRC using MTD compatible software. They will also be required to maintain digital records at the transaction level. Finally, when the VAT return is filed, there should be a clear digital link between the digital records and the final VAT return produced and submitted to HMRC. Concretely, this means the end of “copy and paste” in spreadsheets, no manual re-entry of data and a clear audit trail for any adjustments made.
Although the changes are mandatory, they should not be seen as a burden on businesses. On the contrary, they present an opportunity for businesses because of the many benefits that digital tax returns can bring to businesses themselves.
So what are these advantages?
MTD will help, or already help companies reduce errors and save time, allowing them to focus on other tasks such as strategic consulting work that can help overcome broader challenges, reduce costs and to grow.
In addition, businesses have also benefited from greater transparency on tax data, with a focus on the underlying digital records at the transactional level and the digital journey of that data prior to the submission of the last VAT return. with 9 boxes. For banks, insurance companies and other financial service providers, one of the main impacts has been the requirement to apply reverse charge in an automated manner rather than seeing it only as a manual adjustment when making the reverse charge. preparation of the VAT return. This change has led many companies to consider automating tax determination on the AP side, accurately determining whether reverse charge should be applied and, if so, at what rate.
Navigate through legislative changes
Despite the benefits, introducing BAT in the spring will see many small businesses undergo a period of adjustment in order to become compliant, which will require time, investment and effort.
While a quarter of UK VAT-registered businesses trading below the £ 85,000 VAT threshold have already voluntarily chosen to join MTD, it is estimated that as many as 1.1 million businesses have are not already obligated to meet BAT requirements for VAT reporting and record keeping will be affected.
This is a radical change, with MTD having already been implemented with a ‘soft landing’ period to provide companies with a time frame within which they could gradually adopt the required compliant software.
In June 2019 – two months after the first BAT for VAT rollout – HMRC conducted research showing that 16% of companies mandated to comply with this initial phase had not done so.
To prevent such a scenario from repeating itself, and with the end of this soft landing period, many of the remaining 1.1 million businesses are contacted and notified by HM Revenue & Customs, with 326,500 having received a letter in the first phase to highlight the new obligations.
It’s easy to see why HMRC is taking these steps.
At Avalara, we have seen first-hand that many companies are still not fully compliant. Every business is different, so this compliance gap is not due to just one factor. From ERP upgrades and data quality issues to recent M&A activity, organizations have in many cases simply had other priorities, especially given the adaptations that have been required for businesses to continue to prioritize. operate effectively during the pandemic period.
However, that said, it is now clear that BAT compliance will be taken into account when considering the cause of VAT errors and the extent to which penalties are imposed or mitigated.
Therefore, with just a few months away from the deadline, now is the time to review and implement a compliant process and solution to ensure readiness for April 1, 2022.
Businesses will need to consider the options, tools, and support available to them, each of which will be critical to ensuring they can achieve compliance in a timely, cost-effective and holistic manner. Moreover, this is really just the start of Making Tax Digital, and the current changes and requirements are just small steps putting all UK businesses on an equal footing in terms of data and process, before no new digital reporting requirements will be introduced in the future. The direction of travel across Europe is clear and this is a shift to transactional-level reporting, submitted digitally and in time as close to the real thing as possible. The financial services industry will need to consider how it can respond to changing VAT compliance requirements across Europe, including mandatory e-invoicing. Now is the time to start envisioning a broader digital tax strategy in terms of technology, data and process and think strategically and globally rather than tactically and locally.