Making Tax Digital

Making Tax Digital (MTD) is the digital transformation of the United Kingdom’s tax system by HMRC.

Taxback International have developed Comply – an innovative end-to-end VAT compliance technology. This Making Tax Digital bridging software, enables your business to manage your UK returns regardless of jurisdiction and to stay compliant. To find out how we can streamline your MTD VAT compliance requirements, contact us today.

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    What is Making Tax Digital?

    Making Tax Digital (MTD) is a HMRC program introduced in 2019 that aims to make it simpler for both businesses and individuals to manage tax more efficiently and easier. MTD represents an ongoing effort by global tax authorities to modernise and digitalise their tax processes (myDATA in Greece and SII in Spain are just two other examples.)

    From their point of view MTD and other such systems will reduce the number of reporting errors. For businesses, their tax reporting workflows will be much more streamlined and efficient.

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    Timeline of Making Tax Digital

    April 2019 signalled the beginning of the soft landing period for MTD. At this time, the United Kingdom began implementing Phase I of Making Tax Digital (MTD) for VAT requiring making digital filings of the nine boxes of the VAT return through HMRC’s API-portal.

    The first monthly return was through MTD was on 30th April and by June 30th the first quarterly return was filed.

    Who does MTD affect?

    The implementation affected all VAT registered businesses with a taxable turnover above the UK VAT threshold of £85,000. This was then deferred to October 2019 for some types of businesses.

    Adaption to this new system was not entirely straightforward with many businesses struggling to successfully implementing digital programs. Similarly, the HMRC encountered problems on their side.

    A one year soft-landing period allowed businesses more time to implement permanent links whilst using bridging software to transmit their VAT returns digitally. During this grace period the HMRC did not issue penalties for not keeping incomplete digital records.

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      Digital Links for MTD

      Digital links are an integral part of Making Tax Digital, however, some businesses are still in doubt as to what qualifies and more importantly what does not qualify as a digital link. To maintain compliance within the MTD system, businesses need to maintain a connection via ‘functional compatible software’ with the HMRC.

      In other words, businesses need to show that digital links are implemented throughout the end-to-end process for their VAT returns. There needs to be an electronic data trail between the company’s invoices and the HMRC portal.

      However, the case may be that a business uses one software for submissions and another for record keeping. The solution is using a digital link.

      What qualifies as a digital link?

      There are strict rules about what qualifies as a digital link and it took a long time for the HMRC to give exact details on what qualified. However, the definition isn’t as narrow as was first assumed.

      According to the HMRC, digital links have two qualifications.

      • Data should be able to be transferred electronically between software programs, products, or applications.
      • Transfers should be automated. No manual intervention should be required.

      Examples of accepted digital links:

      • Linked cells in an excel spreadsheet.
      • Emailed records (e.g. Excel spreadsheet).
      • Records stored on a portable device (memory stick etc).
      • Imported or exported XML and/or CSV.
      • API transfer.
      • Downloaded files.

      What does not qualify as a digital link?

      • Manual data that has been ‘cut and pasted’.
      • Manual adjustments or consolidations of group returns via spreadsheets.

      Comply – Our Unique Solution to Making Tax Digital

      Recognised by HMRC, Comply can assist businesses in adhering to Making Tax Digital obligations. Any adjustments to submitted data are fully tracked by Comply to ensure it is compliant with MTD requirements during preparation and adjustments can only be amended before the submission. Comply provides a full audit trail for the HMRC.

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      Making Tax Digital – Phase II

      Phase 2 of MTD was originally scheduled for April 1st 2020 but was postponed for a year due to COVID-19 lockdowns. This signals the beginning of the major changes including an obligation to maintain digital records for submission to the HMRC or risk penalties.

      Digital Reporting

      What records does a business need to keep?

      There is a variety of VAT data that needs to be stored digitally according to the MTD rules:

      • Business data including name, address, and VAT number.
      • Details of any VAT accounting schemes used.
      • List of VAT on goods and services supplied/sold.
      • List of VAT goods and services received/bought.
      • All adjustments made on returns.
      • Both ‘time of supply’ and ‘value of supply’ for everything bought and sold.
      • Rate of VAT charged on goods/services supplied.
      • Reverse charge transactions.
      • Total daily gross takings (for those utilizing retail schemes).
      • Items reclaimable through the Flat Rate Scheme.
      • Total sales including the VAT on sales if using Gold Accounting Scheme.

      Since the beginning of phase 2, digital links need to be in place to track the digital journey of all the data. Failure to properly follow MTD requirements will result in penalties.

      Making Tax Digital Penalties

      From April 2019 to April 2021, businesses were required to demonstrate that they’d made efforts to conform to MTD guidelines. There were no fines during this designated ‘soft landing’ period and stringent digital record keeping was not implemented by HRMC.

      Since April 2021, the beginning of MTD phase 2, businesses that miss MTD VAT deadlines will be subject to penalties based on a point system from HMRC.

      There are three instances in which penalties may apply:

      • Failure to adhere to MTD record keeping guidelines.
      • Late VAT return filing.
      • Late VAT of payment.

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      Have Questions about Making Tax Digital? Contact Taxback International today.

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