Making Tax Digital (MTD) is a government 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.
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.
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.
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.
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.
Examples of accepted digital links:
As an HMRC approved API, 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.
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.
There is a variety of VAT data that needs to be stored digitally according to the MTD rules:
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.
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:
We fully manage all of your VAT obligations across multiple countries, wherever they arise.
Our VAT Compliance technology delivers full visibility over your historic and current global VAT activities.
Our combination of knowledge-based technology and our in-house VAT experts ensure 100% VAT compliance.