What you should know about making tax digital

On April 1, HMRC’s Making Tax Digital (MTD) initiative, the UK’s fully digital tax system, reached a new milestone: all VAT-registered businesses are now required to follow MTD for VAT rules, affecting smaller VAT-registered businesses, but could also have implications for global companies with UK subsidiaries. What does this mean for finance directors, CFOs and senior finance professionals – and what does the future hold? Here, Russell Gammon, pictured above, Chief Solutions Officer, Tax Systems, explores the considerations that finance function leaders should bear in mind.

What do April’s HMRC’s Making Tax Digital VAT requirements mean for the finance department?

MTD is another milestone in digital compliance and requires all VAT-registered organisations to complete returns online using digital links, which should reduce the scope for errors. However, this can be a challenge for organisations who simply don’t have the processes in place to do so. This creates the potential for lots of time-consuming manual work with all the human error that might entail.

Some corporates who were required to comply with MTD for VAT since its first phase in April 2019, initially adopted the minimum requirements, with too much reliance on Excel. However, MTD offers the potential for businesses to achieve wider benefits – by using the right software. Many have since realised this and are reviewing their approach and investment options accordingly. Specialist VAT software will also reduce risk, increase accuracy and control, as well as drive efficiencies.

Whilst the April 2022 deadline focuses on smaller entities, as it brings in those with taxable supplies under £85,000, it has also managed to capture UK subsidiaries of larger financial institutions. This is because they typically make only a nominal amount of UK taxable supplies, and therefore weren’t previously in scope for MTD for VAT. Finance departments would do well to bear this in mind.

How easily are finance departments finding it to comply with MTD and what are the key changes many have implemented?

Many companies have continued to use Excel or similar, limited solutions. However, they have also realised that this takes time, and that spreadsheet reporting is not the most efficient way of handling quarterly or monthly tax compliance. This is because companies have their pain points when it comes to compliance, such as time-consuming data formatting. Much of this is manual but with the right technology can be automated, making MTD compliance both painless and seamless.

Companies should therefore evaluate their pain points and look at how specialist software can improve processes, enhance consistency, and increase reliability, while saving considerable time.

What benefits can MTD deliver to an organisation’s finance function beyond tax?

Having consistent access to considerable volumes of data can be powerful outside just tax compliance. For example, accurate and consistent VAT data can help with insight into profit margins in different areas of a business, enabling smarter decision-making.

Digitisation also generates better business intelligence – helping you identify gaps and assess whether business strategies are either too conservative or too aggressive. In addition, data can be elevated through the business and beyond the tax department where further value can be extracted.

What are the next steps for MTD and beyond?

In November 2020, HMRC released a consultation on MTD for corporation tax, which is expected to come into force in the near future. It’s predicted that this will have a similar impact as the current MTD for VAT legislation and require the same levels of integration, collaboration and digitisation between different finance functions and reporting cycles. Investments in MTD software will therefore continue to pay off as the government’s ambitions for MTD continue to grow.

At the same time, outside of HMRC, there could well be the introduction of EU-wide regulations, which require additional standards, even for non-EU countries such as the UK. Again, having the right software in place that can be updated to take these additional requirements into account will mitigate against future headaches.

It is clear that MTD is an ambitious programme to reform tax compliance and although it can seem daunting, with the right partner you can be confident that you will be fully compliant and can generate the necessary reports quickly, accurately and with minimal fuss.