M

From Start-up to Scale-up – We’ve got you covered!
Give us a call – Let’s talk! See how we can save you time & tax.

CONTACT US
  • Knowledge Bank

How To Be VAT MTD Compliant

How To Be VAT MTD Compliant

Becoming MTD compliant is a major priority for HMRC and organisations who meet the VAT reporting threshold in 2019. However, there will be a number of VAT registered companies who are still confused about what compliance entails. This article, along with others here and here, help to shed light on what you need to know to be MTD ready for the future.

HMRC MTD Starting Date and Deadline

On 13 July 2018, HMRC published their VAT Notice 700/22 which, while officially coming into effect from 1 April 2019, includes a transition period where organisations using non-proprietary accounting software will not be penalised for not being fully VAT MTD compliant by this starting date.

These latest VAT reporting regulations will be fully enforceable by 2020 for all VAT registered organisations. The interim transition period gives time to allow everyone to implement any technical upgrades and system adjustments necessary and in particular provides a ‘soft landing’ for charities and SME’ s with less resources to adapt their reporting measures in good time if using traditional spread sheets from which they have manually cut and pasted.

By 2020, VAT submissions will be more in keeping with higher digital standards of record keeping, eliminating errors that manual inputting via cut and paste can cause. Obviously, increased automation of record keeping also eradicates potential tampering and enhances transparency and accountability too.

What Technical Upgrade Is Required To Be VAT MTD Compliant?

“HMRC is implementing an upgraded digital tool and new protocol, which is known technically as their MTD API. An API is a generic piece of software code, normally downloadable to a variety of software platforms or packages and which acts as a gateway that communicates with external systems, facilitating data transfer in compatible formats. It is the equivalent of HMRC’s systems asking VAT reporting bodies if their system ‘speaks MTD’.

VAT business reporting systems will therefore need to have functional software that is compatible with HMRC’s upgraded system, so that data can cross the ‘gateway’ API into HMRC’s new system. This API tool can be added onto existing software systems, like a ‘widget’, or extra piece of code, easily inputted for minimal disruption. However, compatibility with HMRC’s new system will also require MTD bridging software code that acts as a digital link to the API; it can communicate digitally with the API to ‘announce’ a company’s IT system’s ‘intention’ of imminently sending information in a format compatible with the MTD API.

There are effectively two main routes to digital compliance, namely, upgrading of current proprietary accountancy software to include the latest code that communicates with HMRC’s digital link, or the design of bespoke code for legacy IT systems that have traditionally used spreadsheets to maintain accounts.

For what future, digital data sharing looks like in practice, please see examples of possible VAT submission scenarios below.

Example 1: API enabled package e.g. used by third-party accountancy service

In this example, API enablement means that existing software of your accountant has to have a string of code added to their existing off-the-shelf, or more likely, bespoke software programs, such that their system recognises the HMRC API tool and allows the transfer of client information.

An HMRC API ready system can be a simple system code add-on, taking a reporting agency or company minutes to become information sharing ready, once they upgrade their current accountancy software, or CRM with accountancy modules to the latest version.

Example 2: API enabled software and accounting software

In this example, your organisation may have an integrated IT system, where your accounting software is compatible with an API enabled software program. You will need to upgrade your accounting software program so it includes a digital link, which communicates digitally with the API software program. The digital link transfers the required data to the API software program, which in turn transfers the data into HMRC’s MTD API tool.

With an integrated system, data flows seamlessly through your accountancy software across to HMRC’s API tool, through the API digital link, reducing time and potential errors. This scenario requires an IT administrator or accountancy software vendor to add the necessary API digital link software onto your system, for automatic data submission.

Example 3: Bridging software used with non-proprietary software e.g. spreadsheets

In this example, an organisation uses non-proprietary software, such as spreadsheets, to maintain accounting records. Up until now, data from these spreadsheets would have been cut and pasted into HMRC’s digital portal, but under the new rules, this manual intervention will not be allowed.

Instead, a piece of MTD bridging software code must be incorporated into the spreadsheet system so that data can be digitally extracted from the spreadsheet and sent to HMRC’s API. This digital link must be fully functional by 2020.

Bridging software is essential for organisations that rely on spreadsheets for their VAT records and wish to avoid the expense of purchasing new, fully MTD-compliant accounting software packages.

Summary

Making Tax Digital is a significant shift in how VAT registered businesses interact with HMRC. By understanding the requirements and implementing the appropriate digital tools or bridging software, organisations can ensure full compliance while benefiting from streamlined, error-free reporting processes.