A guide to Making Tax Digital: Drive digital transformation through financial compliance

Making Tax Digital (MTD) started on 1 April 2019. With HMRC failing to collect an estimated £12.6 billion in 2017, it is pushing the UK to become one of the most digitally advanced tax administrations in the world, modernising the tax system and making it more effective, efficient and easier to comply.

However, for medium and large businesses, MTD is a big challenge. These organisations may be using different, multiple on-premise legacy financial accounting packages that aren’t sophisticated enough to prepare and submit digital returns, or keep the correct type of digital record for the correct amount of time.

Larger businesses might need to invest significant time to prepare, test and integrate new systems that can handle this business need.

In this guide, we explain why CFOs should use Making Tax Digital as a trigger to drive change in how their finances teams work.

Find out why Making Tax Digital:

• is not just about VAT processing but a long journey that will mean further changes in the way businesses must pay tax
• is the opportunity for businesses to not only look at VAT processes but also the end-to-end operating model
• asks big questions of businesses on how they handle data and the way they work with multiple systems
• gives businesses an important reason to review their accounting systems and software
• is part of a global tax digitisation trend that businesses should be designing for today.

For many CFOs, MTD isn’t simply an issue of getting tax right but rather an important step in getting rid of manual processes, which businesses have been using for years, and replacing them with new processes that help them become more efficient.

With a requirement to constantly improve processes and keep the right level of control, fixing tax processes should be high up on the agenda.

Here’s an excerpt from the guide:

Why medium and large businesses need to be aware of Making Tax Digital

Essentially, the requirements for Making Tax Digital are simple to understand. These three points reveal why.

Point 1

Although invoices and receipts themselves don’t necessarily need to be created, issued or stored digitally, MTD mandates that specific VAT details about each transaction does.

The exact information a business needs to digitally retain will depend on which VAT scheme they are within but for most large businesses on an invoice-based scheme this means the minimum of an accounts payable and accounts receivable transactional listing and digital VAT account, from which VAT Returns will be prepared.

For all organisations with a VATable turnover above the VAT threshold (currently £85,000) all VAT Return submissions must be done digitally through software that connects to HMRC’s APIs, which is to say, their internet-connected computer systems dedicated to VAT filing.

Point 2

Most businesses must keep digital records for VAT. They can still use spreadsheets, but they need to have “digital links” to some system capable of connecting to HMRC for the transfer of VAT data.

Point 3

Copying and pasting from spreadsheets is not allowed although there is a “soft-landing” period of 12 months where this will be permitted in order to allow businesses time to adapt their systems – but full digital links become mandatory from April 2020.

Copy and paste during this “soft landing” is not permitted for the final part of the VAT report preparation process, where data is loaded into the software that connects to the HMRC APIs.

Although all of this seems simple, for medium and large businesses it can be complicated, particularly if they are using legacy financial accounting software that isn’t sophisticated enough to prepare and submit digital returns, or keep the correct type of digital records for the mandated period of time.

Preparing a business for digital tax is about building processes which are repeatable and automated, which has the additional benefit of saving significant amounts of time. It’s about removing the hours spent each year taking data from one system and manually entering this into another system (sometimes known as “swivel-chair integration”).