Making Tax Digital for VAT: Digital link mandate
04 February 2020
It is the April 2020 phase of MTD that will prove most challenging. Businesses with multiple accounting systems or group accounts are likely to feel this burden more than others. Those that rely on manual consolidation will require heavy investment or very complex macros to replace the human intervention previously relied on. Those businesses that take this opportunity to strategically review their systems and data beyond this immediate mandate, will save cost and time when additional taxes are later added.
Read our Making Tax Digital Guide
What are digital links?
HMRC have defined these as a digital means of transferring VAT information from one software programme to another. This could include running a VAT report in your accounting system or sales and purchase ledger reports from your sales ledger, with automatic extraction to your calculation tool. HMRC have confirmed that these software processes constitute as digital links.
“Digital gaps” occur where manual intervention is required, for example, copying information from VAT output files across to a VAT return spreadsheet. Businesses will need to find alternative solutions to ensure these digital gaps are bridged. Bridging software alone will not solve this issue.
Potential MTDFV digital link solutions:
The right solution for you will not necessarily be the same as for others and will depend on your existing data, systems and VAT return process. When deciding which approach to adopt, it’s important to consider not only these initial VAT requirements, but also likely future additional VAT MTD requirements and those likely to be put in place for other taxes.
What are the current potential penalties?
|‘Careless’ VAT error arises
||Penalty of up to 30% of value of VAT error
|Material issue with VAT controls and processes after providing a ‘clean’ annual certificate to HMRC
||Fixed penalty of £5,000 levied on Senior Accounting Officer (if business is subject to that regime)
|VAT return form filed late
||In the Default Surcharge penalty regime – a late VAT payment to HMRC in the next 12 months leads to a penalty of 2%/5%/10%/15% of the VAT paid late.
|Sliding scale penalty: minimum £50; maximum of greater of (i) £1,500 or (ii) 0.5% of VAT due to HMRC for the period covered by the late VAT return form.
|Not keeping all required VAT records (including filing VAT return figures to HMRC in the new way when required to do so)
||£500 fixed penalty
|Not filing a VAT return form ‘electronically’ at all (ie either via the existing portal or in the new way)
||Up to £400 per return
Spot the broader opportunity
Global tax digitalisation is accelerating the timing of tax reporting and filing obligations for businesses and upping the pressure on data governance, availability and quality. Authorities will inevitably be moving on to other types of taxes and preparing for this today is relevant and appropriate. Companies must plan, by addressing the issue holistically and strategically.
If you have implemented a plan for phase one and it is not going as you would like then please do request a call from one of our team or speak to your regular BDO contact. Our Tax Performance Engineering Team has partnered with Severin Pietri, Special MTD Consultant so we are very well placed to provide direction.