How Making Tax Digital Could Make Life Hard for Companies Doing Business in the UK

This blog was last updated on March 11, 2019

Most of the financial news coming out of the UK currently revolves around Brexit, but a forthcoming VAT initiative is far more likely to have an immediate impact on companies doing business in the UK.

Beginning April 1, 2019, the UK’s Making Tax Digital (MTD) initiative will begin to go into effect. Any company doing business in the UK with more than £85,000 a year of VAT turnover will have to comply with the requirements of MTD, which will radically change how companies send VAT returns to HMRC, the UK tax authority, and maintain their business records for VAT.

All of Europe is in the midst of a digital transformation, and taxation is one of the key areas of investment. As governments across the EU seek to reduce their combined annual VAT gap of €147 billion, more nations are introducing state-controlled, real-time IT platforms that place national tax administrations at the heart of business transactions. The issue is especially relevant to the UK, where VAT gap is £22 billion and third-highest out of the current 28 EU member states.

New UK VAT reporting portal

The first component of MTD that will be effective on April 1, 2019, will be a requirement to use a new government-approved portal for all submissions of the VAT return. The new portal will be more sophisticated than the one that currently exists, and will require businesses to be able to communicate directly with HMRC through the new interface for all VAT matters. Beginning April 1, 2019, companies will no longer be able to submit their VAT returns, or communicate with HMRC on VAT return matters outside of this new digital portal.

The second component of MTD, effective April 1, 2019, is that businesses will be required to maintain digital records for VAT accounting purposes. Businesses will be required to maintain digitally, four categories of information: designatory data, data on supplies, data on purchases, and VAT account data. All of this information will be required to populate the VAT return that will be submitted using the new HMRC digital portal. HMRC is striving to digitise all aspects of VAT collection and enforcement from data collection and storage, to VAT return submission.

Companies that aren’t prepared to use the new portal will not be able to report VAT returns and could face penalties. Further, a lack of digital record-keeping will cause businesses to struggle to meet the requirements under MTD starting on April 1, 2019. Utilising a new portal and maintaining digital VAT record requirements are just the tip of the iceberg for UK VAT enforcement.

The digital link for VAT reporting and investment in new software

A more challenging requirement under MTD will become mandatory on April 1, 2020, after what is technically a one-year grace period. HMRC will require businesses to maintain a “digital link” between VAT account information and the VAT return, which although voluntary during the first year of the initiative, will become mandatory starting on April 1, 2020. This digital link requirement will fundamentally change the way companies collect, store, and report VAT information to HMRC, and will require some investment from firms doing business in Britain to comply.

The digital link element of MTD will change how companies store VAT information and transfer it from one party to another. Manual processes will no longer pass the digital link compliance test. Specifically, transferring data manually within or between different parts of a set of software programs (i.e. between an accounting application and tax software) will not be acceptable.

The digital transfer will qualify as a proper digital link only if there is no manual intervention during the transfer. HMRC has indicated in published MTD guidance that copy and paste of data from one system to another does not constitute a sufficient digital link. After March 2020, businesses will have to demonstrate that there is a digital link between their accounting data for their VAT return and any software used to generate and then submit that return to HMRC.

For many businesses, the new regulation will necessitate an investment in software that can satisfy the requirements of the digital link. The consequences for not complying include not only financial penalties but also potential prosecution for false VAT declarations or tax evasion.

Just a preview of UK VAT enforcement?

And that might be just the beginning of VAT reporting reform in the UK. With other European countries, including Italy and Spain, moving to real-time electronic invoicing to enforce VAT collection, the UK might very well follow suit. That, however, is merely an educated guess at this point, as the UK is unlikely to undertake another major VAT initiative until after Brexit, the timing and specifics of which remain uncertain.

In any case, MTD makes having updated VAT reporting software with digital link capabilities essential, and the clock is ticking for companies doing business in the UK to be prepared before the April 1, 2019 deadline.