Applicable time limits

In April 2018, HMRC launched the testing phase of a new digital system for tax purposes called Making Tax Digital.

Until April 1, 2022. Only UK companies with a turnover above the UK VAT registration threshold are required to apply the method Making Tax Digital (MTD) for VAT reporting. Companies below the threshold may also voluntarily register with the MTD.

From April 2022, all VAT-registered companies will have to comply with Making Tax Digital regulations regardless of their annual turnover. This will be a significant change for very small businesses that currently manually prepare their bills and taxes as the digital link requirement will apply to these businesses as well.

Digital links: what does it mean and when is it required?

MTD requires companies to have digital links between the data reported in the VAT return and the record of issued and received invoices. This means that the data cannot be changed manually at any stage of the process. For example, if you manually exclude non-deductible VAT, or if you check and delete those invoices that were incorrectly posted in an Excel spreadsheet, the digital link requirement will not be met.

The MTD was implemented in two phases: the first period where the obligation to “digital links” was milder and the second period when HMRC would require strict digitization of VAT data processing.

In the first period, some manual changes were acceptable. Copying and pasting data in an Excel spreadsheet and using bridging software to transfer manually updated data were found to be MTD compliant. However, from April 2021, the digital link requirement becomes more stringent. Data copying and pasting will not be possible, and the bridging software will only be allowed in the absence of manual changes to the reported data.

What is MTD?

Making Tax Digital is a program introduced by the UK government that aims to make tax filing with HMRC fast, effective and simple digitally. Businesses must maintain digital records containing information on their VAT accounting patterns, time and value of deliveries of goods bought and sold, VAT rates, reverse charge transactions, as well as important business information such as the full company name, address, and UK VAT number. Click here for more information on the required information.

How can your company prepare for MTD?

To comply with MTD requirements, companies must consider compatible software packages and digital links for digital VAT reporting.

Software

In addition to the above-mentioned importance of keeping digital records, it is important to download MTD reporting compliant software package and authorizing it for the correct submission of VAT returns. This software must enable digital data transfer – in other words, manual modification and data transfer will not be allowed. In addition, the transfer or modification of this data must be done via digital links.

Extensions

Companies with multi-faceted IT systems may qualify to extend to integrate digital links with their software. These companies must submit an application to HMRC with an explanation and a plan on how they will comply with the MTD Directive.