MTD for VAT, what is a digital link?

MTD for VAT, what is a digital link?

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Can spreadsheets be used for MTD?

HMRC’s MTD (Making Tax Digital) initiative comes into force in April 2019. With 9 months to go, there were still many questions unanswered for those following its developments and HMRC attempted to answer these questions in a VAT notice published in July 18.

HMRC’s vision of Making Tax Digital probably envisioned that accounting via spreadsheets would become a thing of the past following their legislation. The inevitable backlash from excel users, accountants and businesses alike, forced HMRC to concede that spreadsheets will have to remain part of the MTD ecosystem. It is not just blind stubbornness on the part of excel users, there are many legitimate reasons for wanting to retain spreadsheets for VAT preparation; companies in VAT groups, businesses with more than one accounting system, and small businesses with no need to invest in a full accounting package being just a few.

The concession by HMRC to accept spreadsheets came with a number of caveats, all VAT returns who qualify under MTD must be filed by the new MTD API’s (application programming interfaces) and crucially, data transfer between software programs, applications or products must be digital, a term that they call a ‘digital link’. This meant that if businesses wanted to carry on using their spreadsheets for their VAT returns, they would still need to use software for the submission and that copying and pasting figures into a VAT return for submission was no longer an option. What was not clear to many was what a digital link is.

What is a digital link?

Copying and pasting either within a spreadsheet, program or between programs is not allowable as a digital link. The July notice from HMRC clarified what exactly constituted a digital link:

A digital link includes linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.

HMRC will accept a digital link as:

  • emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation)

  • transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software

  • XML, CSV import and export, and download and upload of files

  • automated data transfer

  • API transfer

From the examples that HMRC give, a digital link is not obvious, the emailing of a spreadsheet constituting a digital link may surprise some for example.

MTD soft landing period

HMRC have added another complication into the mix, although it may come as a big relief to some. They have allowed a further 12 months for digital link to be in place from April 19. This means that for the first year of MTD copy and paste within spreadsheets and across applications is allowable.but of course there is another exception… the exemption does not apply for data being imported into the software that will eventually file the return. This means that copy and pasting figures into a VAT return within software, will not be allowed. An import of a spreadsheet into bridging software for example will be necessary, even within the first year. It is hard not to wonder whether the office for tax simplification were on holiday when these rules were being put in place.

What is VAT Bridging software for MTD?

Bridging software is an application that does not contain any underlying accounting transactions. It allows you to carry on using spreadsheets and import them to populate the VAT return for submission. Importing a spreadsheet with only 9 figures copied and pasted from manual calculations that go on to populate the 9 VAT box figures will be completely compliant for the first year of MTD. Accountants and businesses will need to be careful that from April 2020, these 9 figures will need to link back to the underlying transactions using any of the digital links given as examples by HMRC.

My Digital Bridge is bridging software for spreadsheet users. For chance to take part in the HMRC pilot scheme for MTD prior to April 2019 for free, register your interest here.

This weeks blog was bought to you by Dan Moss

HMRC remove the mask for disguised remuneration

What is Disguised Remuneration?

HMRC define disguised remuneration (DR) as:

…tax avoidance schemes claim to avoid the need to pay Income Tax and National Insurance contributions. They normally involve a loan or other payment from a third-party which is unlikely to ever be repaid.

These schemes can be used by employers and individuals alike. With the IR35 reforms in the public sector, many contractors, faced with a reduced income were sold the dream and convinced of the legitimacy of these contractor loan schemes, that meant their take home pay was in excess of 85%.

Double Whammy!

These schemes primarily work by paying a small salary and loan the balance of the income to the contractor on the proviso that when the person leaves, the loan is written off. However what most contractor’s are unaware of is that as soon as the loan is written off, it becomes taxable in full. If the loan is not written off, the scheme provider can recall the loan at any time, and if this loan is not declared on the contractor’s tax return as income there is the risk of being hit for the double whammy of a tax bill and fine on top of the loan repayment.

Removing the Disguise

HMRC are combatting these schemes by making it mandatory that all outstanding DR loan amounts are reported as part of the month 12/week 52 FPS for 2018/19 and in any Earlier year updates that are sent for all employees and ex-employees.

“We’d have gotten away with it if it hadn’t have been for you pesky kids!”

It appears that with this change the noose is tightening for these types of contractor loan schemes that have been prevalent in the Umbrella market place and were allowed to thrive due to the previously slow response time from HMRC. This is great news for compliant umbrella companies and for the sector as a whole; which attracts a lot of bad press all drawn from companies running tax avoidance schemes.

Lets hope those pesky kids at HMRC keep up the good work and continue to unmask the villains!

Whose responsibility is the Making Tax Digital knowledge gap?

The right direction

In principle it is hard to argue with HMRC’s overriding vision of a more technology led tax system. Many public sector bodies have already implemented systems to bypass manual processes, a great example being the abolition of tax discs for motor vehicles by the DVLA in favour of online registration and tracking. As with HMRC’s new making tax digital (MTD) initiative the primary motive is centred around compliance, however, this does not mean that there are not benefits that businesses can take from it, automation being the most significant.

Research confirms many businesses are not ready

HMRC’s own research shows that 85% of businesses file their VAT returns via their government gateway. It is not only anecdotal evidence that suggests that many of these businesses will be surprised to hear that the majority will no longer be able to submit their VAT returns in this way come April 2019. Research from ICAEW shows that 40% of affected businesses are not even aware of MTD. In addition to this, 25% of businesses use paper records of which 13% fall within the MTD remit.

HMRC

Some of the figures are clearly worrying and there is a hope that HMRC increase their efforts to reach out to those that still have no knowledge of MTD as we approach the deadline. So far publicity around making tax digital has been restricted to the accounting and software community, this approach may account for the knowledge gap at present for businesses.

Accountants

Figures show that 30% of businesses will be submitting VAT returns through accountants. There is an expectation from businesses that their accountants will keep them informed on developments such as making tax digital will be communicated to them. Accountants who embrace MTD early could make a competitive advantage if they position themselves as MTD experts. Accountants must make sure that they are engaging with software providers who are MTD ready. Joining the live pilot scheme for MTD prior to April 2019 will allow accountants to gain an appreciation of the changes before mandation and give them the confidence to speak knowledgably about the process to their clients.

Software Providers

Software providers who are actively engaging in MTD are probably the closest to HMRC as they collaborate with them to develop the changes needed for the software to be compliant. This makes them probably the best placed to empower accountants with knowledge of MTD to go on and inform businesses responsibly. Software providers who are not already engaging in the MTD pilot are behind as April 19 approaches and accountants and businesses who are using software which is not MTD ready should consider whether they have the right partner going forward

The options for businesses

Accounting software

There are many businesses that will trade in their spreadsheets for software ahead of MTD. MTD for businesses already using accounting software will have little impact on their operations providing they have picked a software provider that is MTD savvy. Despite the worry that many businesses may not be ready for April, those that have prepared by engaging with the right providers will find the transition relatively easy and may wonder what all the fuss has been about.

Spreadsheet ‘Bridging software’

HMRC have conceded that there is can still be a place for spreadsheets in the new MTD world. All VAT returns captured under the MTD remit will still need to use the MTD API’s (Application programming interface’s that allow software to ‘talk’ to HMRC), so in some way or another software must be part of the solution. Bridging software is designed to bridge the gap between spreadsheets and HRMC and soften the impact of MTD on businesses that are not yet ready or have no interest in signing up to accounting software. Bridging software will allow a spreadsheet to be uploaded to software which will populate a VAT return for submission. This, HMRC has agreed, will thereby retain the ‘digital link’ between the VAT figures and the underlying transactions.

Work still to do

ICAEW’s research shows that there is still a lot of work to bridge the knowledge gap for a large proportion of businesses. HMRC, accountants and software providers will all be instrumental in minimising any disruption of MTD on businesses come April 19. A wise choice in software, whether it be accounting software or bridging software, should make the transition much less painful come mandation.

If you are looking for any assistance with Making Tax Digital and your bridging software options get in touch at 0161 925 6162 opt 2.

My Digital Accounts Defeats Making Tax Digital Uncertainty

With a nod to Roy Lichtenstein 1923-1997

We have submitted our first Making Tax Digital compliant VAT return!

Why

We wanted to embrace HMRC’s Making Tax Digital initiative so that our clients can adapt to the new legislation early and remain ahead of the curve. We have managed to become one of the first UK companies to release MTD compatible software ahead of the mandatory change in April 2019

Demonstrating that the change is not an unreasonable HMRC initiative, we started (and finished) the process within 64 days. Although this is an achievement to celebrate, we wanted to show what it is possible with an “early adopter focus”

What

If you have  followed our blog, you will see that we  commenced our Making Tax Digital Journey on the 4th of June and by day 17 we had successfully tested HMRC’s API’s and had started implementing our own database design to meet the MTD requirements And By Day 47 we were ready submit our first tax return and, after securing HMRC authorisation, submitted our first MTD VAT return on day 64!

Going Forward

From today eligible My Digital Accounts customers can subscribe to the MTD pilot. HMRC’s MTD VAT platform allows accountants, and their clients to:

Access VAT data held by HMRC, including current and future obligations, view up to date liabilities outstanding and payments made to (and rebates from) HMRC

It has been a great journey and, whilst we want to celebrate our success, the road was not quite as rocky as some would have you believe!

Day 44 – Making Tax Digital

 

17th July 

Our demo to HMRC has been completed successfully. We are now in a position to apply for our production credentials required to submit live VAT returns as part of the controlled go live pilot.

A separate application to be admitted to the pilot will be made once we have the production credentials.

The VAT registration numbers (VRN’s) of all test clients taking part in the pilot will be checked by HMRC for eligibility in the pilot scheme.

At least two successful submissions to HMRC need to be accepted. These are planned for the next week on a pre-agreed submission date with HMRC.

Day 40 – Making Tax Digital

13th July 

Development completed!!!

We are now coordinating with HMRC to arrange a date to demo the functionality we have built, once we have approval from HMRC we will be able to submit our first tax return as a part of our pilot, before rolling out to our entire client base.

We set out to complete this project over a 40 day period, and although we still have a couple of ticks in the boxes outstanding the hard work has been done. Stay tuned for our updates once HMRC have verified the development.

 

MTD Day 37

10th July 

Development of our making tax digital compatible VAT module is all but complete and we are nearly ready to submit our first VAT return as part of the pilot.

 

Next steps are:

  1. Verify our test client’s VAT submissions are eligible for the pilot
  2. Provide A demonstration of our product to HMRC in the sandbox environment
  3. Make an application to HMRC for live credentials
  4. Submit VAT return as part of the pilot

 

Our development is on schedule to be finished within our initial target time period. As long as the above steps with HMRC are completed in good time, we will be have completed our goal close to our target.

Day 32 – Making Tax Digital

5th July

We have successfully integrated HMRC OAuth2 verification with MDA!!

So the HMRC API’s currently integrated into MDA are as follows:

Re-generate Access Token using Refresh Token

Retrieve VAT obligations

Retrieve VAT liabilities

Retrieve VAT payments

 

So we’re now in the final stretch and are working on integrating the “Submitting a VAT return for a period” API into the system

 

Day 29 – Making Tax Digital

2nd July 2018
Since our last post we have successfully received the test “hello world” response from HMRC through our application and moved onto integrating the APIs within MDA.

MTD (Making Tax Digital) is now configurable at the company level in our testing environment and MTD VAT enabled companies can create test users via the MTD API. Once test users are created for MTD, enabled companies will automatically switch to the new VAT submission flow.

We have also successfully integrated HMRC OAuth2 verification and used the Access code received to get an Access Token.

Summary of HMRC APIs integrated into MDA:
1. Create test User
2. Authorisation Code
3. Get Access Token
We are now in the process of retrieving a New Access Token using the “Refresh Token” process .

Day 22 – Making Tax Digital

25th June 2018
We have completed the first draft of our screen designs for MTD – Click through the links below
Decision still needs to be made to which period we will get obligations for, financial year is preferred over tax year but API range is restricted to only 12 months.
New liabilities and payment screens will allow agents access to payment information that was previously unavailable
Direct Debit marker will give the user an indication if HMRC plan to take by DD

Get obligations screen
View liabilities screen
View payments screen
Submitted VAT return screen
Submit VAT return screen