The UK tax office, HMRC, introduced Phase 1 if their ‘Making Tax Digital’ (MTD) initiative in April 2019. The much more demanding Phase II implementation was supposed to come into effect in April 2020, but this was delayed owing to the noise surrounding Brexit and the Covid-19 pandemic.
However, it was only delayed by a year and therefore 1st April 2021 is deadline day for businesses to comply with the taxing new legislation.
We thought it would be worth giving a quick refresher of what MTD is and specifically explaining what extra obligations will come into effect this April.
Who does it affect?
All businesses who are registered for VAT in the UK, whether the business is established in the UK or not. (Certain businesses may be exempt, but this will be very rare)
What is MTD again?
When VAT registered businesses in the UK file VAT returns, the submission must be done digitally. Previously, businesses would log into the HMRC website and manually populate the VAT return online. From 2019, the manual input method was no longer allowed, and businesses had to use HMRC-accredited software to submit the VAT returns directly from a system. This meant that all businesses needed to maintain digital records of all transactions as well.
We already use MTD software, what changes in Phase 2?
The criteria for complying with Phase 1 MTD were very simple. As long as the VAT return was submitted by clicking a button in a system external to HMRC’s portal, this was acceptable. Therefore, many “quick fixes” were available, including spreadsheet-driven solutions and other bridging software options which will not be acceptable when Phase 2 comes into effect.
What makes Phase 2 so much more complicated?
Digital links. Stringent rules will be introduced around the way all transactions must be recorded in your accounting system and there must be an uninterrupted “digital link” from the time a transaction is created to the time it is included in a VAT return calculation.
Sounds complex? It is indeed, and most basic accounting software tools will not have the required features to provide a way to submit the financial records on purchases as well as sales in this manner. You can read more about the details of how this ‘Digital Journey’ will be validated and audited by HMRC in our MTD Phase 2 Guide.
They will be introducing stringent penalties for non-compliance, so it imperative that you get your house in order immediately, April is around the corner…