In the run-up to the first MTD deadline, we’re launching our Making Tax Beautiful series – a fortnightly look into the changing world of VAT from our Director of Product Strategy, Russell Gammon. This week, Russell takes a look at Making Tax Digital bridging software – and why the new mandate offers a chance to do much more than submit a spreadsheet to HMRC.
Making Tax Digital (“MTD”) for VAT is the biggest change to VAT reporting since the turn of the century. Around 1.2m businesses across the UK will be required to report their VAT figures via HMRC’s API, rather than being able to key them into the HMRC portal. The requirement starts in April 2019 and many diligent firms are already looking to how they’ll gear up for the reporting.
For smaller clients with simple VAT calculations, there are well-known tools such as Xero and Quickbooks which will just manage the returns for them. The data is already there, and these cloud providers can easily cater for the API. However, as soon as the complexity level dials up even slightly, filers are required to purchase software (HMRC call this “functionally compatible software”) to complete their submissions.
The market has tended to segment into two distinct offerings to tackle MTD:
Complete Indirect Tax Engines
A couple of well-established vendors exist for what I would call “Indirect Tax engines”. These come with the ability to deal with the complexities of geographically diverse institutions, and also sometimes look to productionise complex parts of VAT, such as Partial Exemption calculations.
MTD has meant these providers are understandably going around the industry banging the drum again, and no doubt they will get some additional clients from it. However, the reasons for buying such a tool go well beyond just MTD compliance. Ultimately, if you are the kind of business that would buy a tool like this, you’ll do so anyway, for reasons other than MTD. MTD is just a small, extra “nice to have”. After all, satisfying the API submission is child’s play compared to automating a Partial Exemption calculation.
However, these engines often have lengthy implementation projects associated with them (measured in months, not weeks) and associated high licence fees. That’s why we’re seeing the rise of the second approach, the so-called…
Bridging software is the idea that software will slot nicely into the end of the process and submit the return via the HMRC API. It’s very much geared towards the “last mile” of the reporting process, getting the numbers out the door.
Bridging software is cheap. Really cheap. They’re also really basic; think of it as adding an extra tab to your already complicated Excel file, with a button that says “submit to HMRC”. Everything else stays the same.
This approach is very much a “fine for now” way of thinking, a way of thinking that some of the Big 4 are even pushing. However, think about the following…
We all know the story. Internal audit wants to look at the VAT return process for the past 18 months and want to see the files to go with it. What follows is ten minutes finding the filed called “Copy of Copy of VAT return Q2 2017 v12 FINAL” and sending it over. It then transpires that “FINAL” didn’t actually mean it was final and therefore a version Dave saved on his desktop was actually the final one which ties to the submitted return. Dave also left the firm last month. Not helpful.
MTD doesn’t demand auditability of data per se, but it does drive towards having all the data digitally linked from source to report. Therefore, seeing MTD submissions as a bolt-on at the end of the process is somewhat short-sighted and whilst it complies with the letter of the mandate for the April 2019 API requirement, we would argue that it doesn’t follow the spirit of the digital journey that HMRC are trying to instil. Indeed, it’s likely that the first implementation of MTD for VAT won’t be the last, and that this digital footprint will be expanded on.
2. VAT processes can be archaic
From being involved in multiple meetings where we’re discussing VAT processes, it’s clear that in many firms the processes are often manual, involving many steps and are seen as something that “just has to get done” every quarter.
Bridging software actually makes this problem worse, by adding yet another step in an already “step heavy” process.
We believe that the introduction to MTD should be a catalyst to improve processes in VAT, rather than make them worse.
3. Data cleansing in VAT can be painful
Let’s take a typical VAT process. Step 1, download data from SAP (other ERP systems are available). Step 2, give those files to a junior person to spend hours, or maybe days, pouring over. I remember from my time doing VAT returns for a well-known travel agent, this part was a couple of days of “check vendor A”, “check invoice B”, etc. There has to be a better way.
I won’t go into the detail (perhaps the subject of a future post?..), but suffice to say, I would want my “functionally compatible software” to streamline some of this process. We keep hearing about how AI is going to automate everything – how about we actually start doing it now?
4. Two projects rather than one
The HMRC mandate can be distilled to two main requirements. Firstly, the API submission, secondly, the “digital link” of having “source to report” data flow from initial ledgers through the submitted figures. The requirements are staggered; the former from April 2019 and the latter from April 2020.
API-only approaches effectively mean you deal with one part of the problem now, with another project then running to April 2020 to tackle “digital links”. I believe that it’s entirely possible to satisfy both of these requirements in one hit, rather than having to separate them out. API-only software isn’t going to help with the digital link, and therefore it’s entirely possible that buying a solution for April 2019 is only going to be a valid option for one year.
So, before you apply the “sticky plaster” of API-only for 2019, perhaps look at vendors (hint hint…) who can do more than just the API submission, but won’t take months to implement…
You can also sign up now to join our Making Tax Digital webinar on the 27th of September 2018. I’ll be presenting alongside CEO Richard Metcalfe, giving you the latest news and showing you our MTD platform.