From 1 April, companies will have to report VAT payments electronically via software to comply with the Making Tax Digital (MTD) for VAT rules, following a year’s delay due to the pandemic
Most businesses are already completing their VAT returns online, if not directly through their software.
The requirement to report via software is driven by HMRC’s mission to reduce errors in VAT reporting.
Stuart Clark, managing director of Glasgow-based accountants Russell & Russell, said: ‘It is all about transposition - inputting numbers in the incorrect order, for example, £685 rather than £658 - which HMRC says is costing £9bn in year in lost VAT revenues. Hence the reason you can no longer type your VAT return in to the HMRC online portal; instead, you need to upload it directly.
‘With digital till systems in place you need to ensure that these are digitally linked to your accounts software. Rather than manually posting your sales, and possibly creating a transposition error, your systems need to be digitally linked.’
The move to mandatory software has been delayed for two years since the original introduction date of April 2019. Subsequently a year’s delay was announced as businesses struggled to deal with the pandemic.
The software requirement means that the cut and paste option will no longer be accepted. This was allowed during the ‘soft landing period’ when penalties were waived, but will not, in future, meet HMRC’s definition of a digital link.
Clark added: ‘A limited number of further extensions have been granted to those businesses able to prove that they are dealing with complex or legacy IT systems that make 100% digital linking genuinely impossible. But for the vast majority who make up the rest, failure to meet the new rules could incur potentially costly penalties.
‘It is becoming increasingly less likely that those who try to fudge around the rules will continue to slip under the radar. HMRC’s drive towards automation is leading to higher numbers of enquiries as software algorithms automatically flag up discrepancies that previously had to be uncovered through human detection.
‘For even innocent mistakes resulting from human error, there is the potential of penalties. Through automation, firms can dramatically cut down on the likelihood of these types of costly mistakes.’
Similar reforms covering income tax and corporation tax are going to follow as part of MTD and embedding this first stage into your systems of operation will pave a smoother path for more changes to come.