As discussed in a previous edition of Indirect Tax matters, there is an increasing global trend of taxation authorities seeking to collect information from businesses’ enterprise resource planning (‘ERP’) solutions and other internal core systems in real-time by electronic means. There is a fundamental shift in how data is being collected and exchanged – we are moving away from information being ‘pushed’ to taxation authorities towards a position where it is being ‘pulled’ by them.

A number of European jurisdictions, such as Spain, Hungary and Poland, have already introduced digital regimes which affect VAT reporting. Next up is the UK’s Making Tax Digital for VAT (‘MTDfV’) regime which will take effect for VAT periods starting on or after 1 April 2019 for most UK VAT registered businesses.

The UK’s MTDfV regime

MTDfV will represent a significant change to the UK VAT compliance process. In its first wave, it will see an end to businesses being able to complete VAT returns ‘online’. Businesses will be required to ‘push’ the nine figures of their UK VAT returns from their ERP system (or spreadsheet) to HMRC systems via an API (a piece of software, such as Deloitte’s software solution).

UK VAT registered businesses will also be able (at their discretion) to provide additional information (effectively supporting VAT return workings) to HMRC but this will not be mandatory, at least initially. Overall, the UK’s approach is effectively a light-touch approach to a Standard Audit File for Tax (‘SAF-T’) / real-time VAT reporting that has been introduced in other countries.

There are three key digital components to MTDfV:

1. Digital submission

At present, most businesses submit their UK VAT returns through manually re-keying into HMRC’s online portal. In line with the move towards digital, the online portal will close (for most businesses) for VAT periods beginning on or after 1 April 2019, and taxpayers will no longer be able to submit UK VAT returns this way. Instead, all submissions must be done digitally via HMRC’s Making Tax Digital API.

HMRC recently announced that ‘more complex’ businesses will be given an additional six months before they are mandated to comply with the MTDfV regime. These include: trusts, not for profit organisations, VAT divisions, VAT groups, certain public sector entities (government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account, and annual accounting scheme users.

2. Digital records

Although this does not mean businesses will have to store each invoice and receipt digitally, the transaction data will need to be stored digitally. This includes an accounts payable and accounts receivable transactional listing, and a digital VAT account from which the UK VAT return is prepared.

3. Digital links

VAT returns must have digital links to digital records – spreadsheets can remain, but they will need ‘digital links’ to source systems. HMRC has announced a soft landing period of 12 months, however digital links will be mandatory from April 2020.

Ireland’s current position

In Ireland, taxpayers may be pleased to know that Irish Revenue has not made any announcements regarding the introduction of a SAF-T or real-time data exchange regimes for VAT reporting. However, modernising Ireland’s tax system is certainly on Irish Revenue’s agenda. Businesses in Ireland will be aware of the Pay As You Earn (‘PAYE’) Modernisation real-time reporting system that has been operational for all employee payments being made from 1 January 2019 onwards. This represents the most significant reform of the PAYE system since its introduction in 1960.

We are maintaining our long-held view that Ireland’s VAT reporting process will be overhauled within the next few years.

What should organisations be doing now?

In relation to MTDfV, those affected should immediately ascertain whether their existing ERP system(s) is capable of submitting UK VAT returns digitally. Where a business outsources all or part of its VAT compliance process, they should confirm with their service provider whether they are ready to comply with the requirements of the MTDfV regime.

At Deloitte, we have developed a tool (approved by HMRC) which may be of interest to most UK VAT registered businesses as it is specifically designed to work with Excel-based VAT return workings. See a demo of the solution.

More generally, businesses should now also be looking at their full VAT compliance process, and in particular where the data for this comes from, which systems are used, and how this information is adjusted and consolidated.

This end-to-end flow of information should be digital and capable of being audited going forward. Some organisations may be doing this currently by downloading reports and files, but where this information is being manually entered into spreadsheets or tax compliance software, the impact of automating this process should be considered.

It is likely that a digital audit trail from the submission of information to the underlying accounting records may be required, and potentially the submission of the underlying documents. Large organisations running complex or multiple systems may require several years (or longer) to implement these changes in their financial systems.

Should you have any queries on this article’s contents or would like our assistance with dealing with any taxation issue, please feel free to contact us.