Preparing for the future of Making Tax Digital
The UK’s tax regulations are in an era of major change – and while UK businesses are now several years on from the initial rush to Making Tax Digital VAT compliance, it’s far from a case of ‘mission complete’. Chris Peall, director of professional services at Millennium Consulting, explains that the next natural steps in the changes will see the Treasury put not just income tax, but also corporation tax squarely in its sights.
You could simply sit back and wait for the next big HMRC announcement. But especially if becoming VAT MTD compliant meant adopting less-than optimal workarounds, a more proactive way forward involves re-appraising and finding better ways to manage MTD into the long term.
Here’s a closer look at the current MTD position and at how businesses can prepare for the changes ahead.
MTD: The story so far
First announced in 2015, Making Tax Digital is HMRC’s initiative for building “a trusted, modern tax administration system, that is fit for the 21st century, and keeps pace with the many countries already operating digital systems”.
The idea is to bring the system closer to real time; to digitise and automate it with a view to reducing the scope for error and fraud, to ensure timely payments, and increase efficiency for both businesses and HMRC. VAT was the first candidate for MTD. As of 2022, all VAT-registered businesses must comply with MTD, regardless of turnover.
The key elements of compliance are as follows:
- Digital record-keeping, with businesses required to maintain and store digital records of all VAT transactions (output and input VAT, and details of adjustments).
- Software requirements, meaning VAT accounting must be carried out using “functional compatible software”. This software must be capable of storing and maintaining the organisation’s VAT records. It should enable the preparation of VAT returns using the information maintained in those records. It must also be capable of linking up with HMRC digitally through HMRC’s own API platform.
- Digital links, in which HMRC allows for businesses to have multiple software programs in play (e.g. an accounting suite, supplemented by spreadsheets) as long as there are digital links between them. To be compliant, a digital link must ensure that data flows automatically between the different systems without manual intervention (i.e. no copying and pasting). Examples of acceptable digital links include API links between systems and CSV file exports.
- Digital submission – meaning businesses must submit VAT returns directly to HMRC through their MTD-compatible software.
The current solutions
Hundreds of solutions exist for MTD, from basic tools that simply submit the completed VAT return just to HMRC, to solutions that integrate with your finance system (like Millennium's own MVAT) and the HMRC API to allow for seamless production of VAT returns and access to HMRC's reports to see liabilities and payments.
As with every new compliance challenge, in the rush to meet compliance, some businesses have adopted solutions that are either.
Highly sophisticated but with a price tag to match, these solutions can be far more than is needed for compliance and require specific knowledge to integrate well into your finance system.
Or just a basic Excel link with no security, features, or automation, which will most likely be non-compliant when the next round of Information Security or MTD legislation is signed into law. These solutions usually lack integration capabilities, leading to manual data transfers and a higher error risk of operational error.
What’s next for MTD?
The ultimate goal of MTD is to create a fully digitised tax system. VAT is just the starting point: it will be extended to cover the other main taxes in the coming years. On top of the need to comply with MTD legislation, a growing raft of information security legislation reduces the number and types of solutions available to more and more businesses.
First, there is corporation tax. Back in 2020, HMRC said that it proposed to commence a voluntary MTD pilot for corporation tax in April 2024, with mandation to follow “from 2026 at the earliest”. MTD for corporation tax will happen, and with the lessons learned from compliance with MTD for VAT, companies should prepare the groundwork now.
Then, there are NIST2 and CS&RB. The last significant change in the EU and the UK to information security legislation was NIST in 2018; as of October 2024, NIST2 will apply legislation to ten times the number of businesses operating in Europe than NIST. In 2025, the Cyber Security and Resilience Bill will be brought to the UK parliament and is expected to apply to a large number of additional businesses. Several VAT MTD products may become unusable by companies under this legislation, and this might reduce the routes to corporation tax.
How can businesses prepare?
Here are some tips from Millennium Consulting, for optimising your processes and supporting technologies relating to existing MTD VAT obligations and how to prepare for the further changes ahead.
First, don’t allow a stopgap to become a permanent solution. A survey taken just before VAT MTD mandation suggested that one in five businesses knew little or nothing about it. For many others, it was seen as nothing more than another admin burden at a time when they had a big list of priorities to juggle: not least, Brexit – followed swiftly by Covid.
Understandably, MTD wasn’t a big priority for a lot of businesses. They had other, more important things to take care of, which meant they did the bare minimum to get compliant as quickly as possible. Examples included purchasing basic standalone MTD applications and/or setting up digital links between disparate systems. Many finance managers viewed these solutions as temporary fixes, sufficient for immediate compliance, with plans to reassess and optimise the approach at a later stage.
Of course, one problem with this is that a temporary workaround can easily become a long-term fixture! It’s far from perfect; it’s inefficient, increases operational risk and is a poor fit for your existing accounts system - but you never quite get around to replacing it. If this sounds familiar, now is the right time for a review. The sensible long-term aim should be not only meeting HMRC’s minimum requirements but ensuring that your solution is optimised to support your broader business needs.
Second, you should aim for seamless integration. What should MTD software do? Of course, it must comply with HMRC’s mandatory requirements (capable of digitally storing all records, automatically calculating VAT, and submitting them directly to HMRC).
Beyond this, the ideal solution should be easy to use, both in terms of a clear, easy-to-navigate interface and also in terms of not requiring users to jump between different applications for different tasks. Thanks to MVAT from Millennium Consulting, this is precisely what Unit4 Financials by Coda users can now have.
MTD and Corporation Tax: Lay the groundwork now
There’s a reason why VAT was HMRC’s first candidate for MTD: of the major taxes, it’s the most straightforward to account for.
As we’ve seen, MTD for CT is on its way (eventually). But in terms of complexity - not least, the wide variety of income sources, deductions, allowances, and reliefs involved - compared to VAT, it’s going to be a very different beast for both businesses and HMRC to deal with.
With corporation tax, the case for having an MTD solution integrated into your financial management software becomes even stronger. The last thing you need is having to switch between different systems if a better alternative is available.
For over 30 years, Millennium Consulting has been equipping finance departments to navigate crises and deal with major change. For businesses, now is the time to review your capabilities, ensure you are equipped for MTD, boost visibility across all areas of your organisation, and improve your ability to make the right decision.