The Practical Implications of Making Tax Digital (MTD)

Making Tax Digital (MTD) for VAT in the UK has created a shift in the way UK businesses approach VAT obligations and compliance. HMRC has required ‘digital links’ since 1st April 2021, aiming to ensure a fully digital and streamlined process from source records to VAT returns submission.    

So, more than two years on, what have been the biggest practical implications of MTD for businesses? How has making VAT digital triggered positive transformations in tax and what still must be done?  

Digital VAT processes have been a catalyst for wider change  

Initial communication around MTD for VAT suggested significant cost-effectiveness, that reality proved otherwise. The practical manifestation of MTD in tax departments has been a mixed bag. Nevertheless, for VAT many businesses can now acknowledge the benefits.   

Many appreciate that the digital VAT processes in light of these regulations have been a catalyst for internal tax transformation, opening-up budgets for VAT automation software and tax technology that can have a positive impact far beyond the requirements of making tax digital for VAT.    

Has MTD mandated a true digital record keeping process?   

MTD's mandate for digital record-keeping has driven tax departments to invest in software and tax technology, removing legacy manual interventions and workarounds, with far reaching results.   

Processes and documentation are streamlined, and best practices are standardised. Key dependencies have been removed. Tax data is now easy to find and is traceable. This has all worked to improve communications and response times from and to HMRC related to filings. Tax declarations are of a higher quality and digital VAT filings also reduces the need for post-submission corrections.  

Pre-MTD, businesses were still keying data into a VAT portal and whilst this was an improvement on manual processes (of posting forms completed on paper), it was still vulnerable to errors and carried risk. MTD has changed this. However, we’ve seen that the transition from manual data entry to API filing under MTD has posed a real challenge for many businesses.   

Initial connectivity and testing issues with HMRC were a challenge and prompted a reassessment of digital VAT software and tax technology needs. Businesses were keen to find API providers they could trust with the information flow of their sensitive data - from security and reliability perspectives. The learning curve was steep, but the threat of tax penalties expedited the adoption of MTD compliant technologies.  

Making Tax Digital for VAT, business size and sector matter   

Small and medium sized enterprises have adapted, and the initial discomfort has subsided.  They are beginning to reap the rewards that streamlining processes and reducing tax administration bring. Larger enterprises still face challenges, especially in the financial services and insurance sectors, and ongoing testing and continuous improvement around digital VAT processes is part of new routine business processes.  

For medium-sized businesses, in many cases, making tax digital for VAT requirements acted as a catalyst for broader tax transformations and prompted businesses to seek providers capable of addressing not only MTD requirements but broader challenges in tax compliance.   

In fact, we’ve found that organisations have been keen to look more closely at who they partner with and make more informed choices when selecting VAT software and technology providers. In addition, a fundamental part of the shift brought about by digital VAT was a focus on education and how tax teams need to operate in a new era of transparency.   

In contrast, large financial organisations have faced unique challenges due to the consultative nature of their tax calculation processes. For example, in large banking and insurance organisations, VAT calculation and compliance involves frequent interaction and consultation with tax authorities - rather than adhering to a strict formula.   

Navigating these complexities within the context of new VAT rules has required significant effort. Seeking clarifications, collaborating with tax technology and advisory providers, all takes time and incurs costs, and these organisations are still adapting to a new normal amidst the change. For these organisations making tax digital remains an ongoing work in progress.   

The position on penalties under MTD  

So far, HMRC's approach to penalties under MTD has been extremely pragmatic. The focus has been on adoption rather than punitive measures. Globally, a staggering 62% of businesses have been found to be non-compliant regarding indirect tax. HMRC's pragmatic stance has provided a sense of relief as they navigate the new digital VAT landscape. But the mood is changing and the attitude towards penalties is starting to revert to normal, especially for filing issues, where automatic penalties have always been expected.   

The overall impact of UK governments making tax digital has been positive, with improved compliance levels and stabilised tax collection  

While MTD is deemed fit for purpose, the extent of the task and the length of time needed for the changes to business operations was underestimated. External crises such as the COVID-19 pandemic and Brexit added further complexity and challenge to the adoption process and timeline.   

It’s fair to say that MTD may have had a different appeal and outcome without these additional challenges. It has been good for VAT, but HMRC is reassessing the digital narrative somewhat when it comes to income tax and other areas. Perhaps this is due to some important lessons still being learned?  

On balance the tax landscape introduced by MTD has created several practical implications which are a blend of challenges and successes. The positive impact on compliance, coupled with the ongoing evolution of processes and tax technology, positions making tax digital for VAT as a crucial milestone in the journey to a modern and efficient tax management in the UK.   

Overall, MTD has steered businesses towards a digital future and Vertex is a valuable partner for organisations small and large as they navigate the complexities of tax compliance.  

Vertex is a tax technology provider that eases the burden of tax compliance. Vertex VAT Compliance is proven digital VAT software that reduces compliance risk, improving process efficiency, and data quality. Keeping businesses in line with the latest tax digitisation mandates. It provides peace of mind and delivers continuity for businesses.  

Vertex VAT Compliance has passed HMRC's testing, demonstrating its compliance with MTD for VAT requirements. This provides businesses with the assurance that they can confidently address digital VAT reporting obligations imposed by making tax digital for VAT and will give you the peace of mind you are looking for in your tax technology partner!   

Read more in our step by step guide on implementing and ensuring compliance with MTD for VAT regulations.