Tax : MTD – ONE STEP AT A TIME

Even after assessing the level of experience of the vendor, the customer support on offer, and compatibility, it's hard to choose from over a hundred solutions all of which seem very similar. This is because the market has focused primarily on the bridging element which is the lowest common denominator required to be compliant, making it difficult to assess how offerings will scale.

Is the solution a one trick pony or will it pave the way for digital linking mandated for April 2020? Will it automate and test processes, empower staff, and streamline workflows? Will it integrate with IT and data storage systems? Will it scale to meet more complex VAT reporting requirements? It's these sorts of questions that need to be considered when picking MTD software.

Four steps

To deliver on all these fronts, a solution needs to grow with compliance requirements and take into account the business' appetite for automation. If the business can evolve its processes and software gradually, disruption and costly integration projects can be avoided. This overcomes the main problem associated with MTD: change management. To achieve this the MTD strategy needs to cover these four steps:

Step 1: Creation of a digital bridge between the existing VAT calculation and the HMRC API which sees the software automatically populate the nine fields for the submission.

Step 2: Implementation of digital links to all relevant source data creating a central reusable data pool. VAT data can then be seamlessly imported to a spreadsheet or compliance engine.

Step 3: Advancedguidance for complex VAT requirements using a compliance engine. This can draw data direct from source so obviates the need for the spreadsheet, streamlining processes.

Step 4: Forward compatibility of processes and a centralised data pool. This ensures the business is well placed to meet the compliance requirements of future regulatory change such as MTD for corporation tax.

A step-by-step approach such as this provides a clear path and removes the need for teams to revisit their investment as compliance requirements evolve. It also brings operational benefits, improving accuracy by eliminating spreadsheet dependency and provides the means to carry out data analysis to inform decision making. These benefits go above and beyond those conferred by basic MTD bridging software.

Functionality

So how can these steps be achieved in practice? Let's look at the first three steps (step four will be covered in the next article).

Step 1 - The Digital Bridge

At first glance, this is a very simple offering that takes data from the digital record, automatically inserts it into the nine boxes, and then submits the return. Yet with some additional functionality this can become a much more useful tool. Add a pre-test environment and the business can identify any process issues before signing up to MTD and use it to train staff. Integrate a worksheet template from the solution into a workbook and external data use is reduced, simplyfing the process. Add a dashboard and data can be pulled down from the HMRC Business Tax Account, allowing past, present and future obligations to be viewed, making data retrieval and auditing easier. Suddenly we're not just looking at a submission tool but one that delivers pre- and post-filing value.

Step 2 - Digital Linking

Some solutions may only interpret digital linking in a limited form. This can mean not all data sources are digitally linked which could cause compliance issues going forward. Ensure the solution keeps consistent records of where data has been sourced from to reduce the risk of fines associated with poor record keeping. If connectors are used to extract data from accountancy and ERP systems, the business can avoid the need for costly systems integration and minimise disruption to existing processes. Data should be able to be extracted, formatted and encrypted easily while ensuring a transparent audit trail. This provides a ready made pool of data for completing tax computations. Getting this step right now will pave the way for future compliance because the same data can be used to populate other tax returns, such as corporation tax.

Step 3 - The VAT Compliance engine

For organisations who report on multiple entities, large transaction rates or have complex reporting, a compliance engine is the next step. This takes digital linking to the next level by automatically processing data in accordance with tax rules. Tax legislation, embedded in the software, is constantly updated, allowing advanced computations to be automatically performed. Within the context of VAT, a compliance engine can consolidate tax affairs across groups and divisions and be used to meet complex requirements such as by applying adjustments (ie fuel scale charges, partial exemption etc), amendments and error corrections, and special scheme requirements (ie retail, flat rate, margin etc).

If this sounds of interest, Tax Systems have developed the AlphaVAT family, comprising AlphaBridge, AlphaLink and compliance engine, AlphaVAT, to allow the business to adopt a step-by-step migration to MTD. To learn how AlphaVAT facilitates VAT compliance and beyond, sign up for one of our webinars on 'How to get compliant in 20 minutes ' or have a look at our AlphaVAT datasheet.