Making Tax Digital – Why is the government going to all this trouble?

The MTD for VAT programme is a massive undertaking of the government to digitalise our tax systems for VAT. The project is underway with several phases to be rolled out, and some huge changes for us to get our heads around. So, what are the benefits of this idea, and who is benefiting the most?

Eliminating human error

On paper, HMRCs main aim of MTD for VAT is for the purpose of eliminating manual errors in the completion on online forms. These errors are resulting in over £600m in miscalculations, with most of these being in the businesses favour. Currently only about 10% of vat registered companies are utilising the XML-based data upload function of their accounting software to submit their returns automatically to HMRC. Most businesses are choosing to log in to the government’s current VAT portal to manually input their return, resulting in a much larger scope for error. Although this can be down to a general reluctance to move to an automated system, in many instances there are manual adjustments to VAT totals that need to be made, which may account for a certain amount of returns being filed outside of accounting software.

How will MTD solve the problem with input errors?

The MTD VAT return will only be supplying the same 9 boxes of data to HMRC that the online portal does, so it is hard to see how the change will be fixing anything. Why are they going to all this trouble then? HMRC will be introducing a new format for data submission called an API. The Application Programming Interface has richer capabilities when it comes to tax software. The API manages the information that is received by HMRCs’ servers and can handle much more data that the XML process can. HMRC’s aim is to have a suite of APIs that will enable third party products to carry out more tax functions, which may eventually result in much great volumes of data being handled between third party systems and HMRC.

Are there any Tax savings to be made?

HMRC will have its sights set on the VAT gap estimates. The VAT gap is measured by comparing the VAT Total Theoretical Liability (VTTL) with actual receipts. Essentially it compares the amount of VAT HMRC expects to receive, with the amount they actually receive. The most recently published report from October 2018 cites the VAT gap at £13.3 billion, a £1.3bn increase on the previous reporting year. In comparison, the European Union have cut their VAT gap by €10bn to €147.1bn in its most recent published report. In order to establish if the gap is created by honest mistakes or tax fraud, the HMRC will require more information from taxpayers. To achieve this, they are pushing the API reporting systems on all VAT registered businesses. This will ultimately result in HMRC having the capabilities to receive invoice level detail that could help in their undertaking to reduce the VAT gap.

What is time scale for this?

The initial phase; switching from XML to API reporting through MTD, is being rolled out in April 2019. There is a one-year soft-landing phase for this system to bed in.

Currently across Europe and the world, new approaches are being taken to VAT and TAX that involve a lot more control in the hands of tax authorities. In Spain and Hungary for example they require near-live reporting of sales invoices to carry out checks and tackle fast moving fraud. In Brazil and Italy, tax authorities are now able to block suppliers’ invoices from being issued, should the VAT details look suspicious. Greater powers for the authorities is becoming a thing of the norm, and it may not be long at all before HMRC requests businesses to provide full ledger transaction reporting, so they too will have access to any transactions involving VAT. With this level of data, HMRC would be able to analysis transactions and highlight errors or fraudulent activities. Potentially, in as little as 5 years HMRC could have eliminated the VAT gap using MTD to achieve this.