Making Tax Digital and VAT: further extensions for some firms
Earlier this year, we commented on an HMRC update to the ‘soft landing period’ for some businesses affected by Making Tax Digital (MTD). HMRC had updated its public notice about MTD for VAT (VAT Notice 700/22) to note that businesses which needed to comply with the MTD rules from 1 October 2019 would have a full 12-month period to get digital links put in place.
In a further, more recent update to VAT Notice 700/22, HMRC has shown consideration to ‘businesses with complex or legacy IT systems [which] may require a longer period to put digital links in place across their functional compatible software’.
It states that ‘these businesses can apply for additional time to put the required digital links in place (subject to qualifying criteria). If your business qualifies then the additional time will be granted as a specific direction’.
Those qualifying criteria for an extension, detailed in Section 4.2 of the notice, include a formal application to HMRC, an explanation of ‘why it is unachievable and not reasonable for [the business] to have digital links in place by the MTD VAT digital links mandation date’ and a clear timetable.
The need for extensions
From speaking with our clients, we are aware of many businesses with complex structures or industry specific systems who have been let down by their suppliers of specialist or enterprise resource planning (ERP) software. It appears that some of these suppliers have underestimated the change required. Others, as they are often global providers, have not given their UK customers the support they needed, especially if the UK was not one of their main markets or customers are using older versions of systems. HMRC’s list of software that’s compatible with Making Tax Digital for VAT features many bridging softwares rather than whole digital systems, with some major international names absent from the list.
We’ve also learned from clients that those software providers often linked the MTD module to a major price increase which would cause customers to hesitate and shop around. Once you are on a more complex system that integrates with all of your business functions, changing accounting systems becomes a major undertaking; it’s understandable that some customers may have held on to the hope that somehow an easier solution would present itself nearer the deadline. Unfortunately a head-in-the-sand approach is never the answer for business and is also unlikely to meet HMRC’s qualifying criteria for an extension.
As for HMRC’s motives, the offer of further extensions may not simply be an act of generosity. Given HMRC’s own struggles with some aspects of MTD adoption, granting firms additional time is likely to benefit HMRC in turn.
MTD and small businesses
Some of the media reporting of the VAT Notice 700/22 update has wrongly suggested that the update applies specifically to small businesses. In fact, MTD has been a positive opportunity for many small and medium-sized enterprises (SMEs), with support from cloud accounting systems such as Xero, our recommended provider.
In our experience, SMEs with a simple business and VAT structure can certainly benefit from Xero. The scale of Xero’s growth in UK subscribers – 48% in the year to 31 March 2019 – suggests that SMEs are among those taking advantage.
If you would like help to register for MTD and introduce Xero into your business, our outsourcing team would be glad to support you. Please get in touch with your usual BKL contact or use our enquiry form.