The next challenge for Making Tax Digital – linking software products

The major upheaval to drag clients, with some kicking and screaming, into the MTD regime is very much water under the bridge now. There are still a few laggards that won’t play ball just yet…but HMRC will be putting the pressure on shortly no doubt.

However, this was the (apparently) easy bit, despite several hiccups along the way, and is perhaps just the tip of the iceberg? Now comes the challenge of “digital linking”. 

VAT Notice 700/22 contains in paragraph 4.2.1 “Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.

It follows that transferring data manually within or between different parts of a set of software programs, products or applications that make up functional compatible software is not acceptable under Making Tax Digital. For example, noting down details from an invoice in one ledger and then using that handwritten information to manually update another part of the business functional compatible software system.”

“HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link.”

This is going to present very practical problems for lots of businesses. Many will have “external” software products for a specific accounting purpose that run outside of the main accounting software. An example – a commercial vehicle repair business was using dedicated software that produced their sales invoices. There is no way of exporting the data from this software and importing it into his accounting software. Whilst not an efficient way of working, the bookkeeper used to enter the invoices into the accounting software for the purpose of maintaining the sales ledger, allocating receipts, sending statements etc. The software house has no intention of producing anything which will facilitate the transfer of data to the accounting software in use. What does the business do? Ditch the invoicing software and look for something else? Change the accounting software? There are hundreds of vehicles in the system, and it is used to generate reminders for MOT’s, servicing etc. as well as the sales invoicing. It would be a major task to export the data, test the import, and then perform the import into a different product, if indeed one could be found. There would also be a monetary cost to this too; however, VAT Notice 700/22 states cost is not an acceptable reason for not implementing digital links.

There are many other similar situations; the monthly totals from a dedicated hotel booking system are posted manually at the end of each month into the accounting system for instance. 

It is possible to submit a formal application to HMRC for an extension past April 2020, but this needs to be done before that deadline, and a process map needs to be drawn up (examples are in Notice 700/22) and detailed explanations as to why digital linking is not possible at this stage, and when it will be fully compliant!

Once again, this looks to be a sledgehammer to crack a nut, and hugely time consuming for businesses – and for what benefit to them? Agreed, in the long run, there is a possibility that their processes may become more efficient, but at what cost? Do HMRC actually know what happens in a small business?

How many businesses do you think this might affect?  Have you started the process of completing the applications forms yet…or this a job post tax season in February? Do you know all the detailed processes in all your business clients, and what spreadsheets they use? Are your clients going to pay you to prepare and submit this application?

It would be interesting to know how many extension applications HMRC are expecting, and how much resource is allocated to deal with these!

Lots of questions…… any thoughts….?

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  • The example of the vehicle repair business raises a number of interesting points.

    Firstly one of the key goals of MTD is to reduce errors in submitting VAT returns to HMRC and where there are unconnected systems requiring people to manually copy information from source to another there will always be the potential for error.  This example highlights the perceived risk from HMRC’s perspective.

    Secondly the assumption in the example appears to be that the accounting system will be responsible for submitting the VAT information to HMRC.  There are many legacy systems which will be difficult to integrate digitally because of limited export and import options which do not align. To avoid disruption to two established systems I would recommend looking at software specifically designed to support the MTD submission including the required digital links (not just the API submission).

    If the export options are limited it is critical that the MTD software accepts a broad spectrum of import structures.  The more prescriptive the MTD solution is in terms of the required import format the less likely it will fit the requirements of the legacy system exporting the data.  At Arkk Solutions we understand the pressures businesses face in extracting data from one or more systems to create the MTD submission and do not prescribe the information must fit within the prescriptive boundaries of a predefined format before it can be processed.

    Finally it is acknowledged in the article that there are potential savings in the future of integrating systems.  This seems to be limited to process improvements reducing the time spent but does not consider the potential to reduce errors in the business’ current VAT submissions.  The business could be missing mistakes and as a result not recognizing all the input VAT, it is not just HMRC who can benefit from correcting errors! If the business currently has manual systems adding new MTD software which is capable of using machine learning to analyse transactions to spot irregularities automatically could save the business money, reduce the time being spent on VAT and reduce your risk profile with HMRC.

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