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UK MTD 2020: 3 major changes for 1.3 million businesses


First Published in Accountancy Age, 1 November 2019

On 1 April 2020, phase 2 of Making Tax Digital (MTD) for VAT starts with the ending of the UK’s HMRC’s ‘soft landing’ first phase. It is this second phase that will cause most issues. How are the three reforms going to affect almost 1.3 million VAT registered businesses in 2020? 

Congratulations if you are one of the hundreds of thousands who successfully filed on the new HMRC MTD platform following its introduction in April this year. But that was the easy bit. Now it’s the end of the ‘soft-landing’ in April 2020, and time to prepare for the three major changes: digital bookkeeping, digital journey and, the clincher, penalties. It is this April 2020 phase that will cause the issues. How are the three reforms going to affect over one million VAT registered businesses in 2020? Any businesses which were deferred on the first wave of MTD until 1 October 2019 will also be deferred on the 2020 changes until 31 October 2020.

Small businesses will require investment for the digital recordkeeping

The biggest change will be felt by hundreds of thousands of small businesses that keep their records in summary Excel or on paper. The 2020 changes oblige these businesses to digitalise recording of supplies received and made, including time of supply, value and VAT rate. So aside from sales, this extends to purchases, stocks and fixed asset transactions. This will likely lead to the small businesses buying some basic accounting package for the first time – which should be MTD compliant for filing, too. But they may stick with bridging software for MTD to maintain data if it still is able to transfer the data to HMRC without any manual adjustments or intervention.

Mid and large business to fall foul of digital journey

The second change will impact most large to enterprise-sized businesses. From April 2020, transfer of data between functional compatible software (invoice and accounting systems etc.) must be done using digital links. This means no manual inputting, including manipulation, consolidation or error corrections in spreadsheets. That includes the ending of the ‘cut and paste’ concession allowed for the soft-landing. However, if they can ensure an interrupted digital journey from their accounting or invoices systems to the bridging software and then onto HMRC, they can continue on this route. Detailed off-software calculations, such as partial exemption, will remain exempted from digital journey obligations.

This is the one that will hurt businesses with multiple accounting systems or group accounts. They typically manually consolidate all the numbers for the return in a spreadsheet. They will have to find a way – heavy investment or very complex Excel macros – to pull this all together without human intervention. The answer may be integrating all systems or investing in a VAT reporting software that digitally extracts, merges, allows digital adjustments and then files via the MTD API. HMRC has recently announced the option to apply for a further deferment beyond the ending of the soft-landing period. Businesses with complex or legacy IT systems may apply for an extension; but cost alone is not sufficient reason to issue.

Penalties kick-in

To give teeth to the whole MTD regime, the suspension of penalties on late MTD filings ends, too. These are on a cumulative basis, based on the number of offences in the past 12 months. This can reach 15% of the VAT due, plus fines of up to 100% of undeclared VAT as a result of careless or deliberate inaccuracies.

In short, the hard work and software investment will be for next April. And it’ll affect hundreds of thousands of businesses. If this year was just a change of lightbulb, 2020 is redoing the whole electrics.

Contact Avalara if you want to understand the details, and learn how we can solve your MTD 2020 challenges.


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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.
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