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Making Tax Digital for charities – are your digital links compliant?

Blog by Glyn Woodhouse, VAT partner – charities at BDO.

A narrated version of this blog is available at the bottom of the page

When the government first announced Making Tax Digital for VAT (MTDfV) back in 2017, many people doubted that it would be possible for charities to comply. Other commentators were sceptical that it would achieve the policy objective of narrowing the tax gap by eliminating basic VAT errors. Now that the transition to MTDfV is almost complete, it is interesting to see how the sector got on and what lessons can be learned.

The first part of the MTDfV process was to get all organisations to file VAT returns via an electronic API link. This became compulsory in stages last year and was largely successful, with most organisations now filing returns electronically. It was also relatively low cost because, in many cases, bridging software was made available at a discount price or even for free.

The end of the soft landing period

Several years on from the initial announcements, we are reaching the end of the soft landing period that HMRC granted all compulsorily VAT-registered charities, giving them more time to comply with the remaining conditions. From April 2021, all charities will need to ensure that they have an unbroken electronic chain of information between the original entry into the accounting software and the submission of the return to HMRC, with only minimal manual adjustment allowed for specific items.

However, with issues surrounding VAT recovery methods, manual adjustments and multiple accounting systems, ensuring that there are digital links is causing a problem for most – if not all – charities. During the recent BDO MTD update webinar detailing the options for charities, we answered a range of questions from “Can I use cut and paste?” (No, you can’t) to “Can I still use excel files?” (Yes, you can, if you use them correctly).

Overall, the tone of the questions suggested that many were still having some difficulty with the changes. It appears that this change will leave some in a position where it seems impossible for them to comply in the timescale, potentially facing penalties. Those looking for comfort will have noted an ominous tone in HMRC’s recent presentations. When asked if there is any capacity for a further delay, the response was a clear “No”; going on to explain that they feel they have given taxpayers several years’ notice and ample time to make the necessary arrangements.

So what should charities who are still having difficulties do?  

Firstly, we at BDO would suggest drawing out the flow of information through the system and noting any manual adjustments. This should highlight areas of non-compliance and enable different solutions to be considered. It is important to remember that, whilst there are many brilliant software solutions on the market, it may not be necessary, or even desirable, to buy an expensive solution. Instead, you could consider using spreadsheets or other tools to semi-automate the process. This may be especially attractive if you find yourself running out of time to make wholesale changes or if you are already planning IT updates in the near future and, therefore, need a temporary fix in the meantime.

If you do decide that a software purchase is the way to go, we would suggest considering what functionality is actually needed and, most importantly, what data the existing accounting package can produce. We have seen many instances where Charities have tried to implement a new software solution, only to find that in order to do so they need to make fundamental changes to their existing ERP system in order to identify the transactions that the new software needs to operate.

Charities should also consider that this may not be the end for MTDfV. It seems highly likely that the coming years will introduce further changes. It would be wise to ensure that the process is secure and can handle future change.

Using MTDfV as an opportunity

When reflecting on the success or otherwise of MTDfV, it seems clear that the main beneficiaries will be those that have positively embraced the change and used it to critically examine their VAT compliance processes. This has enabled them to streamline the compliance process and formally document them.  

From a personal perspective, whilst I am still not entirely sure that the MTDfV programme has been wholly effective in helping to close the VAT gap, I have seen numerous examples of Charities being forced to consider their VAT compliance in detail, often for the first time, and being encouraged to modernise the process. This will inevitably be beneficial for the Charity in the long run, reducing compliance costs and helping to ensure continuity when they inevitably have staff changes.

Don’t delay: sort your digital links now

If you are one of the many charities that have yet to reach full compliance with the digital link requirements of MTDfV, you don’t have long until your first VAT return post-1 April to ensure they are sorted. You need to consider what’s the best solution for your charity’s circumstances – a short-term fix with excel or other tools, or a longer-term software solution? At BDO, we’ll help you make that decision without pushing one solution on you – one-size-fits-all is definitely not the approach to take here. For more information and a free no-obligation chat, please don’t hesitate to get in touch, I’d be happy to discuss. Good luck, and like I said – don’t delay; sort your digital links now.

Narrated by a member of the ACEVO staff

Image by rawpixel.com

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