HMRC delays second phase for Making Tax Digital (MTD) scheme

As UK businesses deal with the pressures of COVID-19, more stringent rules around digital links for HMRC’s Making Tax Digital (MTD) scheme will no longer be introduced as planned this year.

Instead, the requirement will come into effect from April 2021 onwards, giving businesses that are not yet compliant another year to set up their digital systems.

The deferral was announced just two days before the new rules were set to be introduced, in a letter from HMRC to a selection of professional bodies and software developers.

The Government tax body said:

“We understand that the impact of COVID-19 is creating extremely difficult times for all, and we are committed to helping in every way possible all those businesses facing unprecedented challenges.

“Therefore, we are providing all MTD businesses with more time to put in place digital links between all parts of their functional compatible software.

“This means that all businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.”

MTD for VAT phase one
The first mandatory stage of MTD came into effect from 1 April 2019, when it was introduced for VAT-registered businesses with a turnover of more than £85,000.

Since then, those businesses have been required to keep digital records for VAT, and submit their returns through compatible software that links to HMRC’s application programming interface – or API.

These include business records relating to VAT, details of any VAT accounting schemes used, and the VAT account and transaction data.
Businesses must also digitally record information on sales and purchases, including the time and value of each supply.

The idea is to eliminate paper records and manual data entry, making tax data more accurate and easier to track by keeping it digitally.

However, the rules allowed for an initial ‘soft-landing period’ regarding the way software can be linked together. MTD businesses don’t need to have digital links between all the parts of their software, and can instead copy and paste between different systems.

HMRC also said they would be taking a ‘light-touch approach’ to penalties during the first year of MTD’s mandation, and would not fine businesses for non-compliance as long as they were doing their best to meet the requirements.

The ‘light-touch’ period was due to come to an end on 1 April 2020, but as yet it’s unclear whether this has also been extended as businesses cope with the coronavirus outbreak.

MTD for VAT phase two
When the second phase of MTD kicks in from April 2021, the rules on digital links will be stricter and copying and pasting information will no longer be an acceptable way to transfer it between pieces of software.

This means the most basic accounting software may no longer meet HMRC’s requirements, and businesses will need to review their processes to ensure they’re still compliant. You can find a list of HMRC-accredited software here.

Andrew Perrett, cloud accounting associate partner at TC Group, commented:

“This is good news for businesses that have not yet set up their digital links, as it gives them extra time to comply with the legislation.

“Most of our clients are already compliant with the full requirements of MTD, but now have more time to work closely with those that were struggling to be compliant by the deadline.

“If you have any concerns, please speak to us sooner rather than later.”

If you have any questions about the requirements of MTD, contact your local office on 0330 088 7111.