From the launch of the government’s Making Tax Digital (MTD) programme back in 2015, much of the focus has been on how the way tax returns are submitted will change.
But MTD goes much further than just the submission process, and it is the broader changes – and specifically the new requirement for digital records – that may be the biggest challenge for business. That challenge, though, does not come without opportunity.
Why change the record-keeping requirements?
The government expects MTD for business (MTDfB) (encompassing the digitisation of VAT returns as well as those for business income tax and corporation tax) to have a significant impact on the UK’s tax gap. According to HM Revenue & Customs’ (HMRC’s) estimates, the introduction of MTD for VAT will – as a result of businesses making fewer errors in record-keeping and submissions – generate an additional £400 million annually by 2021-22.
So what is a digital record for MTD purposes? For VAT, businesses will be required to keep digital records showing the time of supply, value of the supply, the rate of VAT charged (for supplies made) and the amount of input tax claimed (for supplies received). This data must then link digitally through to the VAT calculation and to the submission to HMRC, reducing the chances of transposition errors when data is moved between systems.
We do not have the final detailed requirements for income and corporation tax, but we would again expect businesses to have to retain transactional-level records digitally, and transfer them via digital links to the tax computation and return.
Making the most of your digital records
There is no specific requirement either for businesses to keep their underlying documentation (eg invoices and receipts) digitally or for the digital record to be created at the time a supply is made or received. This means that there are a wide variety of ways in which a business can approach the MTD digital record-keeping requirements and remain compliant.
Not all accounting systems are MTD-compliant and businesses should check this alongside the integration with other internal systems.
Many businesses will find there are greater benefits to be realised from moving – with support from their accountant as needed – to a cloud-based accounting system which can pull in information direct from sources such as the business bank account, and which is also capable of creating and submitting a MTD-compliant VAT return. Not only can digitisation ultimately reduce the time spent on pulling together accounts and tax data, managing your figures in near to real-time can give you a better understanding of your business’ financial position and allow you to be more responsive to change.
We have found that, for those adopting a cloud-based accounting system, there is an obvious progression to the use of add-on products to automate the way in which data is processed. This can reduce both processing time and errors, and ensure that there is a good audit trail if there is a query in future – whether that be for the year end accounts or from HMRC further down the line.
A case study: ReceiptBank
One example of add-on products that can be used to enhance digital record-keeping is ReceiptBank, which a number of our clients use. ReceiptBank is an Optical Character Recognition (OCR) software, meaning that it can read a document and convert certain items of information from that document into another format. In simple terms, it can read a till receipt or a purchase invoice and convert it into a transaction.
How it works
The most common way of capturing the data is by using the camera on a smartphone. The user would download the ReceiptBank app, set up an account and then allow the app to access their camera. They take a photo of a receipt that they have just been given (eg taxi, restaurant, train tickets etc) and the app then uploads the image to the ReceiptBank platform. The software identifies certain pieces of information, such as the date, amounts (it will deal with VAT if present) and invoice numbers, and then creates a draft transaction ready for review and processing.
ReceiptBank manually verifies items before they are released for processing. Processing time can be anything up to 24 hours, but is usually much faster, often items are ready within minutes. ReceiptBank claims a 99.9% accuracy rate and it is processing over 4 million items per month. Once the user is happy with the transaction it can be instantly published through to the linked cloud accounting software.
Other ways of uploading data are via email, drag and drop, Dropbox, PayPal and so on. ReceiptBank has recently introduced a new extraction tool known as Invoice Fetch. This links ReceiptBank to supplier websites (Vodafone, BT, British Gas for example) and enables it to automatically download recurring bills and invoices, removing the need to download these manually.
ReceiptBank can also read bank statements, so if for some reason a user is unable to set up a bank feed into a cloud system, they can upload the statements and convert them into a CSV file, which can then be formatted for import. This is particularly useful for accounts held with private or foreign banks.
Whilst ReceiptBank is arguably the best-known in the marketplace, there are some strong competitors out there, such as Datamolino, AutoEntry and Hubdoc, which can all capture and transfer data in a similar way. Interestingly, Xero has recently acquired Hubdoc, so – particularly if you are considering using Xero as your accounting package – look out to see how they incorporate this technology within their own products.