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Making Tax Digital – a rapid recap of requirements

Over the past couple of months, I’ve been approached by quite a few businesses using Oracle, wanting to know about the UK’s Making Tax Digital initiative.

Given these enquiries have been ramping up a bit over recent weeks, I thought it’d be a good idea for me to share my thoughts and responses to some of the more common questions that have come my way.

I’ve kept relatively high-level and I’m aware that there are many questions that might not be answered here. If that’s the case, please get in touch if you need any additional info.

Here it goes…

MTD Requirements

So, HMRC had replaced the manual submission of paper VAT returns quite some time ago with only a few exceptions. To my recollection, something like 99% of tax returns were submitted online, i.e. electronically, but the problem was that over 80% of these were manually entered!

So, as you can imagine, HMRC’s next step to combat this has been to get rid of any kind of manual submission and make sure that the data given by businesses mirrors absolutely the data within its ERP system. This approach has been nicely dubbed as ‘Making Tax Digital’ (MTD for short).

Now MTD doesn’t just cover VAT but also a series of other taxes, e.g. payroll related and corporate taxes, but it’s the VAT return that has become synonymous with the exercise.

The crux of it all? You need to – without any manual intervention or manipulation to the flow of data – create an upload directly to the HMRC site.

There are no changes to the boxes or the amount of data needed to be uploaded (yet) so it should be relatively straightforward. But the problem that most companies face is that they cannot rely on their ERP (Oracle) system to produce the right output directly from the system without any modifications needed. This means most companies simply adjust a spreadsheet and then use this to upload.

Now, as much as HMRC would love to stop the use of Microsoft Excel spreadsheets, they are all too aware that this is something of a Herculean feat to pull off. So, in a rare move of acquiescence, the HMRC have okayed the continued use of spreadsheets and adjustments, provided that a digital record exists with a full audit trail to show how, when and why those adjustments have been made.

How does that differ from a manual adjustment I hear you ask? Well, instead of having a separate spreadsheet that you would do all your partial recovery computations on and then manually correct the Excel worksheet that you would usually use to submit the VAT return, you now need to create and show the ‘digital link’, which is actually not as burdensome as it sounds.

At its simplest, a digital link can be considered as a dynamic reference between one bit of data and another. An Excel spreadsheet might have a cell containing data that is referenced within another, e.g. in a document called ‘Excel_Return_Report’, cell A1 might ‘link’ to cell A2 in another document and look something like ‘=Excel_WorkBookName_A2’. So instead of copying and pasting cell A2 value from one file into cell A1 in another file as before, you now ensure that a digital link is created via a formula reference.

Of course, if you were to try and circumvent the whole point of MTD by creating link after link to documents where you could manually tinker around with the values, then you’re not technically adhering to the rules.

As long as you can show that you’re keeping the data pure, i.e. untouched by human hands, you’re fulfilling your obligations. Put it this way:

link the data together = you’re fine

manually copy and paste = you’re not compliant.


Bridge or interface?

Ok, so let’s suppose that you have been able to get all your data ready to upload and there is a digital link, then what next? You either:

  1. create an interface directly from your ERP to HMRC
    this generates a CSV or XML file that is directly uploaded to HMRC
  2. use some bridging software to do this for you
    you export the data to a special Excel spreadsheet that contains in-built bridging software that uploads to the HMRC

The huge advantage to Excel is that you can again create a digital link from your VAT return Excel file to and then ‘map’ the VAT box values from your file to the correct fields on the bridging Excel file. You simply click Submit and the document sends the data to HMRC for you. Again, just putting the ‘=A1’ to create a digital link is all that is required to be compliant in this case.

There are a range of bridging software options with some being free or very low cost so look around first before landing on an expensive one.


Oracle Options

So, technically, Oracle does provide an MTD solution for you.

For Oracle R12 EBS there exists functionality called ‘Tax Box Allocations’ – originally designed for Portugal and Belgium – that will allow you to put all your transactions into the correct boxes and produce an output, directly from within Oracle.

This can then be uploaded via bridging software (not provided by Oracle) as you would normally. Oracle Cloud has a similar feature and is actually part of the standard reporting solution (they use rules-based tax box allocation to do the same thing).

Et voilà, Oracle has provided a solution for you to use. The snag is that Oracle whilst they provide one of the best tax engines in the world (in the right hands like ours, we can make it do anything to meet any tax scenario), its clients don’t always have the tax set up correctly.

As they’ve said to me on many occasions, Oracle doesn’t do ‘out of the box’ tax logic because they would become liable for that content and they are ‘not in the tax game’. Sadly, from our experience, at least 95% of eBTax and Cloud Tax setups are done so poorly, being either non-compliant, or configured to rely heavily on manual intervention, thereby failing to avail of the power of the tax engine’s capabilities.

It’s worth bearing in mind that extracting the relevant data from Oracle to produce VAT returns might be infinitely doable, but it doesn’t count for much if the data fuelling those reports is… questionable.


Further Considerations

What is the real purpose of MTD? Is it to force you to submit your tax returns electronically? Or, is this about making sure that businesses get their data pinpoint accurate for an as-yet-undisclosed future initiative?

As a tax tech expert, I’m inclined to think that the real goal here is to make sure that the data has a digital audit trail all the way through – from the point it is entered to the tax return itself, which includes data that may have been consolidated and imported into Oracle. You only have to look at what’s happening elsewhere across the globe, i.e. tax authorities increasingly in favour of extracting data for SAF-T style reports etc., and it stands to reason that HMRC is gearing up for something similar.

I believe that MTD is the first step for HMRC to get their taxpayers’ data in a format that can lead to SAF-T being introduced (but not for some time yet). Once the data flow is correct, then, as we have already seen in Poland, tax authorities drop the idea of submitting returns in favour of doing it themselves! It’s a matter of when, not if, so consider what’s around the corner and the motives behind decisions like the MTD initiative.

MTD is a prime opportunity to get the proverbial house in order for tax. As the chair of the tax management special interest group I am more than happy to talk to anyone on the OATUG about their tax requirements to offer advice. But the biggest issue most will face is that they need to make adjustments before they can submit their tax returns which is why they use Excel. This can be achieved in Oracle! A manual tax-only transaction for example to a dedicated internal tax adjustment customer means that you can track all your tax adjustments in your ERP and thus when they flow to your tax return, they are done so with the full digital audit trail.

You will need to make sure you’re not using a GL date-based tax report and use the EU Tax Reporting Ledger where you can have a separate tax calendar and so close off your GL period and keep the tax period open. This means that any adjustment invoices used for tax can still be picked up in the correct tax return period, even if they are in a different GL period.

So bottom line is that you can actually produce the entire MTD solution within Oracle right up to the point you need to submit to HMRC, but there are (including one from us) many options from vendors out there already to do this for you.