Closing the gap
- Is it necessary to convert accounting systems to cloud accounting software to remain compliant with Making Tax Digital?
- The spreadsheet retains an important role in accounting systems.
- Spreadsheets are digital software, so cloud accounting software should not be necessary if the only purpose is to file a VAT return.
- Bridging software will enable data to be sent from the spreadsheet to HMRC's Government Gateway.
- HMRC has relaxed the rules on digitally linking third-party software with bridging software until 2020.
- Spreadsheets will remain a vital tool for businesses for which off-the-shelf accounting software is unsuitable.
Since the news that Making Tax Digital (MTD) for VAT would go live in April 2019, many accountants, bookkeepers and business owners have concluded that the only way to be compliant would be to stop using spreadsheets and convert to cloud accounting software.
Because of the complexities of their clients' businesses, many accountancy practices have adopted this model with only relative success. For various reasons, there are many businesses that cannot be converted to cloud accounting software and the spreadsheet remains the only practical solution for them.
An important role
The truth is that the role of the spreadsheet in accounting is as important as ever. Using spreadsheets for VAT is vital for those complex businesses for which off-the-shelf cloud accounting software is not suitable or lacks the required versatility. Businesses that fall under this category include those that:
- have bespoke software (non-API-enabled);
- are partially exempt – using the VAT margin scheme or other complex VAT schemes;
- are part of a VAT group;
- may struggle to use cloud accounting software and are simply more comfortable with spreadsheets.
As an aside, API in the first point above stands for 'application programming interface'. A quick Google search tells me that API is 'a set of functions and procedures that allow the creation of applications which access the features or data of an operating system, application, or other service'.
HMRC accepts spreadsheets as a form of 'digital software', so there should be no need to switch to cloud accounting software to submit a VAT return. Cloud accounting software should be used as a full bookkeeping solution, not merely a tool whose only function is to enable a VAT return to be filed with HMRC.
The solution to the survival of the spreadsheet for MTD, therefore, is 'bridging software'. This term has been thrown around for far too long with scant explanation of what it will look like, how it will be integrated in a spreadsheet and where the software can be found.
MTD and spreadsheets
For a spreadsheet to be MTD-compliant, the initial input of data may be keyed in manually. Any further transfer, recapture or modification of that same data must be completed using digital links. A digital link in this case would simply be a formula linking a cell from one sheet to another. The use of copying and pasting or manually creating a VAT return is not compliant with MTD.
It is hoped that, for businesses using spreadsheets, little work is needed for them to become compliant. Some may require their multi-sheet spreadsheets to be digitally linked and may need a VAT calculation sheet added to their workbook. Although the terminology sounds complex, formatting a spreadsheet to work in accordance with MTD should not be too difficult for those competent in Excel.
Some accountancy practices have created their own bookkeeping spreadsheets for clients whose businesses do not require complex or bespoke spreadsheets or accounting software. This would be the best approach to maintaining a client's compatibility with MTD because the spreadsheet is required to be digitally linked up only once; it can then be copied for another client's use.
The issue businesses will face is the filing of the VAT return from their spreadsheet – and this is where bridging software comes into play.
Bridging software for spreadsheets
Bridging software will be a digital tool used to send data from the VAT return (boxes 1-9) within a spreadsheet to HMRC's Government Gateway.
In most cases, the software will consist of an add-in 'front sheet' and this will be incorporated into any Excel multi-sheet spreadsheet that a business uses to maintain its digital records. The add-in sheet will take the appearance of a VAT return with a submission button. It will need to be linked to the VAT return calculation sheet, which will already exist under MTD. The integration, therefore, will simply consist of linking boxes 1 to 9 on the add-in front sheet to the calculations sheet. In most instances, four add-in sheets will be required for the four quarterly VAT returns that take place in a 12-month period.
On pressing the submission button, the bridging software add-in will send the details of the return to a secure webpage for filing. The contents of the VAT return will be pre-populated to mirror the spreadsheet version, and the user can file securely using their Government Gateway credentials.
Finally, a submission receipt and copy of the filed VAT return will be downloaded and stored for business record purposes.
The key element is that data is transferred digitally from the spreadsheet to the filing webpage without the manual keying in of data. With this simple tool, anyone with a multi-tab MTD-compliant spreadsheet can now file their VAT return with HMRC.
Complex VAT areas
VAT margin schemes, partial exemptions, capital goods schemes, VAT groups and businesses that use a range of non-API-enabled software, such as bespoke manufacturing software, are in most cases calculated in Excel. Guidance from VAT Notice 700/22: Making Tax Digital for VAT details that businesses not using API-enabled software can continue to do so as long as they are digitally linked.
For VAT groups to be compliant, each group member's spreadsheet would need to be 'digitally linked' to a master spreadsheet on which the bridging software add-in would be embedded.
Non-API-enabled software – which can export data to Excel – would also be used with the add-in to file the VAT return. However, there would still be some work to be done for the VAT calculation sheet to be linked up digitally. The good news is that HMRC has relaxed the rules on digitally linking third-party software with bridging software until 2020. Thus, in this instance, the use of copy and paste from the downloaded data would be permitted temporarily while the business creates a method to programme this process digitally.
In the case of VAT margin schemes, partial exemption schemes and capital goods schemes when a physical calculation is required, MTD would still allow these to be calculated manually, hence the reason spreadsheets remain the preferred choice. Advisers should remember that, as long as the spreadsheet is compliant with MTD, the add-in will ensure filing with HMRC.
Soft landing of MTD
For the first year of MTD becoming mandatory – VAT periods starting between 1 April 2019 and 31 March 2020 – businesses using non-API-enabled software programs do not need digital links between them.
However, if a business uses a bridging product only to submit the boxes 1 to 9 return to HMRC, the transfer of data to the bridging software must be carried out digitally. This could be achieved using a digitally linked VAT calculation sheet, which will then be linked to the add-in submission sheet.
To this day, spreadsheets remain a fundamental part of maintaining business records. Whether a business uses bespoke non-API enabled software – and combines multiple reports to produce the VAT return, group VAT returns or VAT margin schemes – they are unlikely to find an off-the-shelf accounting software package to solve their complexities. In these cases, spreadsheets will remain the preferred choice.
With the welcome news of the soft-landing approach by HMRC and the simple add-in bridging software VAT return that will be available, the spreadsheet can and must remain a vital tool for businesses for which off-the-shelf accounting software offers little hope.
And on that news … be prepared for a new breed of VAT inspectors knocking at the door, requesting to see the digital links to spreadsheets!