HMRC announced on 30 March that the digital links mandate, originally set to come into force in April this year, has been delayed for all eligible businesses until 1 April 2021. The decision was not unexpected due to the difficulty of implementing the mandate during the COVID-19 outbreak. Many organisations are struggling to remain operational and HMRC has over 60,000 staff working remotely from home, making it challenging to oversee the implementation and enforcement of the mandate.

The delay will effectively see the compliance deadline extended by twelve months for the majority of businesses, and by six months for those large businesses caught under the original deferral period. In practice it is simply an extension of the soft-landing period for all businesses until 1 April 2021. Just how this will impact businesses will depend on the frequency of their reporting, be it monthly or quarterly, and their stagger period,

The message from HMRC has been that organisations should make the most of this opportunity. They have told us that customers should use the time “to ensure their administration and processes are ready for their business ramping up again and future requirements” and that this includes “ensuring that there are digital links in place between their software components.” This means that, while the tax authority acknowledges the disruption caused by COVID-19, MTD should not be shelved. Rather, businesses should continue to prepare for Phase 2.

The deferral to April 2021 will also provide the software industry with the time needed to build new valuable capabilities into their platforms. Key requirements that the industry will have to provide in our view include the ability to automate special tax methods such as PESM, validated data cleansing through advanced data handling features, fully automated digital audit trails and time-stamped evidence of adjustments and calculations.

While this breathing space will undoubtedly act in everyone’s favour, there’s one caveat. When we emerge from the COVID-19 crisis, the UK government will need to balance the books to support the national debt and collect every penny it is due. According to the IFS, government borrowing in the next financial year could be in excess of £175 billion, equivalent to more than 8% of national income and more than triple that forecast in Budget 2020.

It’s worth noting, too, that MTD is still regarded as a primary means of closing the tax gap. The latest published tax gap figures showed that avoidable mistakes made by taxpayers cost the Exchequer more than £9.9 billion in lost revenue. MTD for VAT was already forecast to deliver a reduction in the tax gap caused by error and failure to take reasonable care, leading to additional tax revenue (ATR) of £1.2 billion by 2023 to 2024, with steady state savings of around £300 million each year. The Chancellor of the Exchequer, Rishi Sunak, went further in the Budget, stating that “The government is investing in additional compliance officers and new technology from HMRC… enabling HMRC to further reduce the tax gap”.

So, come April 2021, we believe the government is going to expect big things from MTD and that means it’s likely that HMRC will have to come down harder than it has done to date on those that have not used the time wisely. This will probably take the form of penalties issued to those who have failed to comply with the digital links mandate because the argument will be that we’ve all had more than enough time to get our houses in order.