As of 1 April 2019, VAT-registered businesses in the UK need to submit their VAT returns using “functional compatible software”, as part of HMRC’s Making Tax Digital (MTD) plans. With the deadline approaching, we’ve created a Making Tax Digital checklist to help you.
And below, you’ll find a checklist infographic, which highlights the considerations and steps you need to take to prepare for MTD.
One key thing to remember is that if your VATable turnover is above the VAT threshold (currently £85,000), it’s no longer be possible to submit VAT returns manually via HMRC’s website. It must be done via software.
This is a big change and businesses need to prepare now for their first Making Tax Digital VAT return submission.
There are also more than 35,000 businesses that will have a deferred start date for Making Tax Digital for VAT, of October 2019. Read below for more details on the deferred date. The key things to know are:
- If the deferred start date applies to your business, you will have received a letter from HMRC by now.
- If your business hasn’t been notified about the deferred date, you will be required to conform to Making Tax Digital for VAT now.
- If you believe your business qualifies for the deferral and you haven’t received a letter from HMRC, contact them now.
Making Tax Digital checklist
This Making Tax Digital checklist will help you:
- Figure out if your business will be impacted by MTD for VAT
- Work out which business processes need to be adapted for MTD for VAT
- Ensure you have “functional compatible software” for MTD for VAT
- Work out when to switch to MTD for VAT
We’ve also featured HMRC’s MTD for VAT timeline, which will help your company’s preparations.
Making Tax Digital
HMRC’s Making Tax Digital has changed how businesses submit VAT returns – we’ll help you with it via a free telephone consultation.
Figure out if your business will be impacted by MTD for VAT
If your business is VAT-registered, with a turnover above the VAT threshold (currently £85,000) then Making Tax Digital for VAT is required within your business.
If your business is not VAT-registered but is approaching the VAT threshold then it will be worth you understanding the MTD for VAT requirements and possibly seeking the advice of an accountant to help prepare.
If your business is new and/or growing, you might find yourself affected by MTD for VAT and you should attempt to project your income for the remaining business period to see if you qualify.
Making Tax Digital is about more than merely filing your VAT return digitally — you’re also required to store some of your VAT information digitally (digital record keeping). And if you use more than one piece of software to store your VAT information and do your VAT return, they must be “digitally linked.” You might need to start preparing for these requirements well in advance.
The next question to consider is “how much impact there will be?”.
If you’re already using accounting software, the transition might be relatively straightforward and could involve little more than taking advantage of feature updates. However, if you’re using older software, this might not be the case and you should check you have “functional compatible software”.
If you’re using spreadsheets or other manual records to prepare your VAT return then you need to consider ways to replace that existing process with a software-driven approach for recording VAT details and filing VAT returns.
Exemptions and deferrals from MTD for VAT
Some businesses can claim exemption from MTD for VAT if individuals concerned have religious beliefs incompatible with the requirements, or their age, disability or remoteness mean it’s not reasonably practical for them to use digital tools. Insolvency procedures also affect MTD for VAT. You should get in touch with HMRC via its VAT Helpline for more information and to arrange alternative measures.
Additionally, HMRC has also announced that some organisations will have a deferred start date for MTD for VAT. They comprise around 3.5% of the total and the scheme will not apply to them until October 2019, rather than now, as for most other eligible businesses.
This is the official list of organisations that are deferred until October 2019:
- Businesses required to make payments on account
- Annual accounting scheme users
- Not-for-profit organisations that are not set up as a company
- VAT divisions
- VAT groups
- Public sector entities that are required to provide additional information on their VAT return
- Local authorities
- Public corporations
- Traders based overseas
Work out which business processes need to be adapted for MTD for VAT
You should look at all your processes that revolve around generating your VAT return. This might be time-consuming but the investment here is well worth it to avoid penalties later on. Here are some examples:
- How do you raise sales invoices?
- How do you capture expenses?
- Do you use a cash accounting scheme, or invoice-based?
- What other areas of your VAT accounting are still paper-based or exist outside of your accounting software?
For example, while Making Tax Digital for VAT doesn’t mean you should no longer create paper-based notes or invoices, it does mean some of the invoice-level data has to be transferred into your MTD-compatible software at some point. You can no longer simply update your accounting software with the monthly total of all invoices.
If you have access to an accountant, you might find it beneficial to speak to them about these issues and potentially use their experience to review your existing processes for efficiency.
If your business uses an alternative VAT scheme such as the Flat Rate, Retail or Margin Scheme (including the Tour Operators Margin Scheme)—or group VAT—then your requirements and processes will be different.
Ensure you have “functional compatible software” for MTD for VAT
You need to use software that’s compatible with HMRC’s Making Tax Digital programme. In addition to keeping digital records relating to your VAT, the software should be able to communicate with HMRC’s computers so you can file your VAT returns. This is sometimes referred to in technical language as “connecting to HMRC’s APIs“.
If you’re using desktop accounting software (this is installed on your computer and data is stored there – which can make data sharing harder) then you will probably need to update it for MTD, if you haven’t already. You should speak to your software vendor immediately about this.
Some older software might never be updated, so you may have to transfer your VAT accounting (at least) to more modern software to be able to file returns when MTD for VAT comes into effect.
Read more about Making Tax Digital:
- Making Tax Digital: Top tips from Peter Jones
- What the HMRC Making Tax Digital letters mean for your business
- Making Tax Digital: A guide for businesses
- How to submit a Making Tax Digital for VAT return
If you’re using a cloud accounting software package (where data is saved on an external server and you can access it in real time on any device – computer, mobile phone, tablet) then it should update automatically for MTD, although again you may wish to speak to your software vendor for details of how to access the functionality.
If you keep your VAT records using a spreadsheet then it might be possible to use MTD-compatible bridging software to file returns but the process will not be as inherently robust or intuitive as using accounting software.
HMRC provides a list of software suppliers who are developing MTD-compatible software. Notably, this doesn’t mean all the software from the listed suppliers will be MTD-compatible and you should enquire with the supplier directly.
Despite rumours to the contrary, and despite the fact that MTD for VAT is legally mandated (and enforced with fines for failing to comply), HMRC is not making any free end-user software available for MTD for VAT, or offering any software by other means, such as subscription.
Functional compatible software must be acquired by businesses from third parties.
Work out when to switch to MTD for VAT
It’s possible to switch now to the Making Tax Digital for VAT programme, providing your accounting software vendor has signed up to the beta programme (HMRC maintains a list of vendors, although this doesn’t necessarily mean all software packages from each vendor are MTD-compatible).
Your accountant may have suggested you hold back before switching to MTD for VAT. This was probably because there was still a chance the government might adjust the MTD for VAT specifications or deadline. However, in recent months the government has published VAT Notice 700/22, covering MTD for VAT. Therefore, there can be no doubt MTD for VAT will be implemented in April 2019.
The advice from most experts is to switch to MTD for VAT as soon as possible for a number of reasons.
The first is that there simply isn’t much time left until the Making Tax Digital for VAT deadline in April 2019. And if you have to update your existing internal financial processes or keep alternative records, there might be unforeseen issues that starting as soon as possible will uncover before they become critical.
Secondly, millions of businesses are impacted by the switch to MTD for VAT and, as of April 2019, there will be a massive and potentially unsustainable congestion as they all attempt to switch to MTD for VAT.
For example, in the lead-up to that date, the helpline of your software vendor will very likely become busy, as will HMRC’s helpline. By switching your business early, you might avoid this crunch.
Thirdly, if you intend to use an accountant to help you switch to MTD for VAT then the time leading up to the April 2019 implementation date is among their busiest periods, with the self-assessment deadline occurring at the end of January, for example.
Additionally, you won’t be their only client adopting MTD for VAT, and again that April 2019 crunch time will likely affect them as much as anybody.
Fourth, the above points about an accountant’s time also apply to your software vendor, and if you need training for the new functionality in the software then it’s likely this will become increasingly difficult to book into as the Making Tax Digital for VAT deadline approaches in April 2019.
So, switching your accounting processes to MTD for VAT as soon as possible not only makes sense but should be considered mandatory.
HMRC’s Making Tax Digital for VAT timeline
This is HMRC’s latest official timeline for MTD for VAT, through to late 2019:
MTD for VAT pilot programme open to sole traders and companies that are up to date with their VAT.
There are some notable exclusions at this point, however, including businesses that are part of a VAT group or division; businesses that trade with the EU; businesses based overseas; businesses that submit annually; businesses that make payments on account; businesses that use the VAT Flat Rate Scheme; and those who are newly VAT registered but haven’t yet submitted a return.
The pilot programme will be opened to most of these business types at a later date (see below).
Partnerships, companies that trade with the EU, and Flat Rate Scheme businesses can join a private test. Notably, this is NOT the same as the pilot programme. Those interested in taking part should contact HMRC or their software vendor for more information.
Late 2018/early 2019
Sole traders and companies not up to date with their VAT, or newly registered businesses who’ve not yet submitted a return, can join the pilot programme.
Partnerships and companies that trade with the EU can now join the pilot programme.
Deferred businesses, as described earlier, can join the pilot programme.
MTD for VAT officially launches for all eligible businesses. The pilot programme ends for those business types that are not deferred.
Businesses that are deferred are now required to adopt MTD for VAT.
Has your business started preparing for Making Tax Digital for VAT and if not, have you got plans in place to do so yet? Let us know in the comments below.
Editor’s note: This post was originally published in October 2018. It is in the process of being updated now MTD for VAT has come into play.