Since 1 April 2019, VAT-registered businesses in the UK above the registration threshold (currently £85,000) need to submit their VAT returns using “functional compatible software” and store their VAT accounting records digitally.
This is part of HMRC’s ongoing Making Tax Digital (MTD) plans.
But as of 1 April 2022, all VAT-registered businesses will be required to use MTD for their VAT accounting.
This includes around 700,000 businesses that are registered for VAT but are below the VAT threshold, so may not have considered MTD for VAT before now.
With this deadline approaching, we’ve updated this Making Tax Digital checklist to help all businesses get up to speed with MTD for VAT if they find themselves needing to.
The key thing to know is that it will no longer be possible to submit VAT returns manually via HMRC’s website for your first full VAT period following April 2022. 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.
This Making Tax Digital checklist covers the following:
Figure out if your business will be impacted by MTD for VAT in April 2022
If your business is VAT-registered then using Making Tax Digital for VAT is required within your business as of April 2022.
You’ll need to follow the MTD for VAT rules for the first full VAT period that falls after this date, and then all subsequent ones.
Making Tax Digital is about more than merely filing your VAT return digitally. You’re also legally required to store some of your VAT information digitally (known as 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”.
Since this can be complex, it might be worth 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 signing up for MTD for VAT, then activating the feature in your software.
Alternatively, your accountant might be able to do this for you – just ask them.
However, if you’re using older software, this might not be the case. You should check you have “functional compatible software”.
If you’re using spreadsheets or other manual records to prepare your VAT return, you may 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 because HMRC accepts that they’re considered digitally exempt.
This includes people whose religious beliefs are incompatible with the requirements, or people whose 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.
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. While this might be time-consuming, 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 can 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 for VAT 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), you might need to update it for MTD if you haven’t updated it in recent times. You should speak to your software vendor immediately about this.
Some older software might not have been updated for MTD, 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.
Again, this needs to be done before April 2022, and ideally significantly before that point if you want to avoid any unexpected bumps in the road.
If you’re using a cloud accounting software package (where data is saved in the cloud and you can access it in real time on any device – computer, mobile phone, tablet), 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, 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.
It’s so easy to accidentally delete data in a spreadsheet, or break a formula – and this could mean you’re no longer legally compliant with MTD for VAT.
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 has never made any free end-user software available for MTD for VAT, or offered 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
Because MTD for VAT has been up and running since April 2019, it’s possible to switch now.
To do so, you’ll need to register for MTD for VAT, and then activate the feature in your accounting software.
For those who are mandated as of April 2022, the advice from most experts is to switch to MTD for VAT as soon as possible.
This is for a number of reasons.
1. Impending deadline
The first and most obvious is that there simply isn’t much time left until the deadline.
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.
2. Lots of businesses affected
Secondly, hundreds of thousands of additional businesses are now impacted by a requirement to switch to MTD for VAT.
It’s very likely that, as of April 2022, 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.
3. Accountants will be busy
Thirdly, if you intend to use an accountant to help you switch to MTD for VAT, it’s worth realising that the time leading up to the April 2022 implementation date is among their busiest periods. Remember, for example, that the Self Assessment deadline occurs at the end of January.
Additionally, you won’t be their only client adopting MTD for VAT – and again that April 2022 crunch time will likely affect them as much as anybody.
4. Training requirements to consider
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 2022.
Dealing with business admin and compliance can be a challenge. But while adapting to the new Making Tax Digital for VAT rules may seem like a burden in the short term, there are some definite long-term benefits to be aware of.
From efficiently dealing with your VAT returns to staying on the right side of HMRC – and, perhaps just as importantly, having better visibility of your business finances and keeping good records so you know how things are functioning at any time, MTD for VAT will be a help not a hindrance.
So to reduce any additional stress, switching your accounting processes to MTD for VAT as soon as possible not only makes sense but should be considered mandatory.
Editor’s note: This post was originally published in October 2018 and has been updated significantly in the time since.
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