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Voluntary VAT: Here’s what HMRC’s April 2022 mandatory Making Tax Digital requirements mean

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If your business has been voluntarily registered for VAT, you’ll have to change how you make VAT submissions – how you file VAT Returns – as of April 2022. You’ll also need to switch to digital record keeping for your VAT accounting.

This is because Making Tax Digital for VAT will become mandatory for all businesses registered for VAT.

HMRC says it’s notifying businesses of this change.

In this article, we explore the reasons why this change is happening – and provide the lowdown on what options are available in order to be VAT-compliant.

But first, we need to highlight an urgent potential issue with direct debits affecting VAT-registered businesses before that point. This issue is independent of any MTD requirements or changes, but will affect those that have not yet signed up to MTD.

Here’s what we cover:

VAT direct debit changes for voluntary filers: What you need to know

Voluntary VAT and MTD: What’s the problem?

Voluntary VAT changes: Why switch to MTD for VAT now?

Digital linking and MTD for VAT

MTD for Income Tax: Getting ready

HMRC has communicated to accountants that it’s making some changes in its systems relating to voluntary VAT filers outside of the MTD system.

Put simply, if HMRC does not have a valid email address for you then you might find your existing direct debit is cancelled. This might mean you miss payments, which could incur a penalty.

If affected by this, you’ll need to setup a new direct debit mandate through your business tax account, or make alternative payment arrangements, such as paying manually.

To avoid any issues, log into your business tax account and check that the email address on record is correct. Bear in mind that you may have created the account some time ago, using an email address you no longer use.

Alternatively, if your VAT accounting and filing is handled by your accountant, you may wish to speak to them about this issue.

Note that this issue does not relate to the mandated switch to MTD discussed above and, in fact, signing up for MTD will involve creating an entirely new direct debit mandate at that time.

But now, let’s take a look at MTD and the requirement for voluntary VAT filters to follow its rules as of April 2022.

Under existing UK VAT rules, businesses with a VATable turnover above the VAT threshold (currently £85,000) are required to register with HMRC for VAT.

Businesses below this threshold are not required to register with HMRC for VAT. But many choose to do so as this lets them reclaim the VAT paid on most purchases.

These are known as voluntary VAT payers or voluntary filers.

As all VAT-registered businesses are aware, they must report key information by submitting a regular VAT Return, and maintain correct VAT accounting records.

As part of the Making Tax Digital for VAT roll-out in April 2019, HMRC required that all businesses above the VAT threshold kept records digitally and submitted their VAT Return using MTD-compatible software.

Voluntary filers had the option to sign up to MTD and submit their VAT return this way – although if they did, they had to keep digital records, as part of the wider MTD for VAT requirements.

But as of April 2022, this is no longer optional. It’s mandatory.

All VAT-registered businesses – regardless of whether they’re above or below the £85,000 threshold – must become MTD-compliant.

This means:

  • Signing up for MTD for VAT. You can do this, or your accountant can do it for you – just ask. If you sign up yourself then you should still speak to your accountant in case you need to link the sign up to their systems. Note that signing up will involve creating a new direct debit for VAT payments, and you need to be careful, as directed by HMRC, to avoid the old and new debits overlapping.
  • Keeping and preserving VAT records digitally for the first VAT period after April 2022, and all VAT periods after this.
  • Sending VAT Returns for full VAT periods after April 2022 to HMRC using MTD-compatible software (referred to as “functional compatible software” in the VAT Notice).
  • See Making Tax Digital for VAT: What do HMRC’s updates mean for you?

This may come as a shock to many voluntary VAT businesses, since they may have already made an adjustment in their filing processes in April 2021.

At that time, those businesses, who were filing via software but not yet signed up to MTD, had to either switch to MTD for VAT, or switch to making VAT submissions using HMRC’s website portal using their company’s Business Tax Account and VAT online account.

This is because, in April 2021, the old method of filing VAT Returns in accounting software was deactivated by HMRC (known technically as the XML channel).

Filing VAT Returns using the website portal avoided the immediate need to register for MTD for VAT but there’s no longer any avoiding it as of April 2022.

There’s nothing software vendors can do about this change. HMRC announced in 2020 that all VAT filers, regardless of whether they’re above or below the VAT threshold, will need to comply with MTD for VAT.

The requirement to switch to MTD for VAT by April 2022 is defined by law. But the good news is that the technology required to do so has been in use for years now, and is extremely reliable.

And businesses should remember that MTD encourages better record keeping and an integrated approach to VAT accounting can only be seen as a good thing. When done correctly, the move to MTD facilitates real-time views of accounting, so you can always see the state of your finances, and facilitates accounting improvements such as automation.

The best solution for businesses affected by the April 2022 deadline is to register for MTD for VAT now, ahead of when they’ll be required to do.

There are significant benefits to registering early for MTD for VAT, as was demonstrated back in 2018 and 2019 when many businesses were required to make the switch.

For example, you’ll have a chance to test drive MTD for VAT and iron out any wrinkles in your processes. This will reduce anxiety and make the process more manageable before such time as getting it wrong could incur penalties from HMRC.

You’ll also be making the switch at a quieter time, during which few other businesses will be doing so. This means getting support from HMRC, your accountant/tax agent, and your software vendor will be significantly easier.

Make no mistake – almost as many businesses will have to switch to MTD for VAT as back in 2019. It’s going to be a busy time for everybody involved.

When the first wave MTD for VAT was rolled out in April 2019, getting through to HMRC by phone was nearly impossible, with long hold times.

It’s unclear if there’ll be similar congestion with voluntary VAT payer mandation – but if you get things sorted now, that will be one less thing to worry about.

Be aware, however, that voluntary VAT businesses can’t opt-out of MTD for VAT once they’ve made the switch, unless the business entirely deregisters for VAT.

And MTD for VAT also means you must store your VAT records digitally.

You may face issues around correct digital linking, too, which is again why signing up earlier makes sense.

This affected many businesses in the first wave of MTD for VAT sign ups and even inspired HMRC to create a ‘soft landing’ period of a year when it wasn’t necessary to get digital linking 100% correct.

Unfortunately, there is no soft landing period this time around. You need to be ready from day one.

Digital linking is when you have to ensure your digital accounting records are transferred in a compliant way.

Typically, this means the data is transferred in an automated way from one system to another or within an application.

But it definitely can’t involve manual intervention or copying or cutting and pasting data from one place to another. However, HMRC does accept that there are certain scenarios where adjustments are still required to the nine box values of the VAT Return such as, for example, a partial exemption calculation.

This can still be done manually without the need to record the calculation digitally.

There’s a second reason why switching to MTD for VAT sooner rather than later makes sense.

In April 2023, a whole new wave of Making Tax Digital arrives. It affects unincorporated businesses and landlords with a turnover above £10,000 that are currently using Self Assessment tax returns.

This initiative is called Making Tax Digital for Income Tax Self Assessment, or MTD for ITSA.

Getting to grips now with MTD for VAT – such as updating your accounting software and systems – will help you prepare for MTD for ITSA if it also affects you, or MTD for Corporation Tax when it comes in (not before 2026, according to government guidelines).

If nothing else, you can learn from the processes you have to put in place to make the upgrade, and transfer that knowledge across at the right time.

By waiting until the last moment for MTD for VAT on or before April 2022, you risk having two difficult accounting transitions very close to each other – and your business may suffer as a consequence.

Note that there is currently an MTD for ITSA pilot scheme, by which businesses can sign up even earlier than April 2023, but the criteria currently excludes a lot of business types.

This is set to change as we approach the mandation date, though. We’ll keep you informed here at Sage Advice.

Final thoughts

There’s little doubt that it’s been a difficult few years for any kind of business. Coronavirus disruption, Brexit adjustments and now the need to switch to Making Tax Digital for some – administrative requirements might feel as if they’re becoming burdensome.

But the key fact is that Making Tax Digital really does deliver a more simplified form of accounting – and that’s why the government is so keen on it.

And by making your accounting digital, you open it up to a whole world of technologies, both now and in the future.

For example, you can use mobile apps such as Auto Entry to take snapshots of receipts or invoices, and have the details automatically entered into your accounting.

While saying goodbye to relying on spreadsheets or even paper-based accounting might feel like a leap into the unknown, Making Tax Digital can help you reduce admin and therefore gain more time to spend doing the things you love in your business.

And who doesn’t want that?

Editor’s note: This article was first published in November 2020 and has been updated for relevance.

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