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 2021.
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.
Voluntary VAT: What’s the problem?
Under 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 business are aware, they must report key information by submitting a regular VAT Return.
But there are a few different ways that this can be done, depending on whether the business is a voluntary filer or not.
As part of the Making Tax Digital (MTD) for VAT roll-out in April 2019, HMRC required that all businesses above the VAT threshold submit their VAT Return using a new technology HMRC introduced specially for this purpose.
Essentially, this means these businesses must use MTD-compatible software.
Voluntary filers have the option to sign up to MTD and submit their VAT this way (although if they do, they must also keep digital records, as part of the wider MTD for VAT requirements).
But sign up wasn’t mandatory at the time, as it was for those above the VAT threshold.
Because of this, voluntary filers could continue to use the old way of submitting VAT Returns in their accounting software, using a legacy technology unrelated to MTD for VAT.
This is known in technical language as the VAT XML channel.
And that’s the problem here: HMRC has announced that it’s removing the VAT XML channel in April 2021.
This will force many voluntary filers who have not signed up to MTD for VAT to do things differently.
There’s nothing software vendors can do about this change. HMRC is deactivating the feature on its systems.
Voluntary VAT changes: Registering for MTD for VAT
Notably, all VAT registered businesses – including voluntary filers – need to switch to MTD for VAT by April 2022. That’s the law.
Therefore, the best solution if you still use the legacy method to submit VAT returns is to register for MTD for VAT now, ahead of when you’ll be required to do.
Registering for MTD for VAT now, rather than later, means that two problems are solved.
Firstly, you avoid the problem of the legacy VAT submission method being deactivated while still being able to do VAT submissions in the same seamless way using software (provided your accounting software supports MTD for VAT – most do, but it’s worth checking).
Secondly, you ensure your business is ready well ahead of time for when MTD for VAT registration for voluntary registrants is mandatory.
In short, you’ll have to make the switch at some point, so it’s worth doing so now.
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.
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 and your software vendor will be significantly easier.
When MTD for VAT was initially mandated 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.
Voluntary VAT changes: Delaying MTD for VAT registration
There’s a second solution to be aware of following April 2021.
It’s possible to manually make VAT submissions using HMRC’s website portal using your company’s Business Tax Account and your VAT online account.
This avoids the immediate need to register for MTD for VAT.
Although one of the older methods for making VAT submissions, the VAT portal (as it’s informally known) has remained online.
As some people are exempt from MTD for VAT, and businesses also use their VAT online account to do other tasks such as set up direct debit or report changes, it’s likely to remain available for the foreseeable future.
For businesses using accounting software, using the VAT portal will involve manually creating a VAT report for the relevant period, then copying and pasting (or manually typing) values into the HMRC website.
Needless to say, this process is prone to keying errors.
Making corrections must also be done via the VAT portal, which again is more complicated than simply using software.
You’ll also have to make a manual note of the relevant dates by which VAT submissions must be made.
However, manual VAT submissions remain an option if required, until the point when MTD for VAT becomes mandatory for voluntary filers in April 2022.
Voluntary VAT changes: Advice for accountants
Accountants making VAT submissions on behalf of clients face the same decision as discussed above. Doing so via software using the old XML channel method will become impossible as of April 2021.
In response, accountants can either make manual submissions on behalf of each and every impacted client, or encourage them to move to MTD for VAT and make submissions using software and your agent services account.
The impact on the client of this move will be relatively limited and mostly relates to authorising you as their agent.
Considering all voluntary VAT businesses are mandated for MTD for VAT in April 2022, the process of converting these businesses to MTD for VAT should already be starting within your practice.
The same processes previously used for the initial wave of MTD for VAT conversion back in late 2018/early 2019 can be resurrected, such as creating monthly targets for client conversion to MTD for VAT, and listing client lists based around skill levels and the likelihood of them embracing MTD for VAT.
Training can be offered where required, and there are again reseller opportunities to upgrade client software packages.
Perhaps the biggest difference with switching voluntary VAT clients compared to the first round of MTD for VAT may relate to the smaller size of the businesses.
The administrative and financial resources required to complete the move to MTD for VAT may be a bigger pill to swallow. Client instinct might be to delay for as long as possible.
A solution is to position the MTD for VAT message to voluntary VAT clients alongside that of MTD for Income Tax (or even Corporation Tax).
Clients need to understand that all major tax submission will soon require software under government plans.
Most sole traders or property businesses with voluntary VAT registration will have to take heed of MTD for VAT in April 2022, and then MTD for Income Tax a year later in April 2023.
It could be a good idea to take care of both legal requirements at the same time.
You can tell your clients they face a choice of routes to take – one that’s hard and one that’s easy.
The first is as follows:
- Switch to manual VAT submission before 8 April 2021.
- Switch to MTD for VAT before April 2022.
- Switch to MTD for Income Tax before April 2023.
While the second is simply:
- Switch to good-quality MTD-compatible software right now from a reliable, established vendor and future-proof the business accounting.
The announcement from HMRC that the old method of software VAT submission is being deactivated adds to the admin that businesses need to tackle.
And that’s on top of dealing with coronavirus disruption, while a raft of other tax changes start to impact as of April 2021.
Nevertheless, a solution exists, which is to move to a modern, cloud-capable accounting solution. This brings collateral benefits, such as easier admin through automation.