Making Tax Digital – Are you ready?
With the ever looming deadline approaching, 1 April 2019, VAT-registered businesses in the UK will need to submit their VAT returns using “functional compatible software”, as part of HMRC’s Making Tax Digital (MTD) plans.
One thing to remember is that from April 2019, if your VAT turnover is above the VAT threshold (currently £85,000) then it will no longer be possible to submit VAT returns manually via HMRC’s website. It must be done via software for example SAGE.
This is a huge change and businesses need to be prepared before the big day.
Is your business impacted by MTD for VAT?
If your business is VAT-registered and has a turnover of and above the VAT threshold (currently at £85,000) then Making Tax Digital for VAT will be 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 for future changes.
If your business is new, 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 filing your VAT return digitally. You are also required to store some of your VAT information digitally (digital record keeping). If you use more than one piece of software to store your VAT information and do your VAT return, they must be “digitally linked.”
How much impact there will be?
If you are already using accounting software, the transition could be relatively straightforward and may involve little more than taking advantage of feature updates. If however you are using older software, this might not be the case and you should check you have functional compatible software in order to remain compliant to the April changes.
If you use spreadsheets or other manual records to do your VAT return then you need to consider ways to replace that existing process with a software 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, their age, disability or it’s not reasonably practical for them to use digital software.
Insolvency can also affect MTD for VAT. You can get in touch with HMRC through its VAT Helpline on 0843 178 4298 for more information and to arrange alternative measures. Some organisations will have their MTD deferred until October 2019.
These will include:
- 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 must provide additional information on their VAT return
- Local authorities
- Public corporations
- Traders based overseas
Which business processes need to be adapted for MTD for VAT
Look at all your processes that revolve around producing your VAT return. This may be time consuming but it is well worth it to avoid penalties later. 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 an accountant, you may find it a benefit to speak to them about these issues and potentially use their experience to review your existing processes.
- If your business uses an alternative VAT scheme such as the Flat Rate, Retail or Margin Scheme or group VAT, then your requirements and processes will be different.
Functional compatible software for MTD for VAT
You will need to use software that is compatible with HMRC’s Making Tax Digital programme. Such as Sage 50 Cloud Accounting . 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 supplier as soon as possible about this.
Some older software might never be updated, so you could have to transfer your VAT accounting to more modern software to be able to file returns when MTD for VAT comes into effect.
If you are 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 ie: computer, mobile phone, tablet) then it should update automatically for MTD, although again you may wish to speak to your software supplier for details of how to access the functionality.
If you keep your VAT records on a spreadsheet then it may be possible to use MTD-compatible bridging software to file returns but the process will not be as robust or intuitive as using accounting software.
Despite the fact that MTD for VAT is legally mandated (and enforced with fines for failing to comply), HMRC will not be 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 is 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 bought in, in April 2019.
Advice from most experts is to switch to MTD for VAT as soon as possible. This is for a number of reasons.
Firstly there isn’t much time left until the Making Tax Digital for VAT deadline in April 2019. If you have to update your existing financial processes or keep alternative records, there might be unforeseen problems 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 huge and potentially unsustainable congestion as they all attempt to switch to MTD for VAT. For example, in the lead-up, the helpline of your software supplier will very likely become busy, as will HMRC’s helpline. By switching your business early, you might avoid this congestion.
Thirdly, should you intend to use an accountant to help you switch to MTD for VAT then the time leading up to the April 2019 start date is among the busiest periods, with the self-assessment deadline occurring at the end of January. Also, you won’t be their only client adopting MTD for VAT, and again that April 2019 will likely affect them as much as anybody.
Finally, the above points about an accountant’s time also apply to your software supplier 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.
Don’t forget for help with any new Sage software or just to brush up on your current MTD compatible software then here at Sage Accounts Solutions we have remote and bespoke training to support you and your needs. Click here for more details on our training options.
* Information correct as of 02/11/2018 *