Making Tax Digital, the Treasury’s drive to digitise how we file tax returns and make VAT more transparent, is changing in April. Small Business sat down with Fabiano Rocha, product marketing manager at Sage, who explains what’s changed.
What’s changing about Making Tax Digital in April?
Making Tax Digital is the biggest shakeup to the UK’s tax systems to date; that’s why everyone from HMRC to your accountant and companies like Sage have been going on about it for the last few years.
Although back in 2015 the intention to get all kinds of tax submission to be done digitally by 2020, after public consultation and due to the impact of disruptive events like Covid and Brexit, the 2020 timeline got revised a few times to what the current dates are.
The first changes were implemented in 2019 for VAT-registered businesses above the £85,000 taxable turnover threshold. Those below the mandatory VAT registration threshold were invited to join if they wanted to, but they weren’t required to do so. This is what changes on the 1 April 2022. All VAT-registered businesses will now have to comply with the MTD rules, which effectively impacts the businesses below the £85,000 taxable turnover threshold. However, it’s worth mentioning that the timelines to when a business is affected can vary.
So, if that’s the case, when’s my first VAT return due under MTD rules?
This will be for your first full VAT period beginning on or after 1 April. That’s when you’ll be required to start keeping digital records and submitting your VAT returns digitally to HMRC.
To try to make this easier, let me give you an example using the standard quarterly VAT accounting periods:
If your quarterly VAT period ends on the 31 March for example, then you will need to start complying with Making Tax Digital rules for the period starting on 1 April.
However, if your quarterly VAT period ends on 31 May for example, you’ll only be required to follow the new MTD rules from the period commencing 1 June.
This is also valid for businesses with monthly and annual period, so keep in mind what the VAT accounting periods look like.
But it’s also important to know when to register.
When should a business register by?
It’s important to highlight that MTD doesn’t happen automatically. Businesses, either themselves or their accountant, must register in time to submit their first VAT return under MTD rules. If businesses sign up late, they risk overlapping with the older VAT system, including accidentally making double payments, which is something nobody wants.
The timelines to keep in mind are:
- If the business pays by Direct Debit, do not sign up less than seven days before the VAT Return is due or less than five days after your VAT Return is due.
- If the business does not pay by Direct Debit, then sign up at least three days before your VAT Return is due.
As a side note, keep in mind that businesses will be invited to set up a new direct debit for MTD for VAT if that is the way they pay.
Can a business be exempted from these changes?
Businesses can’t just opt out of any MTD scheme. This includes MTD for VAT. If they’re eligible then, by law, they need to register in time for any deadlines and keep your VAT records digitally, as well use the right kind of compatible software to submit tax returns or other required updates.
But the Government does allow exemption for some people it believes are digitally excluded.
These might be people who live so remotely that they simply haven’t got an internet connection. Therefore, they can’t submit a VAT Return online, so can’t follow the MTD for VAT rules.
Also included are people whose disabilities or age make using a computer difficult or impossible. Some religious beliefs can also mean people are exempt because they’re prohibited from using a computer.
If a business believes any of these apply to them, then they should speak to HMRC. That’s important because they can’t just declare they’ve decided they are exempt. They need to ask HMRC to grant an exemption. This can be done by calling or writing to them and stating your case. But, ultimately, the decision rests with them.
If HMRC does decide a business can be exempted, then they’ll continue submitting VAT Returns in the way they always have, such as by filling in a VAT Return paper form and posting it to HMRC.
What type of software can I use?
Businesses need to adopt software that enables them to digitise their VAT record keeping and to submit their VAT Return digitally and directly to HMRC. That can be done by either adopting a compatible software package like Sage Accounting that allows them to carry out both requirements; or by using bridging software to connect non-compatible software (like spreadsheets) to HMRC systems.
Most people use accounting software to ensure they are compliant with those two key requirements just mentioned. Most leading accounting software has mobile apps that make capturing and digitising data easy, which will help you not overlook this vital step in MTD compliance. Also, accounting software is likely to offer several automated processes that can ease a lot of the old-fashioned work of accounting, such as reconciling payments against invoices, automatically apply the correct VAT rates, live calculation of VAT bills for ongoing period and providing insights on cash flow.
What if I still use spreadsheets?
If you use a spreadsheet for your VAT accounting, then it is possible to continue doing so considering the above requirements. But you run the risk of losing data by accidentally overwriting the contents of a cell, breaking a formula that could generate incorrect outputted data or breaking the digital link between source of records and the VAT output, for example.
Spreadsheets can meet compliance needs but they’re not the most reliable way to store data. And when the law requires you to store certain kinds of data in specific ways, they start to unravel surprisingly quickly.
As businesses are required to go through this digitisation process to remain compliant with these MTD changes, it is advisable that best practices are adopted from the get-go to make the transition easier. Therefore, it only makes sense to use it as a lever to boost productivity and day-to-day admin of impacted businesses.
So, to close off, should our readers be aware of any more MTD dates in the future?
Yes, certainly. As I mentioned before, the Making Tax Digital programme had its timeline revised and will affect different types of tax. All VAT-registered businesses will be impacted by Making Tax Digital as of April 2022, but it doesn’t stop there. MTD will have then affect Income Tax Self Assessment (ITSA) in 2014 for self-employed professionals and those with property rental income with earnings above £10,000 and, in April 2015, for general partnerships. Then, Corporation Tax is set to be impacted from April 2026 at the earliest.
What should I do now?
What I’d suggest is that even if you’re not impacted by changes now, that you still consider adopting best practices as soon as possible. Not only will this make the transition easier, but you’ll benefit from improving your daily admin, saving you time on tedious tasks. If you work with an accountant, this will also help you have much more informed and productive conversations with them, especially if you are on a tight budget.
Thanks, Fabiano. Our readers report that Making Tax Digital really helps when connected up to your accounting software and your bank account, giving you a 360-degree view of your business
Small Business was speaking to Fabiano Rocha, product marketing manager at Sage
This article was written as part of a paid-for content campaign with Sage