As the deadline for Making Tax Digital (MTD) for VAT approaches, accountants urge businesses to choose wisely when it comes to adopting MTD compliant software to ensure a smooth transition.
“The first thing to do to prepare for the change, is find a functional compatible software that can submit the VAT returns in an MTD-compliant manner,” said Catherine Hall, tax partner at Mazars.
According to Hall, once the right MTD software for the business is in place, the next step is to review their VAT return process and check that each aspect is digitally linked together.
“Many of our clients use spreadsheets to build their business VAT return workings and they draw data from their accounting system in order to do so.
“We often see a break in the digital link at this point as the data is simply copied from the accounting system and pasted or manually typed into the spreadsheet, which is not permitted under the MTD rules.”
Although Mazars has been able to assist its clients in bridging these digital gaps, the firm suspects there are still some businesses unaware of the full extent of their MTD obligations and how easily the digital chain can be broken.
MTD for VAT – are you ready?
MTD for VAT was introduced in April 2019 for businesses with a taxable turnover of above the £85,000 threshold, and will be extended to all remaining VAT-registered below the threshold in April 2022.
Joanna Rowland, director general for Transformation Group in HMRC, said: “MTD is fundamental to the delivery of a trusted and modern tax system, making it easier for businesses to get their tax right and supporting the UK to go digital.”
Rowland and HMRC expect most businesses to experience long-term benefits from the MTD initiative, including reduced errors and time saved in managing their tax affairs.
“We encourage businesses to explore digital record-keeping for their VAT affairs and use this time to choose the right software to support their business needs.”
According to Sunil Parmar VAT director at Tilney Smith & Williamson, a starting point for businesses who haven’t yet transitioned, is to familiarise themselves with the new MTD for VAT rules and where necessary, take suitable advice.
“Subject to a business’s circumstances, they should review their end-to-end VAT process to ensure it is fully compliant with the new rules.
“From our experience of working with clients on MTD we generally find there are wider advantages to carrying out such a review which can often lead to greater comfort in the accuracy in the VAT return data provided to HMRC and a reduction in the level of human time required in the VAT return process.”
Benefits of MTD
Hall believes that many businesses are sceptical that the costs of MTD implementation justify the potential benefits to the government, and that this may also be seen as a costly extra compliance exercise.
“There may be some taxpayers who value the more regular discipline of tax reporting and the ability to identify their likely tax liability earlier and, therefore, provide for it earlier.”
Parmar also believes the industry has expressed some mixed reactions.
“On one side we have firms welcome the change despite the initial cost and time required to set it up for clients,” says Parmar. “However, some smaller firms may find it harder to invest in technology and change processes especially when dealing with smaller clients.”
According to a HMRC survey of over 2,000 businesses, 69 percent experienced at least one benefit from MTD, including faster returns submissions and increased confidence that they were getting tax right. 67 percent felt that MTD had reduced the potential for mistakes during the return process.
As of December 2021, nearly 1.6 million taxpayers have joined MTD for VAT with more than 11 million returns successfully submitted.
Some businesses may be eligible for an exemption from MTD, if it is not reasonable or practicable for them to use digital tools for their tax.