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Your checklist to Making Tax Digital VAT returns as an accountant in 2022
8 min read
As an accountant, you’ll no doubt have heard of Making Tax Digital (MTD). The new scheme, rolled out in stages by the government over the last few years, aims to make taxation across the UK entirely digital.
Making Tax Digital for VAT was originally rolled out for businesses with a turnover of more than £85,000 but, as of April 2022, the new rules will apply to all businesses registered for VAT.
It’s crucial that you understand what MTD is and what it means for your clients. In this article, we’ll run through everything you need to know to make sure you’re ready to submit MTD-compliant VAT Returns from April 2022.
Phase one of the MTD for VAT scheme rolled out in April 2019, for VAT-registered businesses that turned over £85,000 or more.
Under MTD phase one, those eligible were required to:
Keep regular records in digital form
Keep those records in one of HMRC’s approved formats, or use bridging software to convert them
Send regular VAT Returns to HMRC
As of April 2022, these rules will apply to all VAT-registered businesses - not just those with a turnover of £85,000 or more.
MTD also requires that all Returns be digitally linked. This means that all transfers of data from one program to another must occur digitally - the data should be directly imported, for instance, rather than manually reentered.
In addition, all programs used must be ‘functional compatible software’.
As of April 2022, these rules will apply to all VAT-registered businesses - not just those that turned over £85,000 or more.
Penalties for non-compliance
The government originally planned to give businesses a ‘soft landing’ period of one year from the scheme’s initial rollout in April 2019. During this time, businesses would only be required to keep and send digital records.
This soft landing period was extended due to the COVID-19 pandemic, but the new, stricter rules came into force from April 2021. Since then, all eligible businesses have been subject to penalties for non-compliance with MTD for VAT.
We detail the penalties of non-compliance, but the important thing to note is that the soft landing period is now over. This means that if your clients are eligible to use MTD for VAT from April 2022, you need to make sure they are compliant with the rules - or risk potentially costly penalty fees.
Which businesses will be affected?
There is a simple answer to this question: if your client’s business is registered for VAT, then they will be required to use Making Tax Digital from April 2022.
This means that, from this date on, you will be required to keep and update digitally linked records using functional compatible software.
Exemptions and deferrals from MTD for VAT
With that said, HMRC does allow for some exemptions. You may not have to use MTD for VAT if the government considers a business ‘digitally exempt’.
These reasons include:
If you have religious beliefs incompatible with MTD requirements
If your business is too remote to reasonably use digital tools
If your age or disability makes it difficult for you to use digital tools
If you are going through insolvency procedures
These exemptions are not granted automatically however, so it’s crucial that if you think a client may be eligible for an exemption, you contact HMRC’s VAT Helpline by calling 0300 200 3700 as soon as possible, to arrange alternative measures.
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Unless your client is one of the few who can get an exemption, you should start preparing to shift them to MTD for VAT as soon as you can.
The first step here is to identify all the processes that go into generating a VAT Return.
These will include things like:
Generating and paying invoices
Calculating VAT liabilities
The key is to identify which areas of VAT accounting take place outside of any accounting software you might use - and especially any that are still paper-based.
While you will still be able to generate and use things like paper-based invoices under MTD for VAT, even this data must be transferred into MTD-compliant software at some point. This is to ensure that it is submitted to HMRC in proper, digitally linked form.
Once you have identified all of your relevant business procedures, you can develop a strategy for transferring them so they’re MTD-compliant. The best way to do this will differ, depending on the business. You might even prefer to shift any VAT procedures to digital on a bespoke basis.
But for most it will be easiest to run all your VAT procedures through software like QuickBooks, as this can make shifting to MTD compliance as easy as adjusting the relevant setting.
Functional compatible software
As we mentioned above, MTD for VAT requires that all businesses use ‘functional compatible software’. In simple terms, your clients’ software needs to be able to communicate directly with HMRC’s computers.
This is because MTD requires businesses to file VAT returns in digital form. This aims to reduce the chance of human error by removing the need for your clients to manually enter VAT data into HMRC’s systems.
The definition of functional compatible software can be somewhat vague. The government has a helpful guide for you and your clients to refer to, but there are also some general rules you should keep in mind in order to facilitate your clients’ compliance.
If a client’s software is old, you should encourage the client to update their solution to the most recent version which supports MTD for VAT. If your client’s software has not had an update recently, it is unlikely to be compatible, and you should encourage them to switch to different software. You might want to speak to the client’s software vendor to determine whether it will be compliant with MTD.
Note: If your client keeps VAT records in something like an Excel spreadsheet, you can use bridging software to import their data to functional compatible software. Again, the data import must meet the ‘digital link’ requirements, and businesses need to make sure they are using the right bridging software to remain compliant with the new rules.
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Switching to MTD for VAT
As MTD for VAT has been running since April 2019, it’s possible to switch your clients over to the new system now - and the best advice is to switch as soon as possible.
There are three main reasons for this:
The deadline is soon
Lots of businesses are affected by the change
Your new client may need time to get used to the new system
The first of these reasons is perhaps the most important. The April 2022 deadline is less than six months away. From that date on, all businesses registered for VAT will be required to comply with the MTD for VAT requirements - and your client may face penalties if they’re not compliant.
With this in mind, there’s just no reason for your clients to take the chance of something going wrong and missing the deadline.
This leads us to the second issue. The extension of MTD for VAT to all VAT-registered businesses, regardless of turnover, means that the number of businesses required to use the new system will increase by hundreds of thousands.
With numbers this high - even if things go smoothly for most - even the smallest proportion of problems could lead to serious issues with congestion.
The last thing you want as an accountant is to leave things until the eve of the deadline and then be unable to get through to your client’s software vendor, or even to HMRC itself.
Finally, all individuals involved in the shift to Making Tax Digital will need to account for training time and getting used to the new system. This includes your clients, as they will no doubt be having to use the new system at some point.
Again, the April 2022 deadline is set in stone, and fast approaching. If there’s even a slight chance that a client will need some time to learn the new system, it’s only prudent to make the switch now and spend the next couple of months learning.
To avoid any of these issues, encourage your clients to sign up for MTD as soon as possible.
Major changes to reporting requirements can always be challenging for businesses to deal with. Making Tax Digital is a big change, and it’ll have big effects across the entire tax system. The ‘soft landing’ for MTD for VAT gave businesses some much-needed time to prepare, but the deadline for the full shift is coming soon. As an accountant, you need to ensure that you - and your clients - are prepared to deal with this.
We hope this article has proven helpful. While there’s a lot to stay on top of, the core message is simple: switch your clients to MTD as soon as possible to help them to avoid nasty surprises.
For those who use accounting software like QuickBooks, making that switch can be as easy as signing up with HMRC and activating the relevant feature in their software.
Think you’re ready to move your clients over to MTD? The QuickBooks blog covers a wide range of business-related topics – it’s all part of our mission to help your accounting practice grow.