MTD VAT returns checklist for small businesses

Do you own a small business that’s registered to pay VAT? If so, you need to know about Making Tax Digital (MTD). The scheme marks one of the biggest changes to the tax system in years, and it’s set to cover all VAT-registered businesses from April 2022.

In this article, we’ll explain what MTD is and how it will affect you. Then, we’ll take you through what you need to do to make sure you comply with the new rules.

What is MTD for VAT?

As explained in our Making Tax Digital guide, the scheme aims to ensure all tax records are kept and processed digitally.

HMRC rolled out phase one from April 2019, affecting all VAT-registered businesses with a turnover of £85,000 or more. The COVID-19 pandemic delayed the extension of MTD for VAT, but the scheme is back on track and set to extend from April 2022. 

Under the new rules, all VAT-registered businesses must:

• keep regular digital records

• send regular VAT Returns to HMRC using ‘functional compatible software’ 

Unlike phase one, from April 2022 these new rules will apply to all businesses registered for VAT, regardless of their turnover.

Will your business be affected? 

The extension of MTD for VAT is set to affect an estimated 700,000 additional businesses. From April 2022, MTD rules will apply to almost all businesses registered to pay VAT. 

While HMRC does allow for some exemptions and deferrals, which we’ll get into below, the requirements for these are quite stringent. The aim of the programme is to extend MTD to as many businesses as possible.

Exemptions and deferrals

As mentioned above, the government does allow for some leniency in MTD requirements. Businesses can be granted an exemption if they can prove that they should be considered ‘digitally exempt’. 

You may be considered digitally exempt if you are: 

• unable to comply with MTD for VAT regulations due to religious beliefs

• unable to use digital solutions due to disability, age or remoteness

• going through insolvency procedures 

You have to apply for exemption to HMRC directly and they are considered on a case by case basis. 

If you do not meet these narrow requirements, you will not be able to get an exemption or deferral, and will have to comply with MTD for VAT rules from April 2022. 

If you have any questions or concerns about your eligibility, contact the government’s VAT helpline.

Adapt relevant business processes

In the overwhelming majority of cases, VAT-registered small businesses will need to comply with the new Making Tax Digital requirements for the first time. And with the deadline fast approaching, it’s crucial businesses start their preparations as soon as possible. 

The first step in this process is to identify which aspects of your business need to be adapted.

MTD will affect processes such as: 

• how you generate and raise sales invoices

• how you record expenses

• how you keep your accounts 

In general, you will need to identify which areas of your VAT accounting are paper-based or otherwise outside of your accounting software. This is because, while you can still keep paper records under MTD, certain records must be stored digitally.

Crucially, you must be able to digitally transfer the data into “MTD compatible software” in order to submit your VAT return.

Ensure your accounting software is compatible

Making Tax Digital requires direct communication between HMRC’s software and the software a business uses to keep and submit its records.

The scheme aims to digitise the tax system fully. This means reducing the need for human intervention to the bare minimum: no entering data manually, or even copying and pasting. Instead, all records must be ‘digitally linked’. 

For this reason, businesses affected by MTD for VAT must use MTD functional compatible software - software that can communicate directly with HMRC. 

While desktop accounting software can be updated to do this, the best option is to use cloud accounting software like QuickBooks, which is compliant with the requirements and is HMRC recognised. You can update automatically to help make the switch to MTD. 

Bridging software

If the software you use to keep your records is not MTD compliant, don’t despair: you can transfer the records to functional compatible software. To do this, you will need to use what HMRC calls ‘bridging software’, to ensure that the all-important ‘digital links’ are maintained. 

If you want to keep your initial records in a spreadsheet, for instance, you can use software to import your data digitally.

You can check whether your software is compatible through the gov.uk page on the topic.

Making the switch to MTD for VAT

With all that understood, all that’s left is to decide when to make the switch. And the answer to that question is simple: eligible businesses should prepare to shift to MTD as soon as possible. 

There are three main reasons for this: 

• The deadline is very soon 

• A lot of businesses will be affected

• You will need to adjust to the new rules 

We’ll explore each of these issues here.

The impending deadline

The first point is a simple one: there is very little time left until the deadline. Businesses will need to comply with MTD rules for their first VAT accounting period that begins on or after 6 April 2022. 

In addition, they will not be able to wait until the end of their financial accounting period, as MTD requires businesses to submit regular returns throughout the year. 

Penalties for noncompliance can be harsh. Margins are often tight for small businesses, and it can be crucial to avoid expensive fines. Shifting early can reduce your chances of falling foul of HMRC’s penalties.

The number of businesses affected

As we noted above, the number of businesses who are not already eligible for MTD for VAT under phase one but will be eligible from April 2022 is high - around 700,000. 

With hundreds of thousands of extra businesses impacted, we can expect increasing congestion as the deadline draws nearer. Both HMRC and software vendors will become very busy. Potentially, they will be unable to manage their helplines. The best way to ensure your business isn’t affected by this is to make the switch well ahead of time.

Training considerations

Finally, there are the practicalities to consider. From functional compatible software to digital links and bridging software, there’s a lot of jargon associated with MTD - and that’s without even getting into the specific reporting requirements.

Accountants who may have been able to help will be busy with their own clients and software vendors are also likely to be increasingly occupied and so may not be able to offer any advice and support - especially as the deadline draws to a close.

Once again, the safest option is to switch over early and give yourself time to get used to the new system. 

Staying on top of small business accounting and tax requirements can be challenging at the best of times. The extension of Making Tax Digital for VAT marks a major change, and it’s crucial that businesses are prepared. Functional compatible software like QuickBooks can help you make the switch as smoothly as possible, keeping your business on top of the new rules going forwards. 

Find this checklist helpful? We have plenty of lists and tips on the QuickBooks blog to help you get your accounts in order.

Discover the QuickBooks blog for more