From April 2019, all VAT registered businesses in the UK will need to submit their VAT returns using ‘Functional compatible software’ in order to comply with HMRC’s Making Tax Digital process. As the deadline is fast approaching, here is a quick checklist to help you.
The key thing to remember is that from April 2019, if your turnover is above the VAT threshold of £85,000* you can no longer log onto the HMRC website manually to enter your VAT return figure. All VAT Returns have to be produced and submitted directly from a software accounting package such as Sage 50 Accounts**
If your business is not VAT registered but may be approaching the VAT threshold then it will be worth you understanding the ‘MTD for VAT’ requirements and getting prepared for when your turnover increases. Projecting your income for the near future is advised to see if you will qualify.
Making Tax Digital is about more than merely filing your VAT return digitally; you are also required to store some of your VAT information digitally. This is called ‘digital record keeping’
If you use more than one piece of software to store your VAT information and to do you VAT return, the solutions must be digitally linked.
If you are already using accounting software, such as Sage 50 Accounts**, the transition might be relatively straightforward and could involve little more than taking advantage of the regular updates that Sage send to you. However, if you are using older software, this might not be the case and you should check you have functional compatible software.
If you are using spreadsheets or other manual records to prepare your VAT return then you need to consider ways to replace this process with a software solution for recording VAT details and for filing your VAT return.
Exemptions and deferrals from MTD for VAT
Some businesses can claim exemption from MTD for VAT if the individuals concerned with the business have religious beliefs incompatible with the requirements. Also are exempt are individuals whose age, disability or remoteness mean that it’s not reasonably practical for them to use digital tools. Insolvency procedures also affect MTD for VAT.
You should get in touch with HMRC via its VAT Helpline for more information and for help arranging alternative measures.
HMRC has also announced that some organisations will have a deferred start date for MTD for VAT. For these organisations the scheme will not apply until October 2019.
Here is the official list of organisations that are deferred until October 2019:
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 are required to provide additional information on their VAT return
- Local authorities
- Public corporations
- Traders based overseas
Work out which business processes need to be adapted for MTD for VATYou should look at all of your processes that revolve around generating your VAT return. This might be time consuming but the investment is well worth it to avoid penalties later on. 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, Making Tax Digital for VAT does not mean that you can no longer create paper based invoices or credit notes, for example in Excel or Word. However, it does mean that the individual invoice and credit note values have to be transferred into your MTD compatible software at some point. MTD dictates that you can no longer simply update your accounting software with the monthly total of all invoices.
If your business uses an alternative VAT scheme such as the Flat Rate, Retail or Margin Scheme, including the Tour Operators Margin Scheme or group VAT, then your requirements and processes will be different.
Ensure you have ‘functional compatible software’ for MTD for VAT
From April 2019, you will need to use software that is compatible with HMRC’s Making Tax Digital programme. In addition to keeping digital records relating to your VAT, the software should be able to communicate with HMRC’s computers directly and file your VAT returns electronically.
If you are using desktop accounting software that is installed on your computer and the data is also stored there, this can make data sharing harder. In this instance, you will probably need to update it for MTD, if you haven’t done so already. You should speak to your software vendor immediately about this.
Some older software might never be updated, so you may 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’re using a cloud accounting software package, data is saved on an external server and you can access it in real time on any device, then it should update automatically for MTD. As a precaution, please speak to your software vendor for details of how to access the functionality.
If you keep your VAT records using a spreadsheet then it might be possible to use MTD compatible bridging software to file returns. However, this process will not be as inherently robust or intuitive as using accounting software solution.
HMRC provides a list of software suppliers who are developing MTD compatible software. However, this does not mean that all the software from the suppliers on the list from HMRC will be MTD compatible. You should always enquire with the supplier directly to ascertain which of their solutions are compatible.
Contrary to popular belief, 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
All businesses are able to switch right now to the Making Tax Digital for VAT programme, providing your accounting software vendor has signed up to the beta programme. HMRC has a list of vendors, but again, this doesn’t necessarily mean all software packages from each vendor are MTD compatible.
It was recently suggested in some quarters that 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 implemented in April 2019.
Switch to MTD for VAT as soon as possible
The Making Tax Digital for VAT deadline in April 2019 is fast approaching. If you have to update your existing internal financial processes or keep alternative records, as with all new processes, there might be unforeseen issues.
Millions of businesses are impacted by the switch to MTD for VAT. If everyone waits until just before the deadline, there will undoubtedly be unsustainable congestion as they all attempt to switch to MTD compliant software. Vendors will simply not be able to cope with the demand.
And crucially, if you intend to use an accountant to help you switch to MTD for VAT then the time leading up to the April 2019 implementation date is among their busiest period of the year, due to the self-assessment deadline occurring at the end of January and you won’t be the only client making a late switch. The same applies to your software vendor. If you need training for the new functionality in the software then it’s likely this will become increasingly difficult to book as the Making Tax Digital for VAT deadline approaches in April 2019.