March 22, 2021
From 1 April, VAT registered organisations will face further obligations from HMRC’s drive towards Making Tax Digital
Making Tax Digital – What happens next?
For many years HMRC have had high ambitions of becoming the world’s ‘most digitally advanced tax administration’ and in doing so they are shaking up the way in which individuals and businesses record their tax affairs. By implementing the Making Tax Digital (MTD) scheme, HMRC plan on initially mandating digital record keeping to reduce the UK tax gap, which lies at c.£31 billion of which £9 billion is attributable to ‘errors and failure to take reasonable care’. So where are we now and what happens next?
Well, since April 2019 most UK VAT Registered businesses with taxable turnover above the VAT threshold of £85,000 were mandated to maintain digital VAT records. This also meant they were required to submit their VAT returns using Making Tax Digital (MTD) compatible software. For businesses to ensure they could apply these new processes, HMRC implemented a one-year soft landing period, which was later extended a further year, due to the COVID-19 pandemic.
However, from 1 April 2021, UK VAT registered businesses will face further MTD obligations which were initially meant to be implemented from April 2020 but also delayed due to the COVID-19 pandemic. These new obligations centre around the requirement for a ‘digital link’. According to HMRC this essentially means there is a need ‘to use a compatible software package or other software that connect to HMRC systems’.
Regardless of your current situation, from 1 April 2022 all UK VAT registered businesses must sign up to be MTD registered, regardless of whether they have exceeded the VAT threshold. So, are you prepared? If not, why not make the move to using MTD compliant software in advance of the new changes?
How will this affect my business?
If you have not already done so, you will be required to keep your VAT records in digital form. We recommend using cloud accounting software that is MTD compliant, such as Xero. In doing so you will be adhering to HMRC’s policies by utilising a ‘digital link’.
What is a digital link?
For example, if you use multiple software packages to keep records or submit VAT returns you will need to essentially link them, without any manual input. The most common example for businesses is the use of spreadsheets where figures are then copied and pasted into another system for the VAT return to be submitted – this is will no longer be allowed.
HMRC confirmed ways in which you could link software:
- using formulae to link cells in spreadsheet’s
- emailing records
- putting records on a portable device to give to your agent
- importing and exporting XML and CSV files
- downloading and uploading files
There are however some exceptions to the above obligations. HMRC has granted exemptions for manual calculations for VAT schemes such as partial exemption, flat rate or the capital goods scheme. The digital links between the software packages used, need to be in place before the business’s first VAT period after the 1st of April 2021.
What if I can’t implement the ‘digital link’ in time for April 2021?
HMRC has offered an option for businesses to apply for an extension to the 1 April 2021 deadline if it can be proven that there is no reasonable fix to their legacy systems. The extension would involve notifying HMRC as soon as possible and providing a comprehensive plan to resolve the issues. We would advise you contact HMRC as soon as possible if you require extension.
How can we help
We have been assisting clients for some time now to ensure they are using MTD compliant software. As well as adhering to HMRC MTD rules, businesses have benefitted from the additional benefits of using Cloud Accounting software such as Xero. MTD for VAT was the first of many areas which HMRC will target, there are already plans for digitising Income Tax in 2023 and Corporation Tax in 2026.
So, are you confident you are using the right software? You may not be VAT registered, but knowing HMRC’s plan for the years ahead, we would encourage you to review your financial systems at this stage and plan ahead. Why not get in touch and let us help ensure you are ready for the changes ahead. We have a range of Cloud Consultancy services which can help ensure your business in not only MTD ready but ensure accessibility robust real time financial data.
Please contact us to learn more.