From April 2022, all VAT-registered businesses with taxable turnover under £85,000 will need to comply with Making Tax Digital (MTD), HMRC’s new digital tax legislation. In fact, many will have already received a letter from HMRC informing them of this fact, while those who haven’t should expect one soon. If this sounds ominous – it shouldn’t.
Glen Foster, Director, Small Business and Accounting Partners, Xero.
It just means that those businesses that are submitting VAT through the HMRC portal or the post will have to start maintaining records digitally and file VAT returns through compatible UK tax software in time for the deadline. Those above the VAT threshold have been complying with these requirements since April 2019, and the upcoming expansion of the scope of MTD is going to affect a whopping 1.3m smaller businesses.
And while the deadline stipulated in the letters may feel like a long way off, it’s crucial that businesses prepare for digital records and MTD software now.
Non-compliance with MTD could result in fines that we all know small businesses could do without, especially after the past 20 months of disruption and uncertainty. While MTD may feel like a burden after this trying time, it also represents an opportunity to accelerate business digitalization, giving them the chance to embrace new digital tools to optimize business processes.
With this in mind, here are some simple steps that all affected small businesses can take now to go paperless and get MTD compliant.
1. Get the business up to speed
It’s important that businesses get themselves and their employees up to speed on the implications of these new tax rules. There’s a lot of information out there to help but it can be tricky to know where to start.
That’s why HMRC has created its own MTD for VAT page, which provides a wealth of useful insights to help businesses find out whether they apply, how they can sign up, and much more.
It’s also important to remember that HMRC only accepts VAT returns sent using software that supports MTD, unless you have a legal exemption. So, it’s a good idea to begin the search for a supplier that can help businesses get underway asap – this list will help narrow down the search.
2. Seek support and education
Businesses needn’t go through the transformation to MTD compliance alone. Thankfully, they have a wealth of expertise on hand to support on their digitalization journeys. So, if they haven’t done so already, companies should speak to their accountant or bookkeeper now.
Over the past 18 months or so, many small businesses have started to realize the vital role their accountants and bookkeepers play in ensuring their ongoing success. In fact, Xero research found that almost half (45%) of small businesses believe their accountants are more important to them than ever.
This comes as no surprise – they play a vital role in keeping our small business economy thriving, thanks to their great expertise and support. Chances are, they’ve already thought about how they are going to implement the necessary changes for the businesses they work with ahead of April.
Small businesses can turn to their accountants and bookkeepers for everything from practical advice on cash flow management, to how best to digitize documents, to much-needed moral support. By tapping into their vast knowledge and expertise, SME owners can drive businesses forward. Vitally, they can also help SMEs to identify HMRC-recognized software to help keep digital records and file VAT returns.
3. Understand the software you need and how it can help
By adopting digital tools to optimize business processes, SME owners can achieve a wealth of benefits, from speeding up time-consuming tasks to better managing finances. But many businesses are still unsure as to the exact role digital tools will play in MTD for VAT.
In summary: HMRC will ask for a number of digital records to be kept – from business name, adjustments to returns, rate of VAT charged on supplies made, and more. While businesses can use spreadsheets to calculate or summarize VAT transactions and work out what information they need to send to HMRC, they'll need to use compatible software to actually send it.
This software should seamlessly pull information from businesses’ digital records to submit returns, saving time that can be better spent running the business.
Once they’re ready to get started, businesses should have their Government Gateway login details ready and check the VAT number in their financial settings is correct. HMRC will send all companies an email within 72 hours confirming they’ve been moved to the MTD service. Once they sign up for MTD for VAT, businesses must then submit all VAT returns using this process. Firms won't be able to return to the non-MTD VAT return to view or publish.
4. Use MTD as an opportunity to digitalize the business
As for the next steps on the digitalization journey, businesses might consider signing up to the government’s scheme, Help to Grow. From December 2021, eligible businesses get access to free, impartial online support about how digital technology can help, as well as a discount of up to 50% towards the costs of buying software.
And really, the transition to digital tax returns doesn’t need to be daunting and inconvenient. Instead, businesses can use it as an opportunity to accelerate wider digital transformation, achieving operational efficiencies, happier customers, and greater business success in the future.