Transition to Making Tax Digital is proceeding smoothly – so far

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With HMRC taking a constructive approach to enforcement the outlook is positive.

All VAT-registered small businesses with a taxable turnover of up to £85,000 will have to comply with the latest MTD legislation from April 2022. HMRC has urged these businesses to sign up for MTD for VAT before it becomes mandatory.

HMRC has also announced significant changes to the system for late VAT payments, which were initially due to come into force from April of this year. The new points-based system for late payments was intended to be tougher on repeat offenders but fairer on those who occasionally missed deadlines. This new system has now been delayed until January 2023.

It remains important for this last round of eligible VAT-registered businesses to prepare for MTD legislation and ensure the right processes and protocols are in place.

Some businesses are taking a forward-thinking approach and using the Government’s digitisation drive as an opportunity for further investment in cloud-based technology. However, there are concerns that smaller businesses may struggle to see the initial benefits, at least in the short term.

Key dates

  • April 1 2022: MTD for all VAT-registered businesses becomes mandatory.
  • January 2023: new implementation date for new points-based late VAT payment penalty system.
  • April 2024: introduction of second stage of MTD for Income Tax Self-Assessment (ITSA).

We spoke to several accountants across the UK to find out what impact MTD for VAT compliance is having and likely to have on their clients and their businesses.

Use MTD as an opportunity to invest in cloud-based software

Jeremy Kitson, Director, Prime Accountants Group

Any SMEs not already using MTD-compliant software need a plan in place to transition their records to an MTD-ready solution in advance of its introduction.

MTD is a further compliance burden to SMEs and they will incur additional costs. However, this should also be seen as an opportunity for those that have not already moved onto MTD-compliant software. There are cloud-based bookkeeping packages that can be used to improve the efficiency and accuracy of bookkeeping and to provide up-to-date management information on which to make informed business decisions. There are still a lot of businesses out there that do not have up-to-date management information available.

Next steps: Many businesses rely on their accountants and professional advisors for up-to-date guidance and advice as to the latest requirements. It is up to us as accountants to advise them and ensure they have a plan in place. Without this, a lot of clients will not even be aware of the implications of MTD.

Verdict: Use MTD as an opportunity to invest in cloud-based software.

MTD will improve efficiencies but benefits won’t be immediately clear due to cost burden

Andrew Norman, VAT Director and Simon Armstrong, senior manager, Menzies LLP

As the digitisation of tax has been on the horizon for a while, MDT compliance seems to have slipped down the agenda and there is a risk of some businesses burying their heads in the sand.

The implementation of MTD marks the first step towards a closer disclosure of information between businesses and tax authorities, following in the footsteps of other global tax jurisdictions. In the long term, this should make the whole procedure more efficient for everyone, however, the benefits are not always immediately clear to businesses.

For larger companies, in particular, the switch to MTD has the potential to reduce their administrative burden, enabling them to focus on the strategic running of the business, while minimising the risk of errors and associated HMRC penalties.

On the other hand, smaller businesses that are submitting very few transactions may struggle to see past the initial costs and challenges of compliance to the long-term business benefits.

Next steps: Ensure VAT records are MTD compliant with accurate information and file VAT returns using HMRC-compatible software.

Verdict: MTD will improve efficiencies but benefits won’t be immediately clear due to the initial cost burden. 

Software must improve finance processes

Martin Brown, founder and MD, My Management Accountant

Software needs to be capable of much more than ‘just’ delivering MTD compliance.

On a grander scale, use the move to MTD compliance as an opportunity to review the finance processes, including reviewing how business is supported – if at all – by its existing accountants. Simply meeting quarterly deadlines to file MTD reports will make the scheme an added burden, when it fact, it can be so much more.

Next steps: Consider investing in software that does more than just meet compliance requirements.

Verdict: Software should be more than just MTD-compliant.

Many busineses feel that MTD should have been introduced a long time ago

Clare Bowen, Director, MHA Monahans
VAT registered SMEs who are not currently filing their returns via the Making Tax Digital online system will need to act quickly. By the 1st April 2022, they must be compliant with the new rules. Businesses who fall into the scheme and don’t currently keep digital records will need to find an MTD compatible system that allows them to record their daily transactions, prepare and submit their VAT returns.

However, our hope is that HMRC will be as flexible and understanding through the second round of MTD for VAT as they were through the first and are lenient with the existing penalty regime to ensure that businesses who are trying to get things right aren’t penalised.

Next steps: MTD compliance is a great opportunity for business owners to really understand their cash flow. We are helping our clients move to online digital systems to prepare for MTD and their reaction, in the main, is that it should have been introduced a long time ago. Clients are finding themselves freed up from the paperwork clutter and the time-consuming task of preparing boxes of records for us to prepare their returns each quarter.

Verdict: Clients believe MTD compliance should have been introduced a long time ago.

MTD will encourage new level of scrutiny and utilisation of raw accounting data

Ian Haynes, Tax Director, Haines Watts Scotland

SMEs need to be aware that changes are coming to the way in which they may have to record and report information.  This process will be one of education both for advisors and clients, working together to ensure systems are in place that will allow compliance with MTD while creating as little disruption as possible. 

The announcement to delay the MTD for the VAT penalty regime until next year is another signal that every effort is being made to bring MTD in at all levels with the minimum of difficulty or hindrance.  While the requirements of MTD may seem daunting, the use of new software or tech to harness and scrutinise the raw accounting data will prove beneficial, encouraging access to vital management information. 

Next steps: Clients are understandably uncertain about the unknown, but as more details emerge on the mechanics of MTD, we can hopefully alleviate any of their concerns.

Verdict: MTD will encourage new levels of scrutiny and utilisation of raw accounting data.

Automation of data collection and reporting will allow for value-add services

Nick Levine, chartered accountant and consultant, Armalytix

The opportunity around MTD is clear for accounting firms. The automation of data collection and reporting will allow the value-add services to be better provided to their clients: accountants will not have to spend time maintaining physical copies of invoices and receipts. Day-to-day administration will be far more efficient. Businesses, meanwhile, will be able to access data in close to real-time, giving them the opportunity to plan forecasts more accurately and invest in advisory services such as access to finance and scenario planning.

Next steps: There are two options for SMEs to ensure MTD compliance: implementing MTD compliant software that connects and sends digital records directly to the HMRC, or using bridging tools to connect spreadsheets or legacy software.

Verdict: Automation of data collection and reporting will allow for value-add services.

Annie Makoff is a freelance journalist and editor.

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