Changes are set for April 2019. Businesses with manual and Excel based systems and without the right software will be most affected.
You should consider what changes may be required in your recordkeeping systems.
There are millions of small businesses in the UK that do not use specialised accounting software, or keep their records manually or on Excel. These businesses will struggle the most.
Are you ready to submit VAT returns under the new MTD system?
I read about VAT MTD literally every day. It is a major point of discussion and cause for concern for accountants throughout the country. However, it is not accountants that will be affected, but their clients.
Let me ask you a question. Have you heard anything or read anything issued by H M Revenue & Customs regarding VAT submissions and Making Tax Digital that is coming into effect on 1 April 2019?
I suspect the answer will be a big ‘No’. I expect that unless you have been updated by your accountant on this topic then Making Tax Digital, or MTD as it has become known, will mean absolutely nothing to you.
It would appear that unless you mingle in accounting and tax circles, which most small owner managed businesses do not, then you will have absolutely no understanding of the changes coming your way. That clearly raised issues for small businesses; and weather the new system can work in practice.
What is MTD?
MTD is going to be one of the biggest changes in the tax system since Self Assessment was invented in 1997. The idea is that businesses will make quarterly submissions through accounting software to HMRC.
Businesses, whether sole traders, partnerships or limited companies, were to be required to submit details of their business profits, income and expenditure to HMRC, not annually, but quarterly through special software. This was announced several years ago with the Budget headline news being that Self Assessment Tax Returns would be abolished. Clearly, if the information is being submitted quarterly, then there would not be a requirement to submit it annually as well.
It became apparent around a year or so ago that HMRC, never mind businesses, were not ready and the new accounting software was not fully tested, available or working. Everything was then put on the back burner until at least April 2020.
However, that was just regarding business profits and the cessation of the Self Assessment Tax Return. VAT was left at its original target date of 1 April 2019.
What is VAT MTD?
What is changing is the requirement to use ‘functional compatible software’.
If you keep your records in paper format e.g. using ‘old fashioned’ books and ledgers then you will not be compliant. If you use current accounting software, or even keep your records on Excel, then that is still not enough.
Functional compatible software is a software program or set of compatible software programs that must be able to do the following:
record and preserve electronic records in an electronic form
provide to HMRC information and returns from the electronic records using an electronic API platform
received information from HMRC
The first mentioned may not be a problem unless you use paper records. Excel spreadsheets or accounting software will be compliant, or at least for this single requirement.
The second mentioned is where the headache starts. An API is a special piece of software that acts as a link between your accounting software and the HMRC software. API stands for Application Programming Interface. Your future accounting software will need this feature to be an integral part of it. That may mean changing your accounting software or upgrading to the latest version.
The third mentioned is completely new. Accounting software must be able to electronically receive data and information from HMRC. I’m not aware that any big brand accounting software can currently do this.
HMRC have confirmed that Excel spreadsheets are digital records. The problem is that for 99.999% of businesses their Excel spreadsheet cannot directly submit information to or receive information from HMRC; unless you can program them in VBA. I cannot do that and I have never met or heard of any other accountant or business owner that can.
The VAT Government Gateway will be closed down
Software, or pieces of software electronically linked together, will be required to submit VAT return information directly to HMRC completely digitally. No manual intervention will be allowed and VAT returns must be submitted directly from the accounting records. There will be no manual extracting amounts and rekeying into other software or directly into the Government Gateway, like now.
All VAT registered businesses with a turnover in excess of £85,000 will have the Government Gateway switched off and it will be unavailable to submit VAT returns. It has been agreed that businesses that are voluntary VAT registered and whose turnover is below the VAT registration threshold, of £85,000, will not be required to use functional compatible software. It is therefore expected that the Government Gateway will still be available to these businesses to continue to submit their VAT returns.
HMRC will encourage VAT-registered businesses that have registered voluntarily to join the MTD regime before they are required to do so. If the turnover of a business falls below £85,000, it must stay within the MTD regime until it deregisters from VAT.
The professional accountancy bodies are still pushing for the commencement date of VAT MTD for each business to be the start of their accounting year which falls on or after 1 April 2019.
What is not changing?
There are no proposals to change the way the VAT system works, the date that you pay VAT or how you charge your customers or reclaim VAT on your expenses.
The changes to the system therefore revolve around accounting software and how you communicate electronically with HMRC.