Stuart MacPherson: Planning ahead for the extension of Making Tax Digital for VAT

Stuart MacPherson

Stuart MacPherson, senior business services manager at Aberdeen chartered accountancy firm Meston Reid & Co, details the next stage of HMRC’s digitalisation programme.

The next stage of HMRC’s digitalisation programme is on the horizon with the second phase of Making Tax Digital for VAT - MTD for VAT - to be implemented in April 2022.

HMRC note that there are approximately 1.1m VAT registered businesses with taxable turnover below the current VAT threshold of £85,000 per annum. From their first VAT period starting on or after 1 April 2022, the 75% of those businesses (subject to very limited exemptions) that have not already joined will be compulsorily brought into the MTD for VAT system. They will join the many businesses who are already reporting since phase 1 was rolled out in 2019.

Under MTD for VAT, businesses must keep digital records and use third-party software to submit their VAT returns to HMRC. Under the changes, those who do not already keep their records digitally will need to start doing so for their VAT filing obligations. The process of submitting returns will become more streamlined, with the returns generated and submitted using their accounting software.

For many smaller businesses, the move to a MTD for VAT-compliant system for recording VAT transactions may well be more burdensome than for the larger businesses, many of whom had largely compliant systems in place before MTD for VAT came into operation.

Many small businesses still rely on manual record keeping. So, how can your accountant help business become compliant? There are two main options for those small businesses who must now keep digital records and submit VAT returns directly from those digital records.

Xero, QuickBooks and FreeAgent are three of the main cloud accounting packages that have achieved strong market presence in recent years. These cloud accounting packages assist small businesses in maintaining their accounting records and furthermore to ensure compliance with MTD for VAT and beyond that when MTD is rolled out for reporting income tax liabilities to HMRC.

Meston Reid & Co have experience in using and assisting clients with market leading cloud accounting software packages and are here to help you transition and support you on an ongoing basis.

For smaller businesses, an Excel based accounting system can be more than sufficient for their needs. Spreadsheet based systems can be MTD compliant in conjunction with the use of bridging software for a relatively low cost and can provide a natural solution for those businesses who have historically maintained their accounting and VAT records using Excel and wish to continue to do so.

Meston Reid & Co has bridging solution software that allows the VAT return to be submitted direct from clients’ Excel accounting records. We assist a number of our clients in being MTD for VAT compliant whilst allowing them to effectively continue using the same accounting record keeping system that they have used previously.

With the start date for many of the affected businesses less than 9 months away, now is the time to consider how best to implement compliant VAT recording systems.

Don’t just think of using cloud accounting as a method of becoming MDT for VAT compliant. Instead, it should be viewed as an opportunity to adopt an accounting system which can be used efficiently by your small business. The compliance aspect is an added bonus.

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