Making Tax Digital: A Guide to VAT Compliance

Making Tax Digital - What's all the fuss about?

What is Making Tax Digital for VAT?

Unfortunately, tax returns are a necessary part of any business and most people find them extremely stressful. All of this is about to change as now tax returns are about to become digitised from 1^st April 2022. This means that all businesses that are vat registered and charge vat with a taxable turnover below the £85k threshold will be required to submit their vat returns to HMRC using new digital software. This is the government’s way of bringing tax accounting and collection into the 21^st century, by using new compatible software that will hold accounting records relating to tax in a new digital format. Making Tax Digital for VAT requires businesses by law to keep digital records at a transaction level so when VAT returns are produced there will be a clear link between digital records and final vat returns submitted to HMRC. More information is available from HMRC's Making Tax Digital guidance.

Who is Affected by MTD for VAT?

Ahead of the April 2022 deadline, Making Tax Digital will also affect Sole Traders, landlords and those that use the Income Tax System Self-Assessment system (ITSA). It is now a legal requirement that all registered businesses with a taxable turnover of more than £10,000 and below £85,000 will have to change to this new digital system. However, if an individual or sole trader does not cross the threshold of £10,000, they can continue to submit a Self Assessment tax return and are exempt from changing over to MTD. If an individual is both a sole trader and a landlord receiving rental income then the combined income from these two businesses are used to determine if that person crosses the £10,000 threshold.

Similarly, if an individual owns several sole trader businesses, then the income from each should be added up and this total figure is calculated as a taxable turnover. Agents can be used to sign up on behalf of a business; however, businesses remain 100% responsible for meeting their tax obligation. Making Tax Digital ITSA comes into effect from 1^st April 2023.

From 6^th April 2023, all affected business owners and landlords with a combined income of above £10,000 will need to

• Register for MTD for ITSA
• Keep digital business records
• Businesses must submit their VAT returns through MTD-compatible software, ensuring accurate digital record keeping for VAT compliance
• Return quarterly business income and expenses update to HMRC via the compatible software
• Submit a final declaration to HMRC to confirm that the quarterly submissions are correct.

All of this will replace the traditional annual self-assessment return.

Benefits of Making Tax Digital for VAT

The aim of Making Tax Digital is to simplify the process for sole traders and businesses. Now tax returns will be more efficient and effective and it makes it possible for sole traders and businesses to get their tax, right reducing errors. It also saves a lot of time enabling them to focus on other aspects of their business. MTD will make it possible to see throughout the year how much tax is owed before payment is due allowing businesses to be more ready, calculating how much money to put away making it easier to pay the dreaded year-end tax bill!

Key Dates for Making Tax Digital for VAT

The rules are simple. During the tax year, you are required to submit reports every 3 months to HMRC using new digital software. It is emphasised that 4 reports are the minimum requirement but you can submit more if you feel it will assist your accounting.

1. The first report – To be submitted by 5^th Aug (this covers April to July)
2. The second report – To be submitted by 5^th Nov (this covers July to Oct)
3. The third report – To be submitted by 5^th Feb (this covers Oct to Jan)
4. The fourth report – To be submitted by 5^th May (this covers Jan to April)

These 4 reports along with the end-of-year period statement must be submitted and should contain information about your income, expenses and any adjustments or reliefs. These 4 reports must be submitted for each business that you own and for each property income, so this could mean submitting several reports across the year.

The end-of-year statement or final declaration is required to be submitted no later than 31^st Jan. This final declaration means bringing together all the data from your businesses and or rental property or properties to finalise your tax position reaching a final tax liability. This final declaration applies to you as an individual so this means you only submit one regardless if you have multiple businesses or rental properties.

How to Comply with Making Tax Digital for VAT

Most experts would agree that it’s simpler, easier and more effective by using the correct software. Digital/cloud accounting software is proven to be revolutionary in reducing a lot of the financial administration burden of business owners, freeing up time for other things. However, some people may not have the skills to transform digitally themselves so it is advisable to speak to your accountant or bookkeeper who will be up to speed with this, who should be able to help you both prepare and navigate through these changes.

While changes are mandatory this shouldn’t be looked upon as a burden but as an opportunity for companies and individual sole traders to become much more efficient business owners

Next steps

Given the number of challenges facing business owners at the moment, it would be easy to push these imminent changes to the bottom of the pile. Change isn’t easy, and whilst it may feel daunting particularly when it is a mandatory requirement it should be viewed as a positive step. Digital transformation has been proven to reduce workload. Compatible software such as Xero is readily available with packages at different levels of functionality at a range of prices payable through a subscription model.

If you would like to understand more contact Ekstra for VAT Compliance Help. We will help you plan and organise your financial administration that will ensure you are compliant and ready to embrace the making tax digital transition in a pain-free and timely way.