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Spring Budget 2021_businesses
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Last updated: 3 Mar 2021
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Spring Budget 2021: All registered business required to operate Making Tax Digital for VAT

From April 2022 approximately 1.1 million VAT registered businesses with taxable turnover below the current VAT threshold will also be required to operate Making Tax Digital for VAT for their VAT reporting and record keeping obligations.

Businesses trading over the VAT threshold have been required to submit digital VAT returns via the Making Tax Digital (MTD) system and maintain digital records since 1 April 2019. Now, those businesses that are under the threshold will be required to join them.

Under the changes, those who do not already keep their records digitally will need to start doing so for their VAT obligations and send returns directly from the software they are using to keep their records. The software must be capable of receiving information from HMRC digitally via HMRC’s Application Programming Interface (API) platform.

HMRC say that currently about a quarter of VAT registered businesses which are trading below the threshold have voluntarily signed up for MTD. That seems to indicate that the remainder were happy continuing with their current systems. However, the VAT Online Portal used for non MTD returns is being closed by HMRC, except for those traders who have an exemption from applying MTD, which will force compliance with the MTD regime for most.

Low cost bridging software can be used by small businesses to send returns to HMRC as long as their records are kept using software, and are digitally linked to the bridging software. Spreadsheets are regarded as valid parts of a digital accounting system so there is no need for small businesses to invest in additional software to comply from April 2022. However, for businesses with aspiration to grow it is expected that the additional benefits of accounting software, such as creation of invoices, production of cashflow/debtor reports, and administrative savings will mean that this move will mean an increased use of accounting packages. 

From a VAT perspective, accounting packages only prevent errors if they are set up correctly. For example, the system needs to add the correct rate of VAT to sales invoices, and identify irrecoverable VAT on costs and ensure it does not get onto the VAT return. The accuracy of an accounting system in VAT terms therefore usually depends on the VAT knowledge of the human who set up the software.

What should you do?

Any businesses using any form of manual record or still using the VAT online portal and who do not have official exemption from MTD should prepare for the change over the next year. 

About the author

Linda Skilbeck

+44 (0)20 8037 3114
skilbeckl@buzzacott.co.uk
LinkedIn

Businesses trading over the VAT threshold have been required to submit digital VAT returns via the Making Tax Digital (MTD) system and maintain digital records since 1 April 2019. Now, those businesses that are under the threshold will be required to join them.

Under the changes, those who do not already keep their records digitally will need to start doing so for their VAT obligations and send returns directly from the software they are using to keep their records. The software must be capable of receiving information from HMRC digitally via HMRC’s Application Programming Interface (API) platform.

HMRC say that currently about a quarter of VAT registered businesses which are trading below the threshold have voluntarily signed up for MTD. That seems to indicate that the remainder were happy continuing with their current systems. However, the VAT Online Portal used for non MTD returns is being closed by HMRC, except for those traders who have an exemption from applying MTD, which will force compliance with the MTD regime for most.

Low cost bridging software can be used by small businesses to send returns to HMRC as long as their records are kept using software, and are digitally linked to the bridging software. Spreadsheets are regarded as valid parts of a digital accounting system so there is no need for small businesses to invest in additional software to comply from April 2022. However, for businesses with aspiration to grow it is expected that the additional benefits of accounting software, such as creation of invoices, production of cashflow/debtor reports, and administrative savings will mean that this move will mean an increased use of accounting packages. 

From a VAT perspective, accounting packages only prevent errors if they are set up correctly. For example, the system needs to add the correct rate of VAT to sales invoices, and identify irrecoverable VAT on costs and ensure it does not get onto the VAT return. The accuracy of an accounting system in VAT terms therefore usually depends on the VAT knowledge of the human who set up the software.

What should you do?

Any businesses using any form of manual record or still using the VAT online portal and who do not have official exemption from MTD should prepare for the change over the next year. 

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