MTD for VAT to Apply to All VAT-Registered Businesses

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Despite the ongoing turmoil of COVID-19, HMRC continues to focus on how to further advance its Making Tax Digital (MTD) service. In particular, MTD for VAT has become a testing-ground for HMRC to practice roll-out processes and with implementation of Income Tax and Corporation Tax on the horizon, HMRC are now seeking to complete the implementation process for all VAT registered businesses.

MTD for VAT extended to all registered businesses

So far businesses with a taxable turnover under the VAT threshold of £85,000 have avoided the MTD regulations. HMRC have now announced that all VAT registered businesses will be mandated register for MTD system by their first return submission on or after 1 April 2022.

This will mean that all VAT-registered businesses will be required to ensure that their VAT records are maintained digitally on a transactional basis, using compatible software. The VAT returns will then be submitted directly to HMRC using this same software.

This represents just over a year for businesses to review their current processes and ensure that they will be compliant. For many smaller businesses, manual records are still maintained and businesses will need to be prepared for change. Legislation continues to include both compatible accounts software and spreadsheets as valid forms of software, where this has the correct integrations in place.

Whilst any change could be burdensome, there are also opportunities available for businesses who integrate with the latest technology. Cloud accounting software continues to expand its functionality and many of these can help speed up current manual processes to offset the cost of the software.

Soft-Landing and Digital Links Exemption to End

An initial 12 month ‘soft-landing’ period was granted to businesses included in the first mandating of MTD for VAT, where taxable turnover is above £85,000. The soft-landing period acts as a period of grace where non-compliance could be exempted in so far that businesses can demonstrate that all reasonable efforts are being made to meet the regulations, including that of ‘Digital Links’.

Due to the effects of the COVID-19 outbreak however, this period has been further extended for a further 12 months, meaning the end of this ‘light-touch’ approach from HMRC is due to now end by 1 April 2021. (1 October 2021 for businesses which had a later staging date)

Whilst HMRC figures suggest registrations of mandated businesses to be around 95%, the soft-landing does not exempt businesses from registering for MTD if they should be and therefore we can expect an even tougher stance from HMRC in the future.

One of the largest faced is in the form of the ‘digital links’ requirement, which for many businesses has proven difficult to implement. ‘Digital links’ was intended to ensure greater accuracy in data by preventing businesses from transferring data between systems manually (the manual posting of a monthly sales report total into the MTD-compatible accounts software, for example) and instead requiring the source data to be transferred ‘digitally’ through direct links between pieces of software.

Unfortunately, many businesses have struggled to find integrations for their existing software arrangements or are unable to leverage their software developer to create them. With the impending deadline again on the horizon, businesses without suitable ‘digital links’ should make a concerted effort to contact software developers now to understand what intentions they have to implement integrations by the deadline date and seek potential alternatives, if required.

Businesses who are affected by ‘digital link’ issues may benefit from taking professional advice due to the specific nature of what does or does not count under the rules, something which Thomas Westcott can assist with.

All of our team will be pro-actively working with affected clients over the next year, however if you believe you would benefit from a specific review of your accounting systems or have questions in respect to how these changes affect you please either get in touch with your usual Thomas Westcott contact.

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