With the Government recently reaffirming that Making Tax Digital (MTD) for VAT will be compulsory from 1 April 2019, the race is now on to educate the whole accounting profession as well as VAT-registered businesses.
Prior to this, there was a widespread belief that the deadline would be put back further, so many companies put MTD on the back burner. As a result, we are probably in for a bumpy ride, and this could be a painful time for trade businesses.
What is Making Tax Digital?
Just as a reminder, MTD is HMRC's initiative to bring all tax-related record-keeping onto digital platforms. Their argument is that in the long term it will be better for honest businesses, while they will collect more tax.
Critics argue that it will be much more work for everyone, and is being badly implemented to boot.
The specifics of MTD for VAT are as follows:
- All quarterly VAT reporting needs to be done digitally. The old web form is being dropped, and software that "talks to" the new MTD portal must be used for VAT returns. Businesses that report their VAT annually will follow six months later.
- There must be a link from individual VAT records to the VAT return, and these records must be digitised.
MTD is a rolling program, and MTD for VAT is just the first of the major initiatives that will end up impacting virtually all businesses. The next area affected is likely to be quarterly profit and loss reporting for all businesses with annual sales over £10,000. MTD will also eventually be applied to individual tax returns, although that is currently on hold.
The current state of things
AccountingWEB and system supplier Quickbooks undertook a survey of accountants a couple of years ago - and the top concern, from more than a third of respondents, was poor record-keeping by clients. The big danger with data being plugged straight through to a VAT return, with little opportunity for review, is that the proportion of incorrect returns will soar, at least initially.
Given that errors are likely to occur in both directions, this is somewhat worrying. Businesses could either end up over-paying, which is bad for cashflow, or underpaying and then getting an unexpected catch-up charge later - which is also hardly ideal.
Of course, you might expect accountants to regard their clients as incompetent - but they might do better to look at themselves. A fairly recent survey of accountants by software company Xero found that 25% of them hadn't even heard of MTD.
How do you work with accountants?
The critical thing in determining the way to address MTD is to start with the way that you currently work with your accountant (if at all), and how you want to work with them in the future.
There are broadly two ways of working:
- You submit your own quarterly VAT return using the current web form (or paper return).
- You pass information to your accountant, and they do the return for you.
It's likely that after the MTD for VAT deadline, you will continue to work in a similar way. The big difference is that your sales and supplier invoices and expenses must all be recorded digitally. It will be against the law to manually total up the amounts of VAT, sales and costs, and key the totals into the HMRC web form. They will need to be put into a system by either you or your accountant.
There is one important point to note, which is that the detailed information can be entered onto a spreadsheet, and then "bridging software" can be used to submit it to MTD. However, it's not clear how long this concession will be allowed.
Are accountants ready for MTD?
The lack of readiness among accountants mentioned earlier is worrying, as many trade businesses are likely to be looking to their accountants for guidance on how to comply with MTD. In fact, there is a further worry. Accountants are professionals, and charge by the hour. They are not set up for a sudden surge of admin and implementation work.
Unlike other companies, most accounting firms do not have dedicated people to take incoming calls. Nor are they usually backed with a great customer relationship management (CRM) system to track everything and make sure nothing falls through the cracks.
Given the scale of change needed and the limited time available, there is a big danger that accountants will simply get overwhelmed.
The role of accountants
The MTD system has been designed by HMRC with accountants in mind. In HMRC's parlance, they are "agents" - that is, they can act on behalf of a business. This means that they can make VAT submissions under the new regime on behalf of businesses and will be able to submit other types of MTD return in the future too.
One problem, though, is that this is yet more complex to set up, with an extra step added to the process. trade businesses will need to first authorise the agent to send and receive their information to and from HMRC. Only once that is done will the agent be able to interact with HMRC on the business' behalf.
Complying with the law
MTD requires at least one digital accounting system. There are three ways to comply with the law:
- Run your own system that enables you to capture all the information you need for a VAT return, and submit it to MTD directly.
- Use a system to capture all the necessary information and forward it to the system used by your accountant or bookkeeper, who submits it to MTD.
- Send copies of all of your paperwork to your accountant or bookkeeper, who enters it directly into their system and submits to MTD from there. This may come with a higher price tag, and has the maximum danger of accountants being unable to cope.
Making your choice
At the moment, a mere 8% of VAT-registered businesses use accounting software under their own control for their VAT calculations. I suspect that the figure is even lower among trade businesses - and implementing accounting software isn't a top priority.
However, it may be possible to kill two birds with one stone, as businesses that do not use a computer system to manage their business accounts will realise big benefits if they start to do so. These could include:
- much less time spent on paperwork;
- more control: a better view of finances, what's owing, and so on;
- replacing bits of paper everywhere with a single system where everything can be easily found;
- providing clients with a more professional impression.
However, like everything in life, software introduces costs, problems and issues, most of which can be addressed or reduced:
- The new software might not fit the business. That's why it's important to spend time checking out the software, including trying it for yourself, seeing demos and talking to other customers.
- You may need a lot of hand-holding while getting to know the software, so it's vital your supplier is both available and willing.
The important thing to understand is that going digital will make it easier to submit data to your accountant, as an alternative to posting paperwork which will be inefficient and expensive.
MTD - what to do now
Every VAT-registered trade business should be considering their plans for MTD. If they do things themselves, they could turn to a specialist trade-based software company like my own, Powered Now, or one of our competitors.
If they already have an external accountant to submit their VAT returns, they should be talking to them as soon as possible. My strong advice would simply be this - don't delay.
Copyright 2019. Featured article made possible by Benjamin Dyer, CEO of Powered Now, field service software providers.