With the deadline for the first quarterly VAT return under Making Tax Digital looming, James Foster outlines how to advise freelancer and contractor clients about the changes.
Making Tax Digital (MTD) is a subject that’s weighing heavily on many of our clients’ minds. We’ve been fielding the same queries about the scheme from freelancers and contractors for months: Will it impact me? What are the implications? Are there any benefits?
Many contractors don’t have time to conduct in-depth research into MTD, and can also make incorrect assumptions about the scheme and find aspects of it confusing. Based on our experience, here are a few tips on how to advise your freelancer and contractor clients.
Ensure you can offer an MTD-compliant solution
This may seem quite an obvious piece of advice, but the most crucial thing you can do is to ensure your firm can offer an MTD-compliant solution to your clients and support them with using it.
It’s important that if your clients will be switching to a cloud accountancy platform, for example, that you can not only assist with registering them for Making Tax Digital and filing their VAT returns, but you can help them with all other areas of the system too.
A lot of the main accounting software available will offer support in terms of training videos. This allows you to assist your clients with basic support and confidently advise them with things like how to use the software and get the most value out of it (both from your perspective and the client’s).
Ease worries with bridging software
Some of the initial concerns clients have expressed about MTD are that it is an additional burden and cost for a small business. They are also concerned that it will force them to change their current method of bookkeeping and calculating their VAT returns – a method that may have been working for them for years without inconvenience or errors.
Also, due to the heavy use of MTD in the marketing material from software providers, a lot of small businesses will assume that they need to use one of the main accounting software providers, which are costly and not always necessary.
For a lot of small businesses, using bridging software can ease such worries around both cost and additional work. Bridging software is relatively cheap, and it can be used as a digital link between a business’s current records and HMRC. This means that there is no manual rekeying of data required to submit their VAT returns and they will be MTD compliant.
Ensure they know tax data is the same
Some businesses incorrectly assume that the data they need to send HMRC as part of their VAT returns is more than what they currently provide. This is not the case. The same nine boxes need to be completed, as normal, except they won’t need to manually type this information in.
Don’t rely on communication from HMRC
One of the major criticisms of MTD has been the late communication from HMRC, so this should be something that accountants learn from. A lot of small businesses may only have found out about the scheme from HMRC letters sent in February 2019, when their first MTD VAT return could have been for the quarter beginning 1 April 2019.
For this reason, you shouldn’t rely on communication from HMRC. Instead, you should be proactive and advise your clients on MTD and the impact it could have on their businesses before the date it becomes applicable to them.
This would apply to: clients that could exceed the VAT turnover threshold, businesses in the six-month deferral category such as trusts and not for profit organisations, and for potential future MTD requirements, such as income tax and VAT-registered businesses below the threshold.
Be cautious about the “soft landing”
A common query voiced by contractors and freelancers is about what the penalties are for not complying with MTD.
HMRC has said it will take a “soft landing” approach for penalties in the initial year of MTD. But I say, read into this with caution when advising clients, as it doesn’t mean there’s a blanket no penalties approach.
It’s important for clients to know that penalties will be issued to those businesses who show no effort to comply. So, it’s advisable to ensure your client's file and pay their VAT returns on time, and have a reasonable excuse if they aren’t able to file. Even if your clients cannot file on time, you should always ensure that they pay the return on time.
Make sure they monitor their turnover
It’s important to make sure clients who don’t currently need to comply with MTD for VAT are aware that an increase in their revenue could mean they’d need to comply from that point on.
We keep an eye on clients currently below the VAT threshold but who could exceed it in the near future, and advise them to monitor their turnover. They should know when they need to start complying with MTD and know to register for VAT if they’re not registered.
They must still comply if they fall below the threshold
Finally, many clients often assume that they no longer need to comply if their taxable turnover falls below the £85,000 threshold. This isn’t true. Unless they have de-registered for VAT, they are still obligated to comply with MTD for VAT, so make sure they know this and remain compliant.
About James Foster
James Foster is the Senior Commercial Manager at Optionis Group, the holding company for SJD Accountancy. SJD is the UK's largest specialist provider of fixed-fee, limited company accountancy services to contractors and freelancers.
The award-winning accountancy firm has been acting for contractors across the UK since 1992 and has more than 14,000 clients. It is the only national specialist firm of accountants with offices across the UK. SJD also have more qualified staff than any other firm in its market.