MTD client case study: How to submit the VAT return
The actual submission of VAT returns under MTD needs careful thought. Neil Warren considers the options available to a business and the potential risk of adjustments being done incorrectly before the return is submitted.
I act for a one-person limited company and, with MTD approaching, the owner/director decided to adopt digital accounting software rather than continue with Excel accounting.
This was despite the 30% fee increase for the extra time I would need to spend and the fact that her spreadsheet reporting has been immaculate for the last seven years. She felt that the accounting software would enable her to get up-to-date information about how her business is performing – a fair comment.
However, her most recent email to me highlighted the difficulty that clients face when they enter the world of double-entry bookkeeping for the first time:
“I know that I owe corporation tax but account 802 says I’ve got a credit balance. Does that mean I’m owed a rebate?”
“No,” I replied, “a credit in 802 means a liability is owed to HMRC. If you look at account 502 you will see a debit for the same amount.”
Many businesses need to make VAT adjustments on either a quarterly or annual basis. This will be the case with partial exemption, the capital goods scheme, and some retail schemes require an annual adjustment as well. The calculations can be done outside of MTD-enabled software, eg a handwritten calculation on paper is fine, but then the amount being adjusted needs to be posted into the accounting software (usually by journal) or entered on the spreadsheet.
In my opinion, if clients who are new to accounting software do these journals themselves, there is a real risk they could post them the wrong way round, ie the debit and credit confusion expressed by my client. There is also a risk they could post the journal with the wrong date and miss the VAT period for the return completely.
My client’s company will be joining the pilot scheme for her January 2019 VAT return, six months ahead of her first compulsory MTD return in July 2019. She warmed to the pilot idea and is clear about the need to register with HMRC, and fully understands that she will submit her returns through a completely different system after she joins MTD.
However, before you encourage your clients to join the MTD for VAT pilot, it is important to check they are not one of the 3% of businesses that cannot join MTD until October 2019, eg those using the annual accounting scheme.
There are basically three ways for clients to submit returns under MTD, and the chosen route will depend on the VAT complexity of the business and the client’s own level of accounting skill and tax knowledge:
- Client input only – a direct submission is made by the client using their own accounting software (or bridging software with spreadsheets) ie no agent involvement.
- Client and agent share software – eg cloud-based arrangement, and the agent checks the VAT return before the client submits it. This is the crucial opportunity to ensure that any important VAT journals have been done correctly.
- Client transmits data to agent via digital link – and the agent checks the return and submits it via their own software and their agent services account with HMRC (VAT Notice 700/22, section 6).
Going back to my client, I have a clear MTD strategy in place for her. She is joining the pilot scheme to get in a couple of dress rehearsals. I will be adopting option 2 above when it comes to the submission of her returns. I will check very closely all transactions with a risk of posting errors. I also have a particular concern about the way she is using her director's loan account to deal with her expenses.
There is definitely extra work for me, hence the 30% fee increase I mentioned. Perhaps I should have made it 40%?