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Several hundred thousand voluntary registered VAT businesses will go into MTD on 1 April 2022.
iStock_Crowd_Dmytro Varavin

MTD for VAT: The final push

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From April 2022 MTD for VAT will be extended to cover all VAT registered businesses, regardless of their turnover. As a result, many voluntary VAT registrations will be brought within the scope of MTD for the first time.

31st Jan 2022
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Since its introduction in 2019, MTD for VAT has only been compulsory for businesses with taxable turnover above the VAT threshold (currently £85,000). VAT registered businesses trading below the threshold, often referred to as “voluntary registrations”, could sign up for MTD if they wanted to - and indeed HMRC tell us that more than 280,000 businesses have done so - but they didn’t have to.

That changes from April 2022, when MTD for VAT will be extended to cover all VAT registered businesses, regardless of their turnover. As a result, many voluntary VAT registrations will be brought within the scope of MTD for the first time.

What do voluntary registrations need to do?

As a quick reminder, under MTD for VAT, businesses have to:

  • keep their records digitally;
  • use MTD-compatible software to submit their VAT returns; and
  • have ‘digital links’ in place between the pieces of software used to carry out those functions.

For businesses coming into MTD this April, these requirements will apply to their first VAT period starting on or after 1 April 2022.

The first step towards MTD compliance for those businesses will be to ensure they have the right software in place to meet their MTD requirements. They will then need to sign up for the MTD for VAT service at the right time. These steps are discussed in more detail below.

Exemptions are available where it is not reasonable or practical for businesses to follow the MTD for VAT rules (for example due to disability or age). Businesses that are already exempt from filing VAT returns online will automatically be exempt from MTD for VAT, but any other must apply to HMRC for an exemption.

Software choices

A key requirement of MTD is that the business has software capable of keeping digital records and submitting VAT returns to HMRC in the required manner.

Voluntary registrations who already use software should check it is on HMRC’s searchable list of MTD for VAT products.

Those who don’t already have software need to do some research and consider their options. Again, HMRC’s list of compatible software might be a good place to start. While this can be filtered based on price, functionality and accessibility features, it can still be a little overwhelming.

The best solution for any business is likely to depend on its individual facts and circumstances, including budget, level of tech savviness and wider business needs. MTD for VAT software ranges from free or inexpensive bridging software which can take return information from an existing spreadsheet and submit it to HMRC to more expensive all singing and dancing packages which can be used for record keeping, accounting, tax and more.

The simplest businesses may be happy with the low cost option of a spreadsheet and bridging software, whereas growing or more complex businesses may be more inclined towards more expensive packages with additional features.

Software for both sides of MTD

One important question for unincorporated businesses is whether their chosen software will work for both MTD for VAT and MTD for ITSA when that is rolled out from April 2024.

The software market for MTD for ITSA remains very limited – at the time of writing only seven packages were show on HMRC’s list of compatible software, with another five shown as “in development”. If a business has its eye on a specific software package for MTD for VAT it should contact the relevant vendor to check what plans are in place regarding MTD for ITSA.

Alternatively, a sensible half way house could be to use a spreadsheet and bridging software for a few years for MTD for VAT until a single software product can be found to cope with the requirements of both.

One final point to note on software is that the original soft landing for the digital links requirement has expired, and there appears to be no plan to reintroduce an equivalent relaxation from April 2022. Voluntary registered businesses coming into MTD for the first time therefore need to ensure that, whatever software option they land on, they can put the required digital links in place from day one.

Timing is everything

Once voluntary registrations have their software in place, the next step is to sign up for MTD for VAT. However, the timing of this needs to be carefully considered.

Once a business signs up for MTD, all future returns need to be filed using MTD-compliant software. It’s therefore important not to sign up until the last non-MTD return has been submitted.

Take, for example, a voluntary registration on stagger 1. Their first MTD period will be the quarter ending 30 June 2022. They need to wait until the last non-MTD return (ie for the quarter ending 31 March 2022) has been filed before signing up, but also ensure they sign up in time to file their first MTD return by the deadline of 7 August 2022.

The exact sign-up window will depend upon how the business pays their VAT. If they pay by direct debit, HMRC guidance indicates that they should sign up:

  • no earlier than five days after their last non-MTD return is filed; and
  • no later than seven days before the first MTD return is due.

If they don’t pay by direct debit they will have a slightly longer sign up window, but should sign up:

  • no earlier than the filing date of the last non-MTD return; and
  • no later than three days before the first MTD return is due.

Time to act

In order to be compliant in time, voluntary registrations need to start looking into their MTD obligations and software options as soon as possible.

As the new VAT penalty regime will now be delayed until 1 January 2023, it’s worth remembering that the default surcharge rules will continue to apply for the first few periods these businesses are in MTD. Default surcharge has less leniency built into it than the new penalty points-based late filing penalty regime, which could spell bad news for those who find themselves struggling to file their returns under MTD, especially as HMRC appears reluctant to provide any specific penalty relaxation.

Replies (24)

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the sea otter
By memyself-eye
31st Jan 2022 17:59

The sledge hammer strikes again!

This time the nut is even smaller......

Thanks (2)
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By Hugo Fair
31st Jan 2022 18:01

"The best (MTD for VAT software) solution for any business is likely to depend on its individual facts and circumstances, including budget, level of tech savviness and wider business needs."

Agree, but I'd reverse the priority order. The only factor that really matters is "wider business needs" - within which technical 'fit' (including confidence/proficiency) will be a contributory factor.

I was about to say that Budget (within reason) is the least important - as if it really fits business needs then the cost can be justified (and there are often payment choices) - but in fact easily the least important is HMRC compliance (for filing submissions).

If you have to rely on bridging software to tick their box, then so be it ... but don't let them push you into unsuitable software or unnecessary expense.

[I've met one person who is seriously investigating inverting the whole HMRC concept ... continue using his non-MTD system, but export from it into spreadsheets (that become in HMRC's eyes his source digital records) and then use bridging software to do submissions & tick the box! Insane - but he gets to keep using what serves him well, whilst keeping HMRC off his back.]

Thanks (7)
Replying to Hugo Fair:
By ireallyshouldknowthisbut
31st Jan 2022 19:03

I don't think the inversion is odd. We have a number of clients who's records are little more than an extended cashbook dumped out once a quarter. Does the job and is digital. What they do to actually run their business day to day is their affair. I filed two sets of company accounts last year for qbo record keepers where it was quicker to dump their data in the bin and just run from from scratch from a cashbook as it was such a mess.

Thanks (5)
Replying to ireallyshouldknowthisbut:
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By Hugo Fair
31st Jan 2022 22:50

My fault for not realising that 'sardonic' doesn't easily show up in pure text.

The use of "Insane" was meant to be aimed at the circumambulations he will be going through merely in order to keep HMRC satisfied (despite no improvement in the figures he sends or the submission channels used) - without diminishing the perfectly satisfactory processes & systems that serve him well.

So just extra steps/work that benefit no-one, as HMRC force you to bow at the altar of 'digital source records'!

Thanks (5)
Replying to Hugo Fair:
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By richard.snape
02nd Feb 2022 19:12

I'm going to do that.
I use Quickbooks 2014 for my book keeping which is I think the last version you could buy rather than pay subscription which if course is not compatible with MTD.
It serves me perfectly well and though I don't keep stock in my business I do use that feature for Clothing stocks for the Scout Group I am treasurer of.
Consequently I would need the Plus version at £32 per month and I have no intention of handing Quickbooks nearly £400 a year for no real benefit whatsoever.
So I shall export the VAT100 to Excel and then use VAT100PcFree for bridging. A bit of a hassle but I think a reasonable workaround.

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Danny Kent
By Viciuno
31st Jan 2022 18:58

I just hope they couple this with the automatic registration for MTD when registering for VAT. Why on earth you need to do this as a separate admin exercise is beyond me!

Thanks (11)
Tornado
By Tornado
01st Feb 2022 17:24

I personally think the 'Final Push' will be delayed for some time as there are going to be tens of thousands of people not ready for this and HMRC will just have to compromise if they want the VAT Returns and payments to keep flowing in.

Thanks (1)
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By whiteways
02nd Feb 2022 09:58

I have just one simple VAT return for a voluntarily registered business. What would be the best free bridging software to use?

Thanks (0)
Replying to whiteways:
ghm
By TaxTeddy
02nd Feb 2022 11:05

This will always depend upon a number of factors - your personal preferences for software, cloud or desktop, OS X, Linux or Windows. So it's always just best to run a quick Google search and see what turns up, try a few and see what suits you best.

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Replying to whiteways:
Tornado
By Tornado
02nd Feb 2022 11:15

I use TaxCalc Tax Filer for submission of VAT Returns on behalf of clients but one of them does it himself using the same software but on a one off licence that he has paid for directly. For about £21 per annum he is able to use a quality commercial product to submit 4 Returns, and although not free, it is still very good value for money.

Thanks (1)
Replying to whiteways:
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By Beef curtains
02nd Feb 2022 12:52

Just go to "ANNA VAT for MTD" or suchlike It's free, dead simple to use as long as you already have an excel spreadsheet record of tramsactions and IT WORKS and has an excellent help line.

The Revenue is trying to turn the country into a nation of bookkeepers, not business people. Don't waste money on the programmes already suggested. Hammers to crack a nut. Worry about MTD for Self Assessment when it happens. Meantime, Rubber Duck 'em!

Thanks (2)
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By unclejoe
02nd Feb 2022 12:36

I do the accounting for my son's music business. It has been completely devastated by Covid, as 95% of income came from performances, and he is now just getting things back together. Currently business income is in hundreds, not thousands, and the business has not been eligible for a penny in Covid assistance. We are VAT registered. I have been aware of MTD. and that HMRC were intending to extend it to voluntarily registered businesses, so have been keeping an eye on HMRC website for latest information.

In early December I visited the HMRC "VAT Record Keeping". At that time it clearly stated that below £85k was voluntary. Prompted by this article I checked again - it still states that it is voluntary but they have simply added a contradictory sentence (immediately underneath) saying it is compulsory!! So when was the site updated - there is no information. It does state that I can apply for an exemption; your article states age might work (I am in my 70's retired from mainstream accounting). But if I apply when will HMRC get around to considering my application? I am still waiting for a reply to a letter sent 9 months ago! In the meantime what do I do?

I keep our records on spreadsheet and it has worked fine for us up to now. I have no intention of changing that. So on the surface of it I am going to have to buy software, learn how to use it, keep double records, and monthly reconcile the HMRC approved method with our business records. What a waste of time!!!!!! Or we could de-register for VAT. In which case costs will go up 20% and income will be unchanged (when income restarts) because in our business income VAT is an irrelevance.

HMRC ARE A DISGRACE (apologies for shouting).

Thanks (0)
Replying to unclejoe:
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By HelenGillan
02nd Feb 2022 13:21

I have done vat returns for my parents farm business for years. I use Excel spreadsheet and bridging software from 123 sheets. It is so simple to use. You just enter the relevant totals from your spreadsheet onto the 123 Sheets template and upload onto your 123Sheets online account (which you first will have to connect to your HRMC online VAT account - this was a simple process). They are currently offering half price license for the first year, with an extra 3 months free if you purchase before 8th February. I've attached a link below.
https://123sheets.com/

Thanks (1)
Replying to unclejoe:
Morph
By kevinringer
02nd Feb 2022 16:56

Explanation about the HMRC contradiction: if the turnover is less than £85k, VAT registration is voluntary. From April 2022 all VAT registered businesses must comply with MTD (whether voluntary registered for VAT or not).

I have successfully obtained exemption from MTD for many clients on the grounds of digital exclusion. The youngest was only aged 46. Please see section 3 of https://www.gov.uk/government/publications/vat-notice-70022-making-tax-d.... If you send HMRC a written request using the same terminology and reasoning then you're in with a chance. If you've applied for exemption to don't have to comply with MTD until HMRC refuse your exemption (see the end of section 3.4).

But you are digital already. A spreadsheet is "digital". You don't have to change your record keeping. To comply with MTD all you need is to digitally transmit your Box 1 to 9 direct from your spreadsheet to HMRC. You can do this using bridging software. There's loads of bridging software. Some of it is £free. The only cost to you will be the time to decide which one to go for. See https://www.gov.uk/guidance/find-software-thats-compatible-with-making-t... for the full list.

No apologies needed. We all are frustrated with HMRC, as are many HMRC staff that I speak to.

Thanks (0)
Replying to kevinringer:
Pile of Stones
By Beach Accountancy
02nd Feb 2022 18:18

I use 100pc Vat Free Bridge. Works well, fairly intuitive, and is genuinely free (but you can make a donation if you wish)

Thanks (0)
Replying to unclejoe:
By ireallyshouldknowthisbut
02nd Feb 2022 19:42

@unclejo, Excel is digital.

its just the software companies don't like to admit this, and spew absolute flannel about needing to pay for monthly licences for their products and HMRC seem to be in the pocket of them and also not making this at all clear.

I am shocked that certain adverts you see on the TV and hear on commercial radio are even permitted they are so grossly misleading.

Thanks (2)
Replying to ireallyshouldknowthisbut:
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By Hugo Fair
02nd Feb 2022 22:31

The current situation is both worse & better than that (depending on your perspective), because HMRC have signally failed to provide a definition of how to measure compliance with the 'digital records' aspect.

The core issue is that, like you, I think I know a 'digital record' when I see one (and a value in a cell in a worksheet in Excel meets my definition);
BUT there are some quite senior people within HMRC who believe the requirement is to be able to demonstrate an unbroken 'digital chain' of these 'digital records' that leads to the piece of software making the submission to them AND that the unbroken chain must commence with the 'source digital record' in each case (i.e. NO direct human intervention)!

The first part of that is no problem as a chain need have no more than one 'link' - but there is supposed to be a rule (where?) that says you can't just key in the value to the submitting software ... hence the spreadsheet + 'bridging software' for the submission solution that you're proposing - and which many of us intend to rely on to protect the sanity of clients (and ourselves).

But the big (potential) fly in the ointment is the second part - the reference to 'source digital records' - which the software vendors are obviously keen to enforce (hence the focus on cash basis / bank feeds / etc).
Unfortunately this is starting to form part of the 'vision' within the echelons of HMRC - which will lead us who knows where ... but it won't be pleasant or pain-free (or probably work as a tax collection service)!

Thanks (0)
Replying to Hugo Fair:
Morph
By kevinringer
03rd Feb 2022 07:09

VAT notice 700/22 does not require a digital source. Indeed it specifically allows manual input eg 4.2.1.2. It would be impossible to insist on digital sources because ultimately records have a manual source. Take for example Joe the Plumber. MTD does not require him to create digital invoices. MTD only requires him to keep a digital record of his income. Joe the Plumber can still issue manual invoices if he wishes and punch his figures into software or a spreadsheet thus being fully MTD compliant. If in future the HMRC Powers That Be insist on digital invoices directly linked, Joe would still have to manually input to create those invoices in the first place, so there could never be a digital source. I agree there is misconception about digital sources for MTD and that is exploited by the software vendors. HMRC have got so fixated about "digital" they've completely lost sight of what the their job is: the collection of tax.

Thanks (1)
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By JacquiMBurns
02nd Feb 2022 14:35

I do wish HMRC would get their own house in order before interferring in others. I apply for a lot of Options to Tax approvals. Often, these are based on automatic notifications yet HMRC do not send out actual written approvals unless you beg them constantly for them. Then you often have to jump through hoops & fill out and send in the same information as if you were applying for an OTT rather than just notifying them of it. All this takes MONTHS for them to do when it should be relatively quickly. In fact many ttimes my clients have had an offer to buy the property before HMRC get their act together & then want the OTT approval as part of the purchase. Appeals against penalties & incorrect surcharges which don't follow HMRC's own guidelines are ignored unless you make a complete pain of yourself by saying you want to formally appeal against it & them someone just looks at it before they bother to get into the appeal process & then write & say they have agreed to cancel the assessments almost as if they are doing you a favour rather than admit they have acted incorrectly. The staff on the phone refuse to put you through to anyone more senior & even if they promise to get someone to call you, it doesn't happen. They are a hindrance to business rather than a help!

Thanks (4)
Morph
By kevinringer
02nd Feb 2022 15:59

Most of my sub-£85k turnover businesses are digitally challenged so I'm going to apply for exemption. HMRC have granted digital exemption for all but one of my >£85k mandated clients that I applied for. Incidentally, that one >£85k is incapable of digital anything and despite not being granted exemption, they've done nothing at all MTD and suffered no repercussions despite being mandated almost 3 years ago. If HMRC have done nothing to enforce >£85k mandated businesses, HMRC are going to do diddly squat for sub-£85k businesses for some years.

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By Kebabish
06th Feb 2022 10:21

Can you please advise the rules for keeping records on spreadsheets. I have 3 or 4 v.small businesses with low transaction volumes and everything is on spreadsheets. Have used 123Sheets to file VAT returns under MTD so far but that involves keying the figures into their spreadsheet for submission. Is it just a question of copying the cell with the total now, rather than keying in?
thanks

Thanks (0)
Replying to Kebabish:
Morph
By kevinringer
06th Feb 2022 11:39

The rules are in section 4 of HMRC's guide https://www.gov.uk/government/publications/vat-notice-70022-making-tax-d.... If you already have the transactions in spreadsheets you meet the criteria for digital record keeping (section 4.1). What you need are the digital links (section 4.2.1) which means that instead of typing the VAT return totals into your bridging software, you must link it to the spreadsheet of the transactions. Quoting from 4.2.1:

"HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, as a digital link."

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By Kebabish
06th Feb 2022 10:21

Can you please advise the rules for keeping records on spreadsheets. I have 3 or 4 v.small businesses with low transaction volumes and everything is on spreadsheets. Have used 123Sheets to file VAT returns under MTD so far but that involves keying the figures into their spreadsheet for submission. Is it just a question of copying the cell with the total now, rather than keying in?
thanks

Thanks (0)
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By AndrewV12
15th Feb 2022 13:25

I feel like Rommel in late May 1944, staring into the English Cannel, knowing what is coming his way, but cannot do anything about it. Its going to be a disaster its just a question of how bigger disaster.

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