Time is running out to get VAT clients ready for April 2022
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MTD phase 2 is closer than you think

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John Stokdyk explains what needs to change for taxpayers coming into MTD for VAT in April 2022.

5th Nov 2021
Editor at large AccountingWEB
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Just in case you’re tempted to kick back and take things easy ahead of the tax busy season, it’s worth remembering that the next phase of Making Tax Digital (MTD) comes into play from April 2022.

Although the transition to MTD for income tax has been postponed until April 2024, the VAT filing regime will be extended to all VAT registered businesses by April 2022.

Written in collaboration with Sage, as part of our Countdown To Making Tax Digital series, this article presents a quick reminder of the key compliance requirements and offers practical advice to help business advisers ensure their smaller clients will be ready for MTD for VAT in good time.

Keep building awareness

Since 2019 and before, MTD has been a permanent priority for many practitioners. Businesses above the VAT threshold have all made the transition, but feedback from accountancy’s frontline indicates that many smaller businesses are still unaware of how their accounting and VAT processes will have to change.

The message coming from Sage and other leaders within the profession is unanimous on this point: your first priority as a practitioner should be to educate clients on their new compliance obligations from April 2022. 

After the stresses of the 2019 intake, many accountants started to move their smaller clients into MTD for VAT ahead of mandation. For those who haven’t yet done this, the tax year-end process for self assessment offers a final opportunity to get them ready for the MTD transition in April.

“Opening up communications with your clients is a must,” urged Emily Smith from Finlayson & Co in a recent video on client training and communication for MTD. “Engage with them now to explain to them what’s coming and what your plans are as their accountant to move them through this process.”

In an MTD Bootcamp webinar in August, Shetland-based practitioner Martin Tregonning explained how he had been encouraging early adoption for his clients to lessen the stress ahead of April 2022. “For those who didn’t, I always said, ‘You will have to change at some point. You will have to move on to software.’”

What’s required, when

For any accountant not yet familiar with the MTD guidance, VAT Notice 700/22 and VAT Notice 700/21 set out the requirements to maintain VAT sales and expense records on “functional compatible software”.

When it gets to the end of each VAT quarter, businesses need to file their VAT returns using MTD-compatible tools.

One of the trickiest technical issues during the first phase of MTD for VAT concerned the need to maintain “digital links” throughout the transaction reporting chain. To minimise errors, HMRC stipulated that there should be no re-keying or cutting and pasting of spreadsheet data into VAT reporting tools. Spreadsheets are still accepted as digital records and cash daybooks can be compiled using old fashioned paper and pen, but once the totals are entered into a digital system, they must be passed electronically through to the VAT return to maintain their integrity. 

No more “soft landing”

Some leeway was granted to give businesses in the first wave of MTD time to adjust, but since April 2021 that “soft landing” approach has been dropped. All of the April 2022 MTD for VAT intake will have to have digital links in place from the start. Examples of how digital links work are available in VAT Notice 700/22.

In the first wave of MTD for VAT, larger businesses and groups often struggled with these digital link requirements because of the need to consolidate figures from different subsidiaries or make adjustments across the group. This gave rise to a raft of bridging software solutions. While it is possible to support different client record-keeping systems and reporting needs with spreadsheets and reporting tools, this may not be practical or profitable for larger numbers of smaller business clients.

Experience from the first wave confirmed that capturing transactions via smartphone snaps and bank feeds into cloud accounting software is the most scalable and economic way to bring clients into MTD.

Keep an eye out for penalty risks

The other potential friction point for MTD for VAT filers from April is the new points-based MTD penalty regime, which will be a rehearsal for a wider rollout when MTD for income tax arrives in 2024. Starting from 1 April 2022, the taxpayer will incur a points penalty for filing an MTD submission late. The quarterly updates will incur a two point penalty, and a £200 cash charge will be triggered if the taxpayer racks up 12 points within a two-year period.

Dozy taxpayers can get away with three late updates with no penalty in that time, but the fourth late submission will cost them £200 and any further breaches after that will cost £200 more.

Some taxpayers and advisers might be pleased to be spared immediate cash penalties for late returns, but keeping track of any lapses will be more complicated if responsibilities aren’t clear for who’s filing the returns or someone absent-minded is involved in the process.

Use VAT as a stepping stone towards MTD ITSA

For Sage bookkeeping and accounting product marketing director Chris Downing, it’s a mistake to put the compliance cart ahead of the business horse and focus purely on finding the MTD solution of least resistance. 

Client needs do differ greatly, he said. “But if you can show them what you can do with software to create and send invoices to the customer and get paid quicker, you can let them see the benefits of moving to the cloud.

“Apps are far more intuitive and easy to use and since the first wave of MTD, we’ve seen clients become more confident using the technology and doing more for themselves.” 

At Finlayson & Co, Emily Smith has been through this experience and was building on it for both the next phase of MTD for VAT and MTD ITSA beyond. “Open up communications with more able clients and those who are more interested in going onto digital software,” she advised. “Then work through more technically averse clients in the next year or so.”

This article is the second in a seven-part series from AccountingWEB sponsored by Sage. You can access all of Sage's MTD resources and support on the Sage MTD Hub.

Want to keep up with the debate around MTD? There are over 60 panels, workshops, seminars and lectures at AccountingWEB Live Expo this December, covering MTD, Autumn Budget and much more - many with CPD attached.

Register now for AccountingWEB Live Expo 1-2 December.

AccountingWEB Live Expo takes place on 1-2 December 2021 at Coventry Building Society Arena, Coventry. Registration is now open. A full content programme was announced in early October enabling you to register for specific sessions. Please visit the AccountingWEB Live Expo website for full details and to sign up for our newsletter.

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Replies (28)

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By Hugo Fair
05th Nov 2021 18:40

I nearly bit my tongue, John, but then you said ...
"Experience from the first wave confirmed that capturing transactions via smartphone snaps and bank feeds into cloud accounting software is the most scalable and economic way to bring clients into MTD."

Where is this 'experience' cited? And how was it quantified? By which types of taxpayer?

Thanks (7)
Replying to Hugo Fair:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
05th Nov 2021 18:55

I've presented about 5 MTD-related webinars in the past few months and talked to 20+ practitioners during that time about these and related issues. Similar comments kept recurring over and over to the point that I couldn't pick out just one representative example.

if you would like to review other examples, start here:
https://www.accountingweb.co.uk/tech/accounting-software/migration-tales...
https://www.accountingweb.co.uk/tax/business-tax/benneyworth-a-small-pra...

Also check our MTD Bootcamp video series:
https://www.accountingweb.co.uk/accountingweb-live/preparing-for-mtd/how...
https://www.accountingweb.co.uk/accountingweb-live/preparing-for-mtd/get...

and Sage MTD guides
https://event.on24.com/wcc/r/3299431/3333F6A8D523B4862AB11CB8A21B248E
https://event.on24.com/wcc/r/3332979/CA07ADCD962DA55A48C04F309EBA5971

It's not just me and the software vendors saying this. Practitioners who have started planning ahead for the transition to MTD ITSA are coming to the same conclusions independently. We saw the same shift with iXBRL for corporation tax. Are you going to use your old system and then bolt on a mapping (cf bridging) spreadsheet to complete the last filing step? Or are you going to use a system that inputs data in a suitable format at the start of the process?

Thanks (1)
Replying to John Stokdyk:
Stepurhan
By stepurhan
06th Nov 2021 04:55

John Stokdyk wrote:

I've presented about 5 MTD-related webinars in the past few months and talked to 20+ practitioners during that time about these and related issues.


Is that number a typo?

20+ practictioners is the number of accountants in a decent sized town. Considering that you also ended up speaking to them at MTD-related webinars and you have one of the most unrepresentative samples it is possible to devise.

I also cannot help noticing that a software vendor is literally sponsoring you to write these pro-MTD articles. You can hardly claim to be presenting an impartial view when being paid by a business that would benefit from a particular view being promulgated.

Thanks (7)
Replying to stepurhan:
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By johnjenkins
08th Nov 2021 09:57

Looks like sleeze is creeping everywhere.

Thanks (4)
Replying to johnjenkins:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
08th Nov 2021 11:11

Please reconsider or remove your comment John. I have a very thick skin, but even if you think it's a joke, by accusing me or AccountingWEB of "sleaze" that is a direct violation of our community rules.

Denigrating other professionals' is expressly forbidden, whether they're accountants or journalists. In future, please do not repeat any such allegations about anyone else who post on AccountingWEB.

Thanks (1)
Replying to John Stokdyk:
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By johnjenkins
08th Nov 2021 11:47

John, I was replying to a comment made by a poster and in no way do I think you or AccountingWeb is sleazy, in fact I enjoy AccountingWeb's community spirit. The poster was asking about money being received for certain services. I was merely pointing out that the MEDIA use of the word sleaze could be directed anywhere. Perhaps my wording wasn't sufficient enough to point that out and for that I apologise. There is no intention of denigrating you or anybody else in my posts. It is the post that I always comment on not who is making it.

Thanks (3)
Replying to stepurhan:
By Charlie Carne
08th Nov 2021 11:48

I get that there are significant issues with MTD for ITSA (not least the ludicrously low threshold), but it's hard to argue with John's point "that capturing transactions via smartphone snaps and bank feeds into cloud accounting software is the most scalable and economic way to bring clients into MTD." Unless the business owner truly does not own a smart phone or a scanner, this is a good place to start.

If their business is so small that records can be kept manually, then they will be kept easily in a very simple cloud accounting system (or even just by using an MTD-compatible bank account, like Countingup or Starling). For me, that is the biggest hurdle for my smaller, sole trader clients: getting them to stop using their personal bank accounts for business, and opening a separate bank account that can be tracked online. Once that hurdle is passed, the rest is very much easier.

I'm not suggesting that we stop complaining about MTD, just that we complain about those elements that are particularly egregious and which have a chance of being changed. We ain't gonna stop the train, but there may still be time to alter the direction of the tracks.

Thanks (2)
Replying to charliecarne:
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By johnjenkins
08th Nov 2021 12:06

I have been saying this and will go on saying it till the cows come home. There are many business that will cope with no problems at all but there will be just as many that wouldn't know what scanning is all about and some even that wouldn't want to know. I'm pretty sure that our beef against what HMRC is trying to do is that a lot of business (especially the one man band) won't be able to cope and why should they be forced into not coping. This problem with high techies and low techies will not go away. In fact I see the gap getting wider and wider. Once HMRC wake, because they will have to, we might get somewhere.

Thanks (2)
Replying to Hugo Fair:
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By Paul Crowley
05th Nov 2021 19:07

Hugo
This is a one way street
Dissent will not be tolerated
Did you not see the HMRC at The House of Lords? HMRC have yet to find anyone who does not agree their opinion. And they have interacted with lots of pilot volunteers, so they should know.

Thanks (7)
Replying to Hugo Fair:
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By Open all hours
06th Nov 2021 08:36

Hugo, this independent thinking has to stop. Orders must be obeyed. (No matter how ridiculous). Come the revolution I fear for you just as I fear for myself. Till then, we will continue to write without editorial sponsorship, without fear and without favour.

Thanks (3)
Replying to Open all hours:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
08th Nov 2021 13:14

Again, there are some things being said here that might be taken in jest, but since you raised the point what else have we seen on this thread but independent thinking and dissent?

You've all also had plenty of chances to voice your concerns and opposition to MTD on all those other posts on the site. But you know what? MTD for VAT is already here and is enshrined in law as a set of obligations that businesses and their tax agents have to comply with.

Our job at AccountingWEB is to support our members and try to help them do their job as effectively as they can, so publishing information about MTD - both the technicalities and troublespots and how to prepare for the new regime - is pretty core to what the site is about. We make no apology for that, nor for accepting advertising and content commissions from companies that want to associate themselves with our mission and content.

The point has been made a couple of times here about how poor awareness is of MTD among small businesses. With HMRC providing so little education and guidance, the burden is falling on accountants who see the need to prepare their clients and are devoting a lot of effort to making sure they can make the transition successfully to MTD VAT, then ITSA, then corporation tax etc. There have been delays and plot twists like tax year basis reform, but much of what we produce is designed to illuminate those issues.

There might be a vested interest among software vendors to encourage more adoption of commercial solutions for MTD, but that is in line with the government's stated policy and vision for the digital tax project. So rather than sniping at them and dismissing everything they get involved with as corrupt, they are also helping thousands and thousands of practitioners with client education and preparation for MTD.

Thanks (0)
Replying to John Stokdyk:
the sea otter
By memyself-eye
09th Nov 2021 08:57

I used to have enough of a problem getting clients to keep receipts/bank statements etc without 'educating' them in a process that was and is rubbish (MTD for VAT shows that).
As for governments having 'vision' - the last 20 months have shown that is laughable.

Thankfully, that is now in the past.

Thanks (4)
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By Jane Wanless
06th Nov 2021 16:58

"The message coming from Sage and other leaders within the profession is unanimous on this point: your first priority as a practitioner should be to educate clients on their new compliance obligations from April 2022. "

Happily, I've retired, but from experience, I'd have thought that for many practitioners, their focus at the moment would be meeting existing filing deadlines and getting the 2021 returns done.

Should HMRC not be publicising the new compliance obligations? Not all taxpayers are represented so HMRC should not be relying on the profession, but doing this work themselves. Accountants are not unpaid publicists for HMRC.

Thanks (4)
Replying to janewanless:
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By Paul Crowley
06th Nov 2021 17:52

So far I have only spoken to one client who had heard of MTD before I advised client that the storm was coming.
As far as the average tax payer is concerned, MTD is practically a state secret

I am referring above to MTD ITSA

No idea if the voluntary VAT trader is now getting notifications
Those few clients are a February job for me

Thanks (3)
By ireallyshouldknowthisbut
08th Nov 2021 09:06

Our huge plan here is to............carry on using excel bridging.

Clients are blissfully unaware of the fairly trivial change in our interface to HMRC apart form the fact we cant now deal with DD's which is a pain and means more clients are now late with filing for those who's DD's have gone "poof" for one of many reasons and cant get them back without setting up a business tax account.

Thanks (3)
By jon_griffey
08th Nov 2021 09:33

The sh*tstorm is going to start when MP's and journalists realise that they are going to have to pay their accountants to file their returns quarterly.

Thanks (9)
Replying to jon_griffey:
By ireallyshouldknowthisbut
08th Nov 2021 11:49

Don't worry I expect the MP's will vote themselves an exception.

Thanks (1)
Replying to ireallyshouldknowthisbut:
Morph
By kevinringer
09th Nov 2021 09:35

Correct me if I'm wrong, but I thought MPs were exempt from MTD ITSA. I understand it is because MPs are unable to file online and have to submit SA Tax Returns on paper and this would be continuing when MTD ITSA starts. If this is indeed true, it means MPs will never know the true burden of MTD and so will be quite happy to vote it to apply to Joe the Plumber.

Thanks (3)
Replying to kevinringer:
By ireallyshouldknowthisbut
10th Nov 2021 11:15

kevinringer wrote:

Correct me if I'm wrong, but I thought MPs were exempt from MTD ITSA. I understand it is because MPs are unable to file online and have to submit SA Tax Returns on paper and this would be continuing when MTD ITSA starts. If this is indeed true, it means MPs will never know the true burden of MTD and so will be quite happy to vote it to apply to Joe the Plumber.

@Kevin, I have forgotten that, that will be PD1 paper forms I assume. I imagine there is a specialist firm somewhere that just does MP's and their amazing rules of "life is tax deductible"

Thanks (1)
Replying to jon_griffey:
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By North East Accountant
08th Nov 2021 12:55

Wait until this hits the masses.....it'll make the poll tax protests look like a kids tea party.

Thanks (2)
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By David Gordon FCCA
08th Nov 2021 12:52

Dear John,
You do not live on my planet.
For example
Q1
What about those thousands of s/contractors who are on the contractors' self billing system?
the y do not raise "invoices"
q2)
Yeah, if you enjoy reliable broadband, otherwise??
Q3)
60 panels, workshops, etc, etc to do with MTD!!!
How does this square with HMRC's risible estimated cost of implementation? Or are we supposed to donate these working hours out of the milk of human kindness?
Q4
How much is Sage proposing to charge a straightforward self-employed taxpayer for software capable of dealing with this MTD? Honest answer please

Thanks (1)
By SteveHa
08th Nov 2021 13:07

Quote:
The message coming from Sage and other leaders within the profession is unanimous on this point: your first priority as a practitioner should be to educate clients on their new compliance obligations from April 2022.

My first priority is not to sell software to support an ill conceived and pointless project. My first priority is to assist my clients in complying with the law. If Sage etc. want to sell their wares, do it on their own time and at their own expense.

Thanks (2)
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By GHarr497688
08th Nov 2021 13:18

Good luck SAGE. Your gonna get egg all over ya face

Thanks (2)
Morph
By kevinringer
09th Nov 2021 09:47

My MTD policy has been very effective to date: do nothing until I have to because the MTD can has been kicked down the road so many times. I know of one practice on first hearing of MTD put all their clients on QuickBooks Online. The staff had a lot of grief trying to teach clients only to discover MTD was postponed and they could use spreadsheets. Since then almost all those clients have thrown in the QBO towel and are back to manual records. As far as the April 2022 MTD VAT change is concerned, most of my sub £85k VAT registered businesses are small scale farmers: many over pension age and live in remote parts of Wales. I will wait until March 2022 then apply for exemption on the grounds of digital exclusion. To date HMRC has accepted all but one of my MTD exemption applications so I expect HMRC to accept most of these too.

As far as MTD ITSA is concerned: will it happen? Prior to MTD VAT all my Sage clients had bought a one-off perpetual licence for less than £100 and used that software for typically 10 years before upgrading. Sage could already cope with online VAT return filing, just not MTD VAT filing. Sage made sure the MTD VAT module was only available to subscribers so all my Sage clients had to switch to subscription. We negotiated a discount with Sage which resulted in my clients paying £12/month. That's £1200 over 10 years which is a huge increase on the £100 my clients were paying previously. And yet Sage needed relatively little change to cope with MTD VAT. Since then Sage has put the prices up and my clients are now paying £30/month = £3600 over 10 years. That's a massive increase. Whilst very little change was required to make Sage MTD VAT compliant, a huge amount of change is required to make it MTD ITSA compliant. The cost to Sage will be significant. How will Sage recover this? Put the subscription up? It can't: it has already lost some of our clients with the previous price increases. So Sage is going to have to keep the price the same or risk losing far more customers. If Sage keeps the price the same, what's the incentive to make the software MTD ITSA compliant? There isn't one. HMRC decided on the latest MTD ITSA postponement after the software industry announced it was not ready. As there is no longer a financial incentive for MTD ITSA, I reckon the software industry won't be ready in a couple of years either. The software industry has already had half a dozen years to get ready.

Thanks (2)
All Paul Accountants in Leeds
By paulinleeds
13th Nov 2021 14:38

I would fully accept that larger small businesses and above must use proper software and can’t really manage their business if they are dealing with Excel cash books etc.

However, what I do not accept them is that simply because MTD is coming our way that we must ditch Excel cash books, used in association with bridging software, and all move to the cloud.

I have been an accountant at the coal face for over 36 years. I think that makes me highly experienced and in the position to give a balanced opinion. I have clients of all ages. I run my own very successful accountancy business.

Clients choose to use Excel cash books because they are simple, mostly free and are extremely adaptable. Clients don’t need to be trained how to use complicated software, whether that be cloud or desktop.

I have absolutely no issues with a client choosing to use proper software, cloud or desktop. But please, can we stop banging on about that we must use cloud would software, which is not always simple to use or flexible.

There must be a good reason to change, and I’m sorry, lots of clients like Excel as it follows a logical, simple and highly adaptable solution.

Thanks (1)
Replying to paulinleeds:
Morph
By kevinringer
13th Nov 2021 15:11

Cloud software isn't a MTD ITSA mandation: we are permitted to use spreadsheets and bridging software as we are for MTD VAT. The difference is the complexity. I've developed a simple VAT spreadsheet that I've supplied to my clients free of charge for them to their VAT and either use bridging software to file, or email it to me and I'll use bridging software. VAT is a transactional tax and lends itself to spreadsheet listing. ITSA is far more complex and whilst I've tried to develop a ITSA spreadsheet, it's too complex for clients to use, so I've abandoned it. So though spreadsheets/bridging software are permitted for MTD ITSA, I can't see their use being as extensive as with MTD VAT. That's just my opinion and you might have developed a more client-friendly ITSA spreadsheet than I had.

The problem with my clients is they don't choose Excel either. They choose nothing because they don't see the need for records. They are their business and at any point know who owes them what and who they owe money too and have a good idea how their business is doing just from experience. They're interested in the future, not the past. Recording historic transactions has no interest to them because it won't alter the future.

Thanks (1)
Replying to kevinringer:
All Paul Accountants in Leeds
By paulinleeds
14th Nov 2021 19:18

Assuming that you can get clients on to Excel, they do need to use some simple digital software, bridging software will be ideal, or you obtain csv from bank software. Clients cannot be so idle so maintain no records!! If they are they need educating.

All you then have to do is map the column heading to around 8 boxes (per the usual Self Employed I&E boxes on the Tax Return)

Nothing fancier than that!

Thanks (0)
Replying to paulinleeds:
Morph
By kevinringer
14th Nov 2021 19:34

I'm in Wales and most of my clients are farmers. Many don't have computers. Most don't have internet (landline is too far from the exchange and they live in a mobile phone not-spots, the terrain is too hilly for good 4G mobile signals). I've even got one client with no mains electricity. The average age of a farmer in the UK is 60, so even if they did have broadband etc, they're from a generation that was not taught computers in school. Spreadsheet are alien to them.

Most expenses from agricultural merchants need sub analysing between different categories eg feed, chemicals, repairs, personal, tools etc. Most basic spreadsheets aren't designed for sub analysis of expenses.

Then we've got the complications of farmhouse expenses: most of my clients have more than one farmhouse on the farm, each with different business/private elements.

And then we've got herd basis, farmers' 2-year averaging, farmers' 5-year averaging.

Most farmers also have a let property: all goes through the one bank account. So the spreadsheet will need to be able to handle that and send it through the Land and Property pages.

And 95% of my clients are partnerships so the spreadsheet would need to be able to report for each partner.

Oh, and because the farm is owned by just mum and dad (whereas son is also in the farming business), the rental income is just on mum and dad's tax return and not part of the partnership.

I'd need quite a spreadsheet to handle all that. And that is my typical client.

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