The MTD for VAT action planby
With the next intake of VAT-registered businesses below the threshold going into the Making Tax Digital (MTD) online filing regime on 6 April 2022, accountants need to start preparing for a number of different challenges.
My previous article looked at ways practices could tackle the MTD for VAT needs of smaller clients including how free solutions such as software from the likes of Anna Money could be part of the solution. In this follow up article, we’ll cover how firms should engage with all their clients affected by the MTD for VAT changes.
Changes taking place and when
To recap, the next phase of MTD will take place in discrete steps, starting from the MTD for VAT extension in April 2022:
- April 2022: All VAT registered businesses must keep digital records and update HMRC each quarter on their income and expenses
- April 2022: MTD for VAT digital links requirement enforced; MTD for income tax (MTD ITSA) pilot scheme expands
- April 2023: Self-employed and landlords with a turnover of at least £10,000 must keep digital records and making submissions under MTD for ITSA.
Eduard Panteleev, CEO of ANNA Money, explained his company’s thinking about the challenge ahead: “The MTD for VAT extension means accountants need to work out how to ensure all their VAT registered clients are compliant. We believe that many of these clients can be served efficiently without the need for complex or expensive accounting software. Our free bridging software means that businesses who are used to keeping records in Excel can continue to do so and still meet HMRC digital links requirements.”
The challenge for practitioners is to communicate what is required and when to different groups of clients. With the MTD for VAT extension in April 2022, practitioners can go back and dust off the plans they prepared for MTD 1.0 in 2019 and adjust them for the next wave of clients.
It’s always worth remembering there’s no one-size-fits-all solution for a change affecting so many businesses. Clients and practices will approach the MTD for VAT extension differently, but there are some general principles that firms can use as a guideline.
Step 1: Identify and segment your client base
Within a practice, clients will typically fall into three categories:
- Group 1 - Clients who are already within MTD for VAT (VAT registered with taxable turnover above £85,000)
- Group 2 - Clients who will be within MTD for VAT from April 2022 (VAT-registered clients with taxable turnover below £85,000)
- Group 3 - Clients who aren’t VAT registered and so won’t be impacted by the MTD for VAT changes.
Ahead of April 2022, your practice needs to communicate with the first two of these client groups.
Group 1 should be reminded of their ongoing MTD for VAT obligations and practices should check in to confirm that such clients remain compliant with MTD for VAT.
In particular, clients in Group 1 should be reminded that the digital link soft landing period has now ended. Equally, if it transpires that some Group 1 clients are still not within MTD for VAT, offer to bring them into the fold.
Group 2 clients should be informed of their upcoming obligations to join MTD for VAT from April 2022 and practices should outline what is required under MTD for VAT (digital records and MTD-compatible software).
Step 2: Early engagement
April 2022 may seem like a long time away, but once your practice has identified and reached out to all relevant clients, time will quickly tick away, not least for clients who may need to move from a fully paper-based record-keeping system to a digital one.
Speak to clients as soon as possible to get them up to speed, especially those in Group 2. This should help prevent a last-minute rush to be ready for the April 2022 MTD for VAT deadline.
Step 3: Consider early adoption
Although MTD for VAT will be mandated for all clients who are VAT registered from their first VAT period starting on or after 1 April 2022, it is possible for clients who are VAT registered but have taxable turnover of less than £85,000, to voluntarily opt into the MTD for VAT regime now.
It may be worth encouraging some smaller clients to consider early MTD for VAT adoption, particularly if they already have solid digital record keeping and can easily transition to MTD-compatible software or use digital links.
Moving clients early will help them get used to the regime sooner rather than later, while also staggering workloads for your practice.
Step 4: Determine timescales
After early adoption has been considered, practices should identify which VAT return period will first fall into the MTD regime for their clients, and when returns should be filed. Workflows can then be prioritised, to ensure that no clients entering MTD miss their first filing.
Clients should also diarise reminders of when their VAT filings are due. ANNA Money, for example, sends clients reminders about upcoming VAT filing deadlines, meaning no return should be missed.
Step 5: Confirm compliance
Once your practice is aware of which clients need to transition to MTD for VAT and when they will make the move, the final step is to make sure those clients are supported as they put systems in place to comply with MTD for VAT.
Just what a client has to do to become MTD for VAT compliant will vary. Some who already keep digital records and file digital returns – the majority of VAT registered businesses – may have little trouble making the final switch to compatible software.
Other clients may struggle, especially where paper-based records, or poor record-keeping processes, are still the norm.
Ultimately, each client moving to MTD for VAT should ensure that they, as a minimum:
- have functional, compatible software in place (noting that free software is available)
- Have digital links in place (where required)
- Can maintain digital records.
Step 6: Manage workflows
Transitioning smaller clients to MTD for VAT will be no easy feat, but early engagement and appropriate MTD software selection can help the run-up to April 2022 be as painless as possible.
However, once April 2022 rolls around, your practice needs to ensure it can manage multiple filing deadlines for different clients, and keep track of which returns need to be prioritised over others.
Here, good software can be your friend. ANNA Money, for example, has an accountant view that can save time by providing access to clients’ latest financial data.
Finally, remember MTD for ITSA
Although practices should prioritise getting their clients ready for Making Tax Digital for VAT in April 2022, it’s worth keeping in mind that MTD for VAT is just one piece of the MTD puzzle.
There’s a huge amount of activity going on from all the software companies to ensure that they’re ready for this big change, but there are also going to be solutions from Fintechs such as Anna Money that may be ideal for smaller businesses who don’t need full accounting software.
When you speak with your clients about MTD for VAT, there is also an opportunity to engage with clients who will be impacted by MTD ITSA.
Although mandatory reporting under MTD ITSA is not due until after April 2023, a “heads up” email to relevant clients will at least put them on notice that further changes under Making Tax Digital are coming, and that those changes will arrive sooner rather than later.
It may also give some clients (and your firm) the opportunity to try out the MTD ITSA pilot, and get a head start on 2023.
Small businesses and freelancers use ANNA Money for everyday business banking, invoicing and expenses. As an accountant, ANNA allows you to access your client’s up-to-date financial data.