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How to manage small business clients through MTD for VAT

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What are the options for accountants who have voluntarily VAT-registered small business clients who may not be willing to pay for accounting software?

3rd Aug 2021
Tax Writer
In association with
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The Making Tax Digital for VAT regime (MTD for VAT) has been in place for periods starting on or after 1 April 2019 for most businesses above the VAT threshold. While many businesses (and their accountants) are now very familiar with the rules, there are changes on the way.

From their first VAT period starting on or after 1 April 2022, all VAT registered businesses must comply with MTD for VAT, even if their taxable turnover is below £85,000. This includes self-employed individuals and landlords. The extension is expected to impact around 1.1m VAT registered businesses.

In line with these changes, firms need to decide how to engage with smaller clients who will enter MTD for VAT for the first time. Not all of these clients will be ready to start using fully featured accounting software, but there are a number of challenger banks, such as ANNA Money, offering free MTD solutions that could be ideal for accountants and their lower value clients.

Extension of MTD for VAT

From April 2022 all VAT registered businesses must comply with MTD for VAT. The effect of this extension will differ from client to client. The fact that Covid-19 has inflicted untold stresses on businesses also needs to be considered: while some clients may be focused (all too rightly) on recovering in a post-freedom day UK, MTD for VAT is not something that can be swept under the rug.

There are some key questions that practices need to consider ahead of the April 2022 MTD for VAT extension:

  • How can smaller clients be MTD compliant?
  • What services should firms offer, and how can those services be cost-effective?

Requirements of MTD for VAT

While larger businesses are already familiar with MTD for VAT, the regime may be new to smaller businesses that have not had any previous dealings with it.

Broadly, MTD for VAT requires businesses to keep certain VAT-related records digitally and file VAT returns online with HMRC within functional compatible software.

Common examples of how this is achieved are all-in-one software programmes (such as those offered by Xero, Sage and so on), or bridging software such as API-enabled spreadsheets, which can incorporate the relevant MTD APIs to connect with HMRC’s systems. Sometimes, a combination of compatible software, products, and applications are used to be MTD compliant.

Smaller clients who will join MTD for VAT from April 2022 may not need sophisticated accounting software packages such as Xero. As a result, it may be more cost-effective for such clients to use API-enabled spreadsheets, or another form of bridging software, to comply with MTD for VAT.

Increasingly, digital business bank accounts are offering expense categorisation and integration with MTD-filing software. Eduard Panteleev, CEO of ANNA Money explained: “Businesses are rightly focused on maximising profits and reducing business costs rather than on MTD compliance. We are keen to work with advisers to support that transition with free tools to categorise expenses automatically and file VAT returns. The idea is to make MTD easier for these businesses.”

Digital links

Another core component of MTD for VAT is the need for digital links. As HMRC puts it, once data has been entered into software used to keep and maintain an “electronic account” (the information that a taxpayer must keep digitally under MTD for VAT), any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software, to create the “digital journey”.

This means that manual transfers of data, including the use of “cut and paste” or “copy and paste”, are not considered digital links. When MTD for VAT was first introduced in April 2019, there was a soft landing period for digital links, which meant that businesses did not need to have digital links in place until their first VAT return period starting on or after 1 April 2021. During this time, practices such as “cut and paste” were accepted.

However, the soft landing period has now come to an end, meaning that newly mandated businesses into MTD for VAT from April 2022 should ensure they have approved digital links in place.

Maximising services

While accountants naturally want to help their clients meet their compliance obligations, there’s no getting away from the fact that firms do, ultimately, need to make a profit to survive.

When it comes to clients who will be mandated into MTD for VAT from April 2022, the key issue facing firms is how to make MTD for VAT profitable with such clients, taking into account any budget constraints that lower-turnover clients may face.

Ultimately, value should come from time-saving and cost-effective solutions. For firms, this can mean:

1. Review existing offerings

The upcoming MTD for VAT extension provides a perfect opportunity for firms to review their MTD for VAT pricing and determine whether it is fit for purpose. Key questions to ask include:

  • How much time and resourcing will be spent meeting clients’ MTD for VAT obligations
  • Whether the frequency of invoicing is appropriate (e.g. monthly invoicing for clients versus quarterly)
  • Whether firms wish to charge additional fees on ad-hoc advisory or compliance work associated with the MTD for VAT extension - for example, bringing a client up to speed with the regime, or assisting a client move from a paper-based to a digital record-keeping system

2. Make the most of free software

In order to comply with MTD for VAT, businesses must have functional compatible software. However, HMRC does not offer its own software, meaning businesses must make use of third-party providers to meet their MTD for VAT needs.

From a practice perspective, firms may find it more efficient to have one preferred software product for MTD for VAT, where possible. This is because having clients use one core MTD product ensures familiarity with the software among practice staff, and avoids the issue of having to train staff (and in turn clients) to use multiple software products.

HMRC provides a list of recognised compatible software providers for MTD for VAT, from all-in-one solutions to bridging software. Bridging software remains a very viable option for clients with lower turnovers, who may not be inclined to pay higher fees for a comprehensive cloud-based software package.

Panteleev puts the case for how digital banks like ANNA Money can play a part ANNA Money in helping clients with their digital record-keeping from automated expense capture through to categorisation, maintaining digital records and filing the returns with HMRC. 

“We developed ANNA to support business clients and their accountants by taking away those administrative burdens. If clients are comfortable with Excel records, that can be handled by bridging software. This not only saves time, but it can also give clients more comfort in their transition to MTD for VAT.”

3. Consider resourcing

From the outset, firms should determine whether existing resources can cope with the April 2022 transition period: do any additional staff need to be hired or would a reallocation of existing staff solve any potential problems?

When considering resourcing, bear in mind that while some clients may be happy to file their own MTD for VAT returns and monitor their digital record keeping, others may need a lot more hand holding through the process.

It’s also worth preparing for the possibility that, when faced with the prospect of MTD for VAT, some clients might want to say goodbye to it all and deregister for VAT. This brings its own tax implications, and such clients will need appropriate advice to determine if such a decision is the right choice for them.

4. Saving time on client communication

Clients entering MTD for VAT are likely to have a number of questions about the regime.

Given MTD for VAT has been around since April 2019, no practice wants to spend significant additional time responding to new rounds of questions about MTD for VAT (if it can be helped). To that end, HMRC has issued a stakeholder communications pack for Making Tax Digital, which covers both VAT and Income Tax.

Practices can use this communications pack, including the frequently asked questions portion of the guidance, to educate clients about their obligations and answer their most burning questions, saving time in the process.

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.

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