MTD-VAT: A vision of the future

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As from April 2019 all VAT-registered businesses with turnover above the VAT threshold must submit VAT Returns via the MTD system. But very little has been announced about how this will work or how the migration process will be managed. Matt Bailey, founder of Gbooks, peers into the future to look at how the system may operate.

VAT was, until a week ago, a sleepy backwater of the MTD project. The challenges of reporting quarterly self-assessment income, by millions of the least financially sophisticated taxpayers, monopolised the attention of HMRC, accountants and software developers alike.

But with self-assessment postponed, VAT has suddenly found itself as the only part of the MTD masterplan with a firm start date. Given a lack of official guidance, I set out below a best guess for how the MTD-VAT system will work, based both on the information released and HMRC’s approach to other taxes.

When will businesses be required to make the switch?

All we know is that the relevant businesses will be required to submit VAT Returns via the MTD system “from April 2019”.

Based on HMRC’s approach to quarterly MTD-SA submissions, businesses are likely to be required to use MTD for the first VAT Return starting after 5th April 2019. So quarterly VAT Returns ending in April, May and June 2019 should continue to use the old system.

What information will businesses have to report?

MTD-VAT Returns will be the same as those submitted now. No transaction-level data will be required, although (as for MTD in general) there will be a requirement for businesses to keep the underlying records in digital format.

Will the submission and payment deadlines be the same?

Not quite. In its response to the MTD consultation, the government said the VAT payment deadlines will be unchanged, including the additional seven days for online payment plus an additional three days if paying by direct debit. But it also stated that the deadline for submission will be one month, in line with the deadline for quarterly SA submissions. So the seven-day filing extension for submitting (and paying) VAT online is being dropped.

How will HMRC know if a firm is above the VAT threshold?

Presumably, the onus will be on businesses below the registration threshold to monitor their taxable turnover and inform HMRC if the threshold is breached. It may make sense, from a practical viewpoint, to report any breach when completing a VAT return, and then move to the MTD system the following quarter.

What happens if turnover drops back below the VAT threshold?

HMRC runs a separate system for MTD, and will migrate taxpayer data across to this system as required. Once they’ve undertaken this process, and given that any new data will be added to the MTD system, it’s unlikely HMRC will give businesses the option of switching back if turnover subsequently falls. So moving to MTD will be a one-way street.

What differences will businesses notice?

Businesses mandated to use the MTD system will need to submit VAT returns using MTD-compatible software. They will no longer have the option of filing the VAT returns using HMRC’s online portal.

What differences will accountants notice?

Accountants wishing to submit MTD-VAT returns will also need the appropriate authority from the client. The adviser will need to register for HMRC Agent Services, verify their identity and periodically renew this verification. Any existing VAT authorisations will be transferred across from the current system.

What about accessing previous submissions and other VAT data?

The current online portal contains records of previously submitted VAT returns along with information about payments, refunds, penalties, interest, surcharges etc. This data will be available to software providers via various new APIs.

Based on HMRC’s approach to other taxes, it will continue to make this data available via the entity’s Digital Tax Account. Businesses will need to go through a two-step verification process to access the data, thereby preventing access by third parties such as accountants.

So is there any good news?

HMRC is putting a system in place allowing software to do more and to access more information for the user. Businesses or accountants will be able to register for VAT, enrol for schemes, file returns, view their VAT account and authorise new clients (or their agent) using a single system. While this integration may not set the world on fire, it may one day make VAT compliance a little easier.

About Matt Bailey

matt_bailey

Founder of Aegia Cloud Systems (Gbooks), the leading cloud-based tax and accounts system.

Replies

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21st Jul 2017 12:21

Before HRMC can mandate use of software, surely accounting software is going to undergo a massive change and actually compute VAT correctly in 100% of cases?

Good luck with that. No software we use coped with services business coming off flat rate correctly, let along partial exemption and some other more exotic areas.

I think we will quickly see a further push back for limtied companies as it would be virtually impossible to integrate MTD and final accounts inside of 18 months (so presumably killing iXBRL and all the integration work HRMC and Companies House have done), not to mention the fact you would end up with a "half in half out" scenario for (say) a December 2019 year end.

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By cbp99
21st Jul 2017 15:45

You say: "The current online portal contains records of previously submitted VAT returns along with information about payments, refunds, penalties, interest, surcharges etc."

Which portal is this - it's not on the one I see, other than the previous 6 or so returns.

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By mabzden
to cbp99
22nd Jul 2017 14:43

It's harder to find than it once was. But it is still there.

If you log on, click "More VAT Details" and then "View Payments and Repayments" you can then access the VAT Account. This contains the info mentioned.

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to mabzden
24th Jul 2017 16:04

Sorry to be thick, but is this the standard HMRC agent on-line service? I cannot see 'More VAT Details' for any clients.

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By mabzden
to accountsdragon
24th Jul 2017 20:05

It looks like you need to be logged in as the business to see the info.

The agent system is a bit more frugal with information. Maybe that's all part of the cunning plan so we can't wait to use MTD software.

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By cbp99
to mabzden
24th Jul 2017 17:33

mabzden wrote:

It's harder to find than it once was. But it is still there.

If you log on, click "More VAT Details" and then "View Payments and Repayments" you can then access the VAT Account. This contains the info mentioned.

Like accountsdragon i see no sign of "More VAT Details" on my screen.

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24th Jul 2017 10:13

Is it coincidence, or is this new launch date deliberately timed for the start of formal Brexit when people's minds will be focussed on that huge event - or [***]-up depending on whether you're as cynical about the process as I am?

That aside, how confident can we be that this new deadline will be met? Seems to me that MTD is a project in some chaos with start dates and requirements changing on a regular basis.

I'll believe this latest "start date" will happen when it actually comes to pass.

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to Agutter Accounts
24th Jul 2017 17:45

Most traders won't be affected by Brexit.

Not in the sense that they need to change the way they run their businesses. The majority of traders neither import nor export.

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to lionofludesch
25th Jul 2017 10:25

True. They won't be affected directly.

However, I am noticing since the turn of the year signs of clients' turnover going down, hinting that all is not well in the economy as a whole.

The worry about MTD is that it will add to the non-trading obligations of the already stretched small business/sole trader clients I serve. And continued uncertainty about the direction government is taking on this project at a time of general upheaval is most unwelcome.

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to Agutter Accounts
25th Jul 2017 10:40

Sure - turnover will go down. It's because businesses are too busy doing the Government's job for free.

The Brexit thing was totally unnecessary. Just some cocky, overconfident idiot thinking he could carry the vote without any real campaigning whatsoever.

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24th Jul 2017 10:14

Quote: 'Based on HMRC’s approach to other taxes, it will continue to make this data available via the entity’s Digital Tax Account. Businesses will need to go through a two-step verification process to access the data, thereby preventing access by third parties such as accountants.'

So basically repeating the same mistake yet again. We need access to this information. Many of my smaller clients have no interest in a Digital Tax Account and even less inclination to use any part of it.

HMRC needs to realise not everyone wants to 'go digital' and indeed many don't want to go near a computer, hence why they employ us in the first place.

MTD needs to be as simple as possible and agents need better access using agent codes not yet another log in process- just how many passwords are we expected to keep??

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By SXGuy
to Ian McTernan CTA
24th Jul 2017 10:26

From what i understand the information will be available to software developers api, meaning we should have access via software which obviously requires authorisation via 64 8.

I think the 2 step verification is only limited to personal tax accounts and shouldn't be confused with our access via other means. I'm hoping anyway.

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By daas49
24th Jul 2017 10:17

what arrangements will there be for the submission of VAT returns by voluntarily VAT registered businesses whose turnover never exceeds the VAT threshold ?

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to daas49
24th Jul 2017 10:29

They'll presumably be on the existing system.

Lucky us, we'll have two systems to work with -, one that has been working fine for years and another that nobody has asked for and no accountants and taxpayers can see the benefit of.

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24th Jul 2017 10:25

I think I will wait for the film and see the end result after the floor has been littered with the rushes.

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24th Jul 2017 10:30

I presume the sun in the picture above is it setting on common sense?

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24th Jul 2017 10:51

Assuming software is available. The new IR35 rules have put paid to many working on the project. If a client wants an agent to pepare the return (as payroll is) then the same software has to be available to the agent.
Personally I don't think MTD will work or even happen in its present form. So for 2019 read 2025.

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24th Jul 2017 11:00

Quote: 'Based on HMRC’s approach to other taxes, it will continue to make this data available via the entity’s Digital Tax Account. Businesses will need to go through a two-step verification process to access the data, thereby preventing access by third parties such as accountants.'

As usual, try and push the accountants out of the way because they are the ones who identify 97% of HMRC errors and they (most of them) don't roll over and let HMRC bully them into submission

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24th Jul 2017 11:02

And here we go again...

Quote:
...there will be a requirement for businesses to keep the underlying records in digital format.

Now what PRECISELY does this actually mean?

Do HMRC, Treasury and/or Government actually fully understand what the phrase "Digital records" means and implies in the real World where I live?

Presently, we maintain ALL client VAT records in Excel.

Which, by any definition known to mankind (And woman kind, naturally) is a digital process based on binary processing logic: I punch in data from bills, invoices et al, on a QUERTY analogue keyboard, which uses the global standard of ASCII:

Quote:
ASCII stands for American Standard Code for Information Interchange. Computers can only understand numbers, so an ASCII code is the numerical representation of a character such as 'a' or '@' or an action of some sort.

ALL computers interface with the World of humans (i.e. HMRC, Treasury, Politicians excluded!) by a process called A to D: Analogue to Digital Conversion: usually carried out by A-to-D Converters.

Ergo, Excel Spreadsheets are a Digital Record! Since the data is held digitally and only converted back for puny humans when we need to look at it on a VDU or print it on paper.

It is not much of a surprise, EVERY Government initiative, led by loads of high sounding acronyms and stirring sound bites such as "Joined Up Government" etc, etc, yadda, yadda, yadda, have failed, dismally.

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By DMGbus
24th Jul 2017 11:48

So, which software will make the specialised VAT calculations (and at what cost) for the Following:
1. Partial exemption
2. Margin Scheme
3. Retailer specicial schemes
4. Annual adjustments for the above where necessary?

Currently if using any mainstram desktop or cloud based systems it is a matter of exporting data to Excel to do the necessary calculations (quite complex ones in some cases) which are seemingly beyond the ability or development budget of typical software [for small businesses] suppliers.

Presumably there will be double cost for clients liable to the scenarios that I list:
i. Cost of new software to replace existing software (Existing Excel software that is integrated with the necessary special calcuations Excel will need to be made more complex)
ii. Cost of add ons to do the special calculations
iii. Training costs to use the new software (as it will undoubtedly be more complex than an existing Excel cashbook - instead of a simple one line entry it will be necessary in some software to create payments via a special form onscreen with lots of boxes to be populated)
iv. Client gives up, too much hassle, so needs to pay accountants or bookkeepers for the new hassle under "Making Tax Difficult 2" (MTD2 let's call it).

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to DMGbus
24th Jul 2017 13:23

DMGbus wrote:

So, which software will make the specialised VAT calculations (and at what cost) for the Following:
1. Partial exemption
2. Margin Scheme
3. Retailer specicial schemes
4. Annual adjustments for the above where necessary?


The answer is none of them because MTD does not require it. See https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil... page 201 paragraph 20 - HMRC has released the software companies from digitising this instead saying the taxpayer can do it on paper. HMRC want to digitise transactions to reduce errors but what aspect are taxpayers more likely to get wrong: transactions or scheme calculations?
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By Briar
to DMGbus
24th Jul 2017 16:31

I agree totally. Just as with the initial pronouncements by HMRC on MTD (which we all rubbished - and eventually HMRC saw sense and delayed the project (sine die?), when one starts to look at the areas of difficulty of VAT (set out by DMGbus above), maybe someone with some actual knowledge of preparing VAT Returns and the difficult areas will change the assertive and uninformed announcements by HMRC. If they really want to go ahead, consultations should take place with those that know!!! This will take longer than April 2019.

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24th Jul 2017 15:21

Realistically, VAT is just too complicated for off the peg accounting software.

Using software to press a button and automaticaly submit your return is far-fetched.

Submitting your return under the effective software we already have and keeping the underlying records on software - bit more realistic.

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to lionofludesch
24th Jul 2017 16:25

Sorry, but I have to disagree with "Realistically, VAT is just too complicated for off the peg accounting software."

My company was formed in April 2010 and since then has submitted 4 VAT returns a year at (more or less) the press of a button. Via Xero, as it happens, in our case.

I would argue that, for the majority of "normal" situations, bookkeeping software can file accurate VAT returns without any issue.

Yes, there are special schemes and situations that require additional and, sometimes, quite complicated calculations but that's not a requirement for most businesses.

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By Briar
to Adrian Pearson
24th Jul 2017 16:35

But when will HMRC realise that there are special schemes and complicated calculations (e.g. partial exemption)? One size will not fit all and HMRC need to realise this.

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to Adrian Pearson
24th Jul 2017 17:58

Adrian Pearson wrote:

Sorry, but I have to disagree with "Realistically, VAT is just too complicated for off the peg accounting software."

My company was formed in April 2010 and since then has submitted 4 VAT returns a year at (more or less) the press of a button. Via Xero, as it happens, in our case.

I would argue that, for the majority of "normal" situations, bookkeeping software can file accurate VAT returns without any issue.

Yes, there are special schemes and situations that require additional and, sometimes, quite complicated calculations but that's not a requirement for most businesses.

Contrary to what you imply, imho, VAT is the biggest barrier to the MTD Utopia.

I think that there are more "special schemes" and abnormal situations than you realise. You may not need partial exemption or retail schemes or margin schemes or the capital goods scheme or flat rates or fuel scale charges but many businesses do. The problem will be - if HMRC make the adjustments too complicated to bring into the accounting system, they'll be left for the next VAT control visit, leading to exactly what HMRC claim they wish to avoid - a loss of revenue.

But more to the point, the VAT Return software is undoubtedly HMRC's best offering, used, so I heard at the weekend, for well over 95% of all VAT returns. That includes a substantial proportion of those submitted by agents.

Why dump it?

If it ain't brock, don't fix it.

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to lionofludesch
24th Jul 2017 19:10

Now what on earth do Badgers have to do with it?

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By papafur
to Adrian Pearson
24th Jul 2017 19:53

Although you are probably right, will HMRC accept that there are exceptions and allow them to continue using the current methods.
My experience of bureaucrats is that they will try and put a square peg into a round hole. What is even more disturbing is they will continue to try even after it has failed.

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to Adrian Pearson
25th Jul 2017 07:45

How does your company deal with the following:

* fuel scale charges;
* purchases on Amazon which originate from outside the company's home country(+);
* proving the content of box 5 (net inputs) is correct, and correctly excludes exempt & beyond-the-scope items;

I'd like to see more detail from Xero (and similar vendors) about how it teaches itself to get VAT right. Do you know on Xero's website where it provides such proof?

(+) I'd guess UK in your case. In my case, it's several UK entities, plus companies in 3 EEA countries and companies in North America.

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to martinengland
25th Jul 2017 08:56

martinengland wrote:

* proving the content of box 5 (net inputs) is correct, and correctly excludes exempt & beyond-the-scope items;

Box 5 ? Surely, you mean box 7.

Box 5 is the amount you owe to - or are owed by - HMRC.

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24th Jul 2017 16:39

This also comes back to the c*** up with the 2016/17 tax calculations!!!
Go take a cold bath MTD people.

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to david wilks
25th Jul 2017 13:02

The fiasco concerning the 2016/17 SA tax liability calculations directly affected me and my wife, and that was the moment when I became certain that HMRC and HMG are simply not capable of providing us with a tax system that can be reduced to simple algorithms for use in universal software. During my many years in business, and in my leisure pursuits also, I have learned how to recognise the signs which tell one that an organisation is out of its depth and incapable of fulfilling its commitments. HMRC/HMG are flashing those warning signs to me.

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to C.Y.Nical
25th Jul 2017 13:22

Thank you for that.

What is being ignored by everyone on the MTD, rush to digitise and all round "let's make all businesses do as we say" merrygoround is that the warning lights stopped flashing a long time ago. They are currently on a steady bright red.
I have said it before and will repeat, c'mon guys. Man up, get your own house in order before you have the audacity to dictate to others how to run their businesses vis a vis keeping records.

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By papafur
24th Jul 2017 19:57

Could someone advise if those on the annual VAT submission cycle will need to go through with this farce on a quarterly basis?

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to papafur
25th Jul 2017 08:55

papafur wrote:

Could someone advise if those on the annual VAT submission cycle will need to go through with this farce on a quarterly basis?

The consultation responses only refer to quarterly VAT. There isn't a single hit for "annual accounting". It is as if it doesn't exist. I suspect that MTD-VAT would be annual but if the trader's turnover exceeded the VAT threshold they would have to submit quarterly MTD-TAX from 2020 onwards. Incidentally I have a lot of farming clients who have monthly VAT returns. The consultation seems unaware that some traders submit monthly VAT returns. MTD-TAX does permit more frequent filing than quarterly but I don't know about MTD-VAT.
It is important that we understand that there won't be one single quarterly MTD filing: businesses will be required to make MTD-VAT filings and at least quarterly MTD-TAX for each separate business eg a sole trader with a let property will be required to make separate quarterly filings for each and an annual filing for each s0 4xMTD-VAT, 5xMTD-TAX for each trade, 5xMTD-TAX for each property business and the annual declaration. I've also seen reference to the need to still complete an SA return! It reminds me of RTI. HMRC said how they were getting rid of the end-of-year return (not that we had ever said it was a problem) and instead replace with 52 in-year returns and oh yes, an end of year EPS. So we still had to file an end-of-year return.
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to kevinringer
25th Jul 2017 09:20

I confess that I haven't paid much attention as I don't have any clients on annual accounting but I seem to tecall some oblique reference to those on annual accounting having to sumit their MTD annually too.

Browsing through my own clients, I have some 63% who need some sort of adjustment to their basic records before submitting their VAT returns. Extrapolating that small sample to a national average is probably a bit of a stretch - unrepresented traders are likely to be simpler cases - but there's no doubt thar the number of affected businesses will be in the millions.

I still say the compromise is submit returns as now with MTD records separately (and not necessarily within the same very tight time limit of one month).

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25th Jul 2017 10:02

I see software companies are still trying to second guess what will actually happen and recoup some of their losses incurred thus far.

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to thomas34
25th Jul 2017 10:20

I don't think software companies have had a great deal. HMRC have said "this is what we want - you'll need to develop it at your cost." Then they come back a couple of years later and say "we've changed our minds, now we want this and you'll have to change the softwae at your cost."

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25th Jul 2017 15:52

I received the following notification from a tax product I subscribe to:

HMRC has announced that Making Tax Digital (MTD) will become mandatory from April 2019 for VAT purposes only, and will apply to businesses with turnover above the registration threshold.

MTD will require the submission of transactional data to HMRC by electronic means (as opposed to manual input of total figures in the return form, as at present). A compatible accounting software package will have to be used, at least for the submission itself. It will be possible to keep basic accounting data in a spreadsheet, provided that the data can be recognised by the submission software.

This suggests that transactional data is required, whereas the article suggests that it doesn't.

The accountancy firm that provides audit services for my company also believes that transactional data is required.

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By mabzden
to peterkilley
25th Jul 2017 16:27

Here's a quote from the consultation document:

"The government has therefore decided that from April 2019 the MTDfB VAT updates will only include the existing dataset from the current (nine box) VAT return."

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to mabzden
25th Jul 2017 16:50

mabzden wrote:

Here's a quote from the consultation document:

"The government has therefore decided that from April 2019 the MTDfB VAT updates will only include the existing dataset from the current (nine box) VAT return."

Quite, but MTD-TAX required every transaction digitised even though only the SA-SE schedule P+L and BS are transmitted to HMRC. I believe HMRC are after the same for VAT: 100% digitised transactions but with only the existing VAT return totals transmitted to HMRC.
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to peterkilley
25th Jul 2017 16:45

peterkilley wrote:

I received the following notification from a tax product I subscribe to:

HMRC has announced that Making Tax Digital (MTD) will become mandatory from April 2019 for VAT purposes only, and will apply to businesses with turnover above the registration threshold.

MTD will require the submission of transactional data to HMRC by electronic means (as opposed to manual input of total figures in the return form, as at present). A compatible accounting software package will have to be used, at least for the submission itself. It will be possible to keep basic accounting data in a spreadsheet, provided that the data can be recognised by the submission software.

This suggests that transactional data is required, whereas the article suggests that it doesn't.

The accountancy firm that provides audit services for my company also believes that transactional data is required.

It may be ingenuous to suppose that the goalposts will remain in place for two more years.

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03rd Aug 2017 10:01

Thank you, Matt, for a succinct and interesting read. As software developers we have had to divert our attention away from MTD for those below the VAT limit and are now looking at launching a dod-dle MTD ready VAT product soon.

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