The Making Tax Digital initative aims to make it easier to comply with regulations. However, it still has risks for small-business owners like you
While HMRC’s new digital VAT initiative, Making Tax Digital (MTD) for VAT, launched on Monday April 1 – many may not have noticed the difference just yet. MTD is a key part of the government’s plans to make it easier for individuals and businesses to manage their taxes and keep on top of their finances.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. MTD is making fundamental changes to the way the tax system works – transforming tax administration to become more effective, efficient and more straightforward for taxpayers.
You might not notice any changes until you go to file your first VAT return since the initiative came into effect or perhaps even run into trouble. To make sure the latter doesn’t happen, here’s what you need to know about the new system.
If your business is VAT registered, with VATable sales above the VAT threshold, then you will need to take action, even if you already use digital VAT software.
First of all, if you’re not currently using MTD-compatible software to file VAT returns, you need to register to HMRC’s new MTD system, sign up to MTD-compatible accounting software, and then connect your MTD-compatible software to HMRC. If you’re already using MTD-compatible software to file VAT returns, you need to sign up to HMRC’s new MTD system, then make sure your MTD-compatible software is connected.
Once your accounting software is connected to HMRC’s MTD system, there are a few day-to-day tasks that you’ll need to manage to meet with the demands of the new digital VAT initiative. One of the most basic, but perhaps most important of these tasks is ensuring you keep digital records of relevant sales and purchases in your chosen MTD-compatible software. Sales tracked in basic spreadsheets, log books and scrawled on the back of a napkin will no longer be accepted.
In the old system, businesses could calculate VAT liabilities however they liked, but in the new system the accounting software will do this automatically. You also need to ensure you submit your completed VAT return through your chosen MTD-compatible software. Businesses can no longer submit VAT figures through HMRC’s old VAT portal, and you’ll only be able to file VAT returns to HMRC’s MTD system with compatible software.
One final thing to remember is to pay your VAT bill on time. The penalties for missing payments are still the same as those in the old system, so make sure you leave yourself enough in the bank to cover any upcoming bills.