September 27th, 2018
According to recent research undertaken by the Institute of Chartered Accountants in England and Wales (ICAEW), over 40% of businesses that will be affected by Making Tax Digital (MTD) for VAT are not yet aware of it. With only six months to go until MTD goes live for some businesses in April 2019, HMRC have only recently launched a major communications campaign to try and build awareness amongst small businesses.
The ICAEW survey also shows that although there has been a significant increase in the number of businesses now using accounting software, a quarter of all businesses are still using a paper based accounting system – unchanged from two years ago. Paper based records will not be permissible for MTD for VAT.
From 1 April 2019, MTD for VAT will become compulsory for VAT registered businesses making annual taxable supplies of over £85,000. New rules will make digital record keeping for VAT compulsory as well as introducing a new requirement to file VAT returns directly from software. Many businesses currently type the figures for their quarterly VAT return directly into a free form provided on the government’s GOV.UK website. In future all VAT registered businesses within the scope of MTD will have to use accounting software to complete their VAT returns.
Overall, 38% of all UK businesses now use accounting software for keeping their accounting records, a significant increase since 2016. This increase seems to have come from businesses which had previously been using a mixture of electronic and paper-based systems.
Only 54% of VAT registered businesses currently use accounting software. The proportion of all businesses relying on paper based records alone remains unchanged at 25%, and this includes 13% of those businesses that will need to implement MTD for VAT.
Of those businesses we surveyed, 34% will be relying on their accountant or tax adviser to deal with the changes for them, 20% will be buying new accounting software and 15% have done so already. However, 20% of businesses that will need to implement MTD for VAT have not yet made any preparations for it.
HMRC have issued new guidance on how VAT businesses and other VAT entities can get ready.
The guidance confirms that the pilot, which started in April 2018, is still currently in a private stage and available only to invited volunteer VAT businesses and their agents. HMRC will continue to limit the number and types of business invited to join the pilot, stating: ‘This is so we can work with software providers, testing our systems and their products on a small scale before opening Making Tax Digital to a wider audience.’
The latest guidance also states: ‘We’ll publish details of the VAT software available later in the year, when we open the VAT pilot to more businesses’
Interestingly, the guidance also advises that HMRC will give businesses until 31 March 2020 to make sure there are digital links between software products. Before that date, cut and paste will be an acceptable way to transfer information.
The exception to this is where return information is to be transferred to a software product enabled for an Application Programming Interface (an API provides a secure link between software and HMRC) and designed to submit the 9-box VAT return (such as bridging software). In those circumstances the transfer of information must only be digital.
Whilst the ICAEW says it is keen to help make MTD a success and also ensure that businesses get this right, it believes that preparation time is running out.
It is worth noting that of course, not all VAT registered businesses will be within the scope of the new rules. Around 40% of all VAT registered businesses are registered voluntarily, their turnover being below the VAT threshold. Such businesses will not fall within the scope of MTD from April 2019.
The HMRC guidance on preparing for VAT can be found here.