Getting prepared for the next phase of Making Tax Digital for VAT

Making Tax Digital (MTD) isn’t a new concept. But as the industry rides out the wave of phase one, it’s time we look ahead in preparation for the next phase of MTD for VAT. 

From April 2022, MTD for VAT will extend its reach to approximately 1.1 million VAT registered businesses that fall under the £85k annual turnover threshold. It’s the next stage in the government’s 10 year strategy for MTD, soon followed by MTD for ITSA  in April 2023.

What is MTD?

MTD is HMRC’s vision for a simpler tax system. It’s an initiative aimed at closing the tax gap, while ensuring that the flow of information from source records to tax payable is efficient, scalable and reliable. It’s the modernisation of the UK tax system.

As it currently stands, clients above the VAT threshold of £85k must file VAT returns online using HMRC-recognised MTD software, while for those under the threshold, it’s optional. However, in April 2022 the requirement will be extended to all VAT-registered businesses. 

How MTD can benefit your practice

According to HMRC, they lost out on £10bn of VAT in the 2018/19 tax year. MTD provides the opportunity to prevent this from happening in the future.

As well as benefiting HMRC, your practice can also benefit, with greater visibility of your clients’ financial situation. MTD may feel like a burden, but it can help you and your firm get greater clarity on client cash flow and provide more time for you to focus on the more valuable aspects of advising. 

For example, by keeping accurate digital records, you’re able to use that data to forecast profitability, understand cash flow and ultimately grow your clients’ business in a sustainable way. It also means you have a single ledger source of truth. Used one day for compliance, the next for internal business reviews, and the following to raise the required funds.

By having your clients on Xero you know that they’re MTD compliant, allowing you to spend more time to offer more value to your clients.

Preparation is key 

The next phase of MTD for VAT affects all businesses that have voluntarily registered for VAT and are below the £85k turnover threshold. 

How should I prepare my practice and clients? 

  • Get your Agent Services Account setup with HMRC, if you haven’t already
  • Plan, by segmenting your client base and understanding when they’ll be impacted by the changes
  • Review your onboarding process, our bootcamp sessions are running throughout the Autumn to provide support
  • Get your clients familiar with  digital record keeping now (they’ll thank you for it later)

My advice to accountants and bookkeepers in this area is very much around understanding the challenges these clients face in an MTD environment. Whether it’s the move from paper or spreadsheets to digital record keeping, clients providing this information to you digitally will help reduce errors and streamline and declutter their processes (and yours). This is where digital solutions can come into their own. 

Currently using spreadsheets?

Spreadsheets can still be used to keep digital records; but practices will require bridging software to enable clients to submit VAT returns digitally. Xero’s bridging software feature is available in all plans that support VAT at no extra cost (note the bridging software solution is not available for those on the Xero Flat Rate Scheme). This allows businesses to continue using spreadsheets to calculate VAT and keep digital records. 

Bridging solutions for this demographic (under £85k annual turnover) will likely be prominent, but be mindful that this can be tricky as it’s only a specific format that will ensure compliance with digital links. Also, by continuing with spreadsheets your practice and your clients will not be enjoying the true benefits of digitising tax through MTD.

Getting started with MTD for your clients

Firstly, ensure your clients are signed up for MTD. You can either sign up each of your clients  individually or have them sign themselves up directly through the HMRC website.

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Once registered, it can take up to 72 hours to receive confirmation. When you receive confirmation from HMRC, you will then need to connect Xero to HMRC in order to use Xero for your MTD VAT returns. It’s important to note that even if you’ve previously been submitting these through Xero, you’ll still need to sign up for MTD with HMRC. Once this is done, you’ll be away.

From the first launch of MTD, we can see clients often leave it to the last minute. Unfortunately you don’t have that luxury. That’s why we suggest making a plan now and communicating it with your clients as soon as possible.

What are you waiting for?

This is a significant change for small businesses and our industry as a whole. April 2022 will be here before you can say “Making Tax Digital”, so it’s essential your clients are up to date with the latest news and timelines moving forward. Check out our webinar, Prepare your practice for the next phase of MTD, for more information on this second phase. See you there!

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