Making Tax Digital – SMEs still not registered or prepared

Hillier Hopkins LLP

Chartered Accountants & Tax Advisers

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The Making Tax Digital, MTD, regime for VAT was introduced on 1 April 2019. It requires, amongst other things, that all VAT registered businesses with a taxable turnover in excess of £85,000 file their VAT returns online via MTD compliant software.

But, despite the MTD VAT regime being in place for over a year, many businesses are still struggling with their VAT returns.

The polling company Ipsos Mori was commissioned by HMRC in March to understand the record keeping of businesses and the scope for errors in preparing VAT submissions. The results are concerning, leaving businesses open to fines and unnecessary cost.

The survey found that businesses approach MTD in one of three ways – a fully automated system with good digital links at every stage, a partially automated system with some digital links, and a manual system relying on bridging software to provide the necessary digital links only when required.

The research did not indicate the number of businesses in each of these categories but did show that the scope for error increases the more a business moves away from a fully automated system.

These findings echo in part our own experiences, with clients not fully prepared for further changes to the MTD regime.

There are still a sizeable number of businesses that have yet to register for MTD despite the need to do so. Businesses, particularly with the COVID-19 pandemic, have a hundred and one things to do and many will simply have not found the time to register.

COVID-19 has also, sensibly, seen the Government delay the requirement to include digital links VAT returns until April 2021.

The term ‘digital link’ is, in itself, complex. There is little guidance on the subject. In essence, HMRC’s view is that, from the point at which data is entered into the accounting system to the point that the return is filed, should be linked without further human intervention. The difficulty arises where the mandatory information is stored in several different systems that do not ‘talk’ to each other. As an example, a spreadsheet that records the daily takings is a digital record in its own right. If this is generated from the till system, the spreadsheet needs to be linked to the accounting system with no human intervention. Contrast this with the retailer who manually records the daily takings in a book, taking the details from the till. He/she can manually enter the daily figures by journal into the accounting software.

The truth is that it is very difficult to link a spreadsheet to an accounting system without further human intervention. Some of the more advanced bridging software can get around this by importing the spreadsheet into its template and then allowing the operator to link using formulae. Copy/cut and pasting of results is not allowed, but the simple “=” function in excel and then locating the cell(s) is a digital link.

The guidance on digital links woeful and the delayed timing of their introduction, just three months after Brexit, surely has to be questioned. It is likely that many businesses will be caught out.

The current VAT threshold is £85,000, although it is rumoured that this might fall in the autumn statement. Many businesses that currently do not reach this turnover threshold have registered for VAT. And whilst they do not need to move to a MTD-compliant accounting software package, the way VAT returns are to be filed will change.

All VAT registered taxpayers’ records will be transferred to the new HMRC platform that operates MTD in early 2021. This does not mean that those that currently do not need to file under MTD will be expected to do so at that point. However, just what the VAT return filing process for these businesses will look like has not been announced, making it very difficult for them and their agents to prepare. From 1 April 2022, all VAT registered businesses will be required to file their VAT returns under MTD, regardless of size.

Small businesses will, we believe, struggle with this change and may well want to deregister for VAT.

To find out what is available to you check out our MTD checker or for more information and resources please visit our dedicated MTD page.