Making tax digital; illustrative examples and solutions that help you comply and improve your business performance.
In April 2019, there is a huge change in the way that HMRC will receive information from VAT registered businesses in the UK. The project has been dubbed “Making Tax Digital”, MTD for short, as it requires information to be transmitted to HMRC in digital form and some of the underlying records to be stored in a digital format.
Rather than viewing MTD as another nagging compliance task, we view MTD as an opportunity to help our clients upgrade their systems, improve business performance and free up valuable time and resources. In this regard, MTD should not just be viewed as another compliance exercise but an opportunity to and innovate and improve.
Here, we discuss what options you have (with illustrative examples) for achieving a similar outcome for your business. The right solution will depend on the complexity of your business and the current systems used.
Key Changes that arise due to ‘Making Tax Digital’
It’s easy to think compliance with MTD is as simple as ensuring you file your VAT return via the correct channel but a closer look at the rules shows more careful consideration is required.
You will no longer be able to use the government gateway portal to file your VAT returns. Here, you could compete and file your VAT return by manually keying the amounts required in each box from a spreadsheet or other offline software package you were using to perform the underlying VAT calculations.
You will also no longer be able to keep manual records. Instead, digital records must stored which include:
- Designatory Data: your business name and address, VAT registration number and the VAT accounting scheme used.
- Customer and Supplier Data: the time of supply (the tax point), value of supply (net of VAT), and the rate of VAT charged
What you must now do – use compatible software
These digital records must be kept in what HMRC define as “functional compatible software”.
The compatible software used to ensure compliance will typically be either an accounting package or an Excel tools. We discuss what the best option is likely to be for your business below.
Functional compatible software keeps you compliant by storing your records in line with the new MTD rules and filing your VAT return by communicating directly with HMRC via an Application Programming Interface (API).
You therefore file your VAT return directly from the software itself rather than manually submitting VAT data via a government portal.
HMRC define functional compatible software as one program or a set of programs that must:
- Record and preserve digital records
- Provide VAT data to HMRC by using the API platform.
- Receive information from HMRC via the API platform.
Your first VAT return which must comply with the new rules is the first VAT return which covers a period starting on or after 1st April 2019. For example, if your latest VAT return covered the three month period: March to May 2019, your first VAT return under the MTD will cover the period; June to August 2019.
There are some exceptions to this such as group registrations and businesses who use the Annual Accounting Scheme. In these instances, a six month deferral period applies. This means that MTD will apply to VAT returns that commence on or after 1 October 2019.
Finally, a business needs to have ‘digital links’ between software packages it uses, for all VAT returns starting on or after 1st April 2020. We discuss the rules around ‘digital links’ and whether they’re relevant to your business a bit later on.
The best way for your business to achieve MTD compliance
The best outcome for your business is not just to achieve compliance with the new VAT rules, but to find the most hassle-free solution that ensures compliance does not become a burden for your business.
Instead, MTD is actually designed to achieve the opposite and encourage small businesses to use digital solutions to save them time and effort when completing record keeping and other admin tasks. An optimal solution should therefore not only keep you compliant with MTD, but also reduce your workload and free up your time to focus on the more pressing issues within your business.
The best solution will also depend on the current system or systems you use to prepare and submit your VAT returns. Below, we look at minimal solutions that will ensure MTD compliance to alternative options which will also help you reduce the amount of time and effort required to stay VAT compliant.
Option 1: Moving your business onto the cloud
If you are not using software and instead prepare your VAT returns using manual records or offline using spreadsheets, you will need to use compatible software which follow the three criteria mentioned above which HMRC require for software to be deemed MTD compliant.
The Compliance Solution:
If you’re able to move your business onto a software solution which is already recognised as MTD compliant, such as Xero or Quickbooks, this is most likely to be your easiest option. Both are MTD compatible; being able to with both record and preserve digital records and communicate directly with HMRC.
Here are three possible solutions if you’re able to move your business onto the cloud or have already done so to some level or degree.
For those able to migrate their business onto the cloud, using Cloud Software such as Xero or Quickbooks is most likely your easiest option. We are partners with both and can help you with the migration if you wish to do so.
I use multiple pieces of software
To ensure compliance as illustrated above, your business must use Xero or Quickbooks for all VAT record keeping, preparation and filing activities.
If you use multiple pieces of software for VAT purposes, the MTD rules clearly state that VAT data must be transferred between the two without manual intervention such as rekeying, copying over information by hand or even the use of “cut and paste”.
Therefore if you use excel or another spreadsheet tool to initially log invoices and calculate the amounts required in each VAT box, you cannot then simply key these amounts into compatible software, and submit.
If you do this, you’re business will not be compliant with MTD.
Instead, there must be a ‘digital link’ between each piece of software software being used. Each piece of software must be digitally linked to other pieces of software to create the digital journey. In other words, there should be no manual intervention.
Software such as Xero and Quickbooks provide the most value to your business when they’re paired with other cloud tools and apps.
To ensure your setup has the digital links required to be considered MTD compliant, the most hassle-free solution will most likely therefore be to connecting Xero to a bookkeeping app such as Receipt Bank or HubDoc.
Such tools can handle the initial capture of records required by HMRC and transfer these over to Xero to be stored digitally and reconciled with the bank in a few clicks. When it comes time to file your VAT return every quarter, Xero / Quickbooks uses the digital records it has received and stored to automatically calculate the amounts required in each VAT box, and submits to HMRC.
Unsurprisingly, we find that this type of tech enabled solution is most effective for many small businesses. It reduce the amount of time and effort required to stay compliant and more generally, reduces your admin burden so you can focus on the more important parts of your business.
The Fully Streamlined Solution
The solution which provides the largest potential benefit to small businesses is the one that achieves compliance with the new VAT rules but also makes your business more efficient and your workforce more productive.
We recommend using the opportunity to explore other options outside of just upgrading your core accounting solution.
The Xero API can be used to communicate with not just bookkeeping apps as illustrated above but also point of sale systems, ecommerce platforms and CRMs as well as software which tracks employee time and tools to help manage your inventory.
This can help transform business performance by freeing up time and resources to focus on growth and profit activities rather than low value admin tasks such as data entry and record keeping.
Option 2: I run a larger business, with more complex requirements and use bespoke software
If you use bespoke software or a software package you’re particularly reliant on, it’s probably not as straightforward as just switching to a cloud software solution like Xero.
We have a separate guide for businesses who have more complex requirements. If this applies to your business, take a look at your options here.
Whatever your needs, the best solution for your business is the one that provides the most streamlined operations, the most productive workforce and the one which also takes care of compliance accurately and efficiently.
Maintaining the use of Excel spreadsheets and manual processes to calculate your VAT is hardly ever going to achieve this outcome. Online tools and apps provide an overwhelmingly more simple and robust system for looking after your records and automatically calculating VAT.
If you have questions or need support upgrading your business to new VAT compliant systems, we’d love to hear from you. Dolfinblue can help review your current setup and implement the most effective solution for your business.
Drop us a line using the form below and one of the team will be in touch.