The UK government’s roll-out of digital government continues apace. You can pay your Vehicle ‘road tax’ from your mobile phone or sign up for the Universal Credit system online. The tax collection arm of the UK government (Her Majesty’s Revenue and Customs – HMRC) is no slouch here either with the ability to check personal and business annual tax statements via the government gateway.
Under the guise of making tax returns easier and more ‘error free’ the HMRC are rolling out yet more digitisation under the title of – Making Tax Digital (MTD). The first stage of this was supposed to be self assessment of individuals but they have backed off from this goal (or kicked the can down the road a little at least). Instead the first deliverable of MTD are changes to the way VAT (Value Added Tax) registered businesses must make their VAT Returns (often quarterly for most businesses).
HMRC used to allow businesses to use the government gateway to electronically enter their VAT returns to HMRC instead of sending in paper returns. This was obviously more efficient for the HMRC as processing digital returns is many times quicker than processing manual returns. Logically HMRC have now made paper returns obsolete and made businesses submit all returns digitally. This change really laid the ground work for MTD by forcing businesses to use digital means to enter their returns. The new changes under MTD however, go much further and if you are conspiracy minded seem a little like the thin end of the wedge of the government wanting to know all about your finances.
MTD came into force on 1-Apr-2019 and in my experience are widely mis-understood by the small business community which in large numbers have made no preparation for MTD and the deadline of 1st April. I cannot fault HMRC here are they have been communicating the changes by all sorts of media (TV, Radio, press and online). I have a harsher attitude to the accountancy profession however who largely seem to have left small businesses to their own devices regarding preparing for MTD. Most seem to have included an article or two in the newsletters over the past year or so but have not proactively contacted their clients and checked to see what progress they have made in complying with MTD.
So what are the changes that MTD will make to how companies file their VAT returns?
- Your business can no longer use the government gateway to file VAT returns
- You must use an accredited software package to submit your VAT returns
- All transactions (Sales and Purchases) must be entered in the accredited software package (i.e. no double entry or manual copying of data between software packages)
Now as well as not faulting HMRC I can’t fault the accountancy software companies (e.g. Xero, Intuit, Sage) here as they have been advertising like crazy about MTD and have updated all their software to comply with MTD. And well they should as they will be the main beneficiaries of MTD after HMRC itself. This change singlehandedly will force all VAT registered business into using accountancy packages whether they like it or not. Now for most companies in the SME (Small to Medium Enterprises) this won’t be anything new but in the micro to small business end of that sector this will be new. Even for companies who already use accounting software this will bring about unexpected changes. Lot’s of small businesses use desktop based software from one of the main accountancy software companies. However probably less than half are running the latest version of their software, many will NOT have software maintenance agreements which allow them to upgrade without further cost. Because of course, only the latest version of these software packages will have the code necessary to talk to the government gateway. In a stroke the HMRC have handed the accounting software providers with massive extra custom in the past year and to repeat year after year.
I have spent the last nine months trying to prepare my SME customer base for these changes that now are in force. If you are VAT registered and have a VAT return date of the 1st April 2019 or later then this applies to you.
So what has been my experience with MTD and my customer base? Well they break down into a number of categories: –
- Already using accredited accounting software, running a version compliant with latest government gateway. Already use the accredited accounting software to submit their VAT returns to the government gateway. No action required already compliant.
- Using out dated desktop accounting software and using the government gateway to submit VAT returns. Either upgrade accounting software to latest compliant version or move to a compliant cloud based accounting software package. Start submitting VAT returns via software.
- Using non-accounting software for recording Sales and Purchases (typically this will be via a spreadsheet(s) like Excel or Numbers) and using the government gateway to submit VAT returns. MUST migrate over to a compliant accounting software package (desktop or cloud) and enter all transactions (sales and purchases) in that package. MUST not continue using spreadsheet and copying over data to accounting package – this is specifically prohibited in MTD. Obviously there is a large training issue hereas well as cost.
- Not using any computer based system for recording sales and purchase
and using the government gateway to submit VAT returns. It will be a surprise to many but lots of micro sized business (particularly ones using Flat Rate VAT scheme) are actually still using handwritten ledgers to record their business transactions. I have in particular found these businesses to have been let down by their accountants in terms of preparing them for MTD. These businesses have the highest barriers to climb, as they must abandon their book ledgers and start using computers in their everyday business activities. The training burden alone is considerable. Fortunately these businesses are good candidates for cloud based accounting packages which have the shallowest learning curves
A common thread that runs through a lot of micro to small businesses is the use of external bookkeepers who actually run the accounts for the business. These bookkeepers quite often submit the VAT returns on behalf of the business. This in itself is not a problem. What is potentially a problem is if the bookkeeper is just using summary figures (i.e. total sales per month, total purchases per month, VAT due on sales per month and VAT reclaimed on Purchases per month etc. Bookkeepers will no longer be able to just use these summary figures in the accounting software to produce VAT returns, each individual sales or purchase invoice (transaction) and it’s associated VAT element must be recorded to comply with MTD. To me this looks like a business procedure change with the business entering all transactions daily (i.e. sales and purchase invoices). Bookkeepers need to be aware of their responsibilities under MTD if they are doing the VAT returns.
Of course this is just potentially the start of HMRC wanting to have closer and closer views of our business activities. How long before they require access to our company bank accounts. Like I say if you are conspiratory minded is this the thin end of a wedge.
If you need help or advice in complying the HMRC Making Tax Digital (MTD) then please use the contact form HERE to contact me.
Alan Sinclair-Brown is an IT Professional with over thirty years’ experience in managing, deploying and fixing computer systems. He is passionate about helping people and small businesses make the most of their investment in IT technology.