Making Tax Digital is off the blocks but are businesses prepared?

Photo of three swimmers diving into a pool
By The CA magazine

15 May 2019

VAT-registered businesses in the UK will now have to submit their VAT returns using compatible software, as part of HMRC’s Making Tax Digital for VAT (MTDfV), also known as MTD. Are they prepared?

Sanjeev Bhaskar is known for many things, but few associate the much-loved British comedian and actor with tax. One tax software provider, however, enlisted the star to front TV adverts to raise awareness among small businesses about the 1st April deadline for HM Revenue & Customs’ digital VAT deadline.

If a business’ VAT-able turnover is above the threshold of £85,000, from April it will no longer be possible to submit VAT returns manually on HMRC’s website. Returns will have to be filed using software.

This is the biggest reform of tax administration in a generation, affecting more than one million small businesses and their accountants, hence QuickBooks’ belief that a TV advert with a top-flight celebrity might make small business owners sit up and pay attention.

Of course, QuickBooks’ software is also compliant with HMRC’s MTDfV regime, so the advertising decision wasn’t entirely philanthropic.

However, choice is in no way limited. There are around 70 software solutions available for MTDfV on HMRC’s website, so few businesses or their accountants have any excuse not to at least attempt to go digital.

New process and new procedures?

MTD doesn’t necessarily mean you have to replace your existing processes with a new accounting application. Bridging software is available, enabling businesses to file based on spreadsheets in a way that is MTD compliant.

Encouraging businesses to adopt mobile technology will give them a better view of their financial position in real time and allow them to ditch boxes of paper receipts.

The aim is to improve the tax take and reduce human error.

Paul Oldridge, Business Development Director with BTCSoftware, says: “Using BTCHub means that if you or your clients want to stick to your current way of working you can still do so after April.”

Ultimately, HMRC’s grand plan, which began around three years ago, is to have all tax filings completed via software. The aim is to improve the tax take and reduce human error, which HMRC claims results in an estimated £9bn tax shortfall for government.

Reasons for a digital switch

The digital switch also aims to benefit businesses, particularly small business owners, which don’t have armies of advisers to help them.

Encouraging businesses to adopt mobile technology will give them a better view of their financial position in real time and allow them to ditch boxes of paper receipts.

Businesses... will be primed to spend more time scaling up and increasing their bottom line.

For now, however, the April deadline affects only VAT returns for those above the threshold.

Alex Davis, Business Development and UK MTD lead at Intuit QuickBooks, said: “It is fair to say that the level of readiness is mixed but… it is vital that practitioners, vendors and businesses work together to make the transition to MTD as smooth as possible.”

He added: “Businesses that utilise financial software and move away from data entry to data automation will not just ensure they are MTD compliant, but will be primed to spend more time scaling up and increasing their bottom line.”

A tax springboard for system upgrades

HMRC wants businesses and their advisers to use digital software to input data into its systems, avoiding any copying and pasting or rekeying information. Practices that aren’t already using accounting software could use the MTDfV reform as a springboard to become fully digital in the coming years.

The tax change is not as easy as it could be for some accountants.

Firms that are already using software should check with their provider that their product is MTD compliant. Even if practices are using cloud-based products, double-check. If not, make sure the provider upgrades the software to meet HMRC requirements.

Although commercial software providers are developing new tools to meet HMRC’s MTD requirements, the tax change is not as easy as it could be for some accountants.

In guiding clients through MTDfV, Martin O’Hara CA, small practitioner, says his preference is to encourage them to use their existing software with an MTD upgrade.

Otherwise, his recommendation is to opt for Xero or QuickBooks “because they are MTD-ready, cloud-based and can have multiple users logged on at the same time, and it’s all backed up”.

Testing, testing, MTD

HMRC has launched a pilot and is encouraging companies to sign up early and test their systems, although most business owners won’t have to submit their returns until early summer.

The latest figures from HMRC in early February revealed that only around 7,000 of the 1.1m businesses affected had so far signed up. However, tax officials are confident this figure will accelerate now that January’s self-assessment season is over.

Ed Molyneux, founder and CEO of provider FreeAgent, says the “story is one of two halves” with some people already technologically up-to-date being ready to go, while others aren’t; and of the second group, he said, many don’t even know about the change.

Ed says: “Not many people want to get ahead of the game in the pilot and file before they have to. There’s little advantage for them really.” That said, like many providers, he is expecting a greater influx from April.

Only 23% of small business owners know that MTD will be compulsory for all businesses in the future.

Still, Martin says the lead-up to the deadline has been lacking in direction and guidance from HMRC: “Output from HMRC has been slow and the goalposts have moved several times so all the directions have had to come from us, practitioners.”

Recent studies support these concerns. Damon Anderson, Director of Partner and Product at accounting software provider Xero, says: “Only 23% of small business owners know that MTD will be compulsory for all businesses in the future, while less than a third (29%) fully understand the penalties associated with non-compliance.”

Nonetheless Brian Palmer, tax policy expert at AAT, says now is the time to “engage with the pilot”, otherwise it’ll put “your or your client’s firm at risk of making mistakes or finding you need to change the way you report figures after the mandation date, potentially meaning you will be non-compliant”.

He added: “Joining the pilot now means you can check any teething problems with the system and for HMRC themselves to have confidence in the system, and for you to train up all relevant staff without any fear or concern of consequences.”

File without fear

The first year will be a so-called “soft landing”; that is to say, businesses won’t be penalised if they fail to fully meet requirements, as long as it’s clear that “they are doing their best” to record VAT returns digitally.

Despite the concerns, accountants and software providers are upbeat about the long-term benefits to business. Wylie & Bisset, a Glasgow-based chartered accountancy firm, suggests business owners should view the move to digital as an advantage rather than a burden.

I advise clients that they should consider utilising the latest advances in technology, regardless of Making Tax Digital.

Lorna Wyllie CA, head of Wylie & Bisset’s business advisory services department, says: “There are significant business efficiency savings to be realised through using digital technology, such as removing the need to rekey financial information, thereby saving businesses hours in administration tasks and freeing them up to concentrate on the more important and rewarding aspects of running a business.

“That’s why I advise clients that they should consider utilising the latest advances in technology, regardless of Making Tax Digital.”

What do you do now?

First, get up to speed if you haven’t already. You cannot design a solution until you understand the problem. Understand what MTDfV is all about in the first instance.

All of the accountancy professional bodies, including ICAS, have guides and help centres, so contact your institute for help as a matter of urgency.

Second, do some research into what’s available. Are you already a digital practice? If so, then it’s likely the software you already use will be MTD compliant. Crucially, check with your provider.

There is free basic bridging software available.

If you don’t have software that is MTD compliant then make sure you research the software market to decide what packages and/or apps might fit your needs and those of your clients.

HMRC has a list of more than 150 software providers that have MTD-compliant products. There is also free basic bridging software available.

Third, it’s time for a digital practice overhaul. Check your selected product against HMRC’s MTD compliance requirements. This will determine what changes you might wish to adopt in your practice and what recommendations you may make to clients.

It’s high time to embrace mobile software. Not only will it provide a long-term business benefit, it will secure savings in time and money – something every business wants in these uncertain times.

Sign up for an HMRC agent services account. This will be essential to submit MTD VAT returns.

Step four is a client action plan. Make sure you know which of your clients will be mandated to join MTD from April and consider which already have accurate digital records and file on time.

Then consider whether they’d be keen to be “pioneers” for your firm. Next, contact your potential ‘early adopters’ – those who may need a bit more help to get ready for the change.

Finally, focus on the “laggards”, those that are not technically up-to-date and will need a great deal of handholding to meet the deadline.

Finally, if you haven’t already done so, sign up for an HMRC agent services account. This will be essential to submit MTD VAT returns.

You’ll need: your Unique Taxpayer Reference (UTR); the postcode associated with your UTR reference; and your money laundering supervisor details (including your supervisory body’s name, your membership number and the date your membership expires).

You’ll also need the Government Gateway user ID and password you currently use to access other HMRC online services for agents.

Getting over the bumps in the road

Xero’s Anderson advised: “Don’t be scared! MTD for VAT is straightforward and it will make your businesses and practitioners work smarter.”

Tushir Patel, CEO and co-founder of cloud-based accounting software provider Capium, said: “There’s a lot of work to be done between now and April. I feel confident the deadline can be met. There’s no reason why we shouldn’t be able to get clients over the line.”

Like any change there are likely to be bumps in the road and, although there is no immediate benefit to business owners following the MTDfV deadline, small businesses (and practices) should see the writing on the wall – it’s high time to embrace mobile software.

Not only will it provide a long-term business benefit, it will secure savings in time and money – something every business wants in these uncertain times.

Topics

  • CA Magazine
  • Tax
  • Business

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