What will change under Making Tax Digital in April 2022?
Over two and a half years have passed since HMRC launched its Making Tax Digital (MTD) for VAT trial. Since April 2019, enterprises in the United Kingdom with a turnover of £85,000 have been required to file their VAT returns online.
Beginning in April 2022, businesses that charge VAT and have a taxable turnover of less than £85,000 will be required to comply with Making Tax Digital. If they have not already received notification, concerning firms will shortly receive letters advising them of the change. Around 1.1 million small enterprises would be impacted by this round of MTD for VAT.
What this implies for proprietors of small businesses
Small businesses that continue to submit VAT through the HMRC online or by letter will soon be required to keep digital records and file VAT returns using certified software. Otherwise, they risk incurring unexpected penalties – an undesirable addition to the diversity of difficulties they already face.
Affected firms must begin their Making Digital Tax preparations immediately, ahead of the April 2022 deadline. It is never too early to implement the necessary processes and infrastructure even for companies and landlords that are not VAT registered and have until April 2024 to comply with MTD for Income Tax (ITSA).
How to Prepare for the Digital Transformation of Taxation
The following checklist may assist small firms in complying with MTD:
Understand your deadlines and the implications of MTD for you.
Firms must do their study on the law and assist in bringing their leadership teams up to speed. There is a wealth of useful products available, but it may be challenging to know where to begin. That is why HMRC has built its own MTD for VAT website, which contains important information to assist companies in determining if they should apply, how to enrol, and more.
To avoid last-minute rushing to meet tax obligations, I’d also urge that firms keep a diary of the days when VAT returns are due.
If companies pay VAT every quarter, their VAT payment deadline is typically one month and seven days following the end of the VAT period, including the time required for the payment to reach HMRC. Those that use the Annual Accounting Scheme, on the other hand, will have different deadlines. If you’re unsure, HMRC has a free VAT payment deadline calculator, which may be used to determine when returns are due.
Make an appointment with your accountant or bookkeeper.
Given the plethora of issues confronting small firms, it’s all too tempting to push a new digital tax plan to the back burner. April 2022 may seem far away, but now is the ideal moment to enlist the assistance of your accountant or bookkeeper. They can advise you on the best method and time frame for digitising your paper-based system.
Small companies have increasingly recognised the critical role of their accountants and bookkeepers in ensuring their continued success during the last 18 months. Indeed, according to Xero data, over half (45%) of small companies say their accountants are more critical than ever. And it’s unsurprising why. Accountants and bookkeepers can bring expertise to bear on difficult challenges that most small company owners lack the time or resources to address on their own.
Getting your thinking in the right frame of mind for business transformation
Change is not always simple. Indeed, our recent poll found that aversion to change, uncertainty about the result, perceived inconvenience associated with digital adoption, and the inability to quickly evaluate solutions are the primary hurdles stopping small firms from adopting technology such as MTD software.
However, digital transformation may aid in burden reduction and increased agility. Whether your small company has not yet executed its digitisation plan or is still in its infancy and frightened of further change, you may utilise Making Tax Digital jumpstart your digital transformation.
Conduct a software search.
HMRC will require the retention of several digital records – including the business name, adjustments to returns, and the rate of VAT charged on supplies made. While companies may use spreadsheets to compute or summarise VAT transactions and determine what information they need to provide to HMRC, they must deliver it using suitable software.
HMRC will only accept VAT returns submitted using authorised MTD software, such as Xero, unless you have a legal exception. It’s a good idea to begin the supplier search early — this list will assist in narrowing the search. This software should automatically extract data from a business’s digital records to submit returns, freeing up time that could be spent running the business.
This should not be seen as a burden or an added expense. Although this software is required for compliance, it can assist small businesses in optimising processes, promoting wider digitalization, and ultimately improving cash flow.
While each organisation has unique requirements, businesses should ensure that the software they select meets the following criteria:
- Calculates your tax liability automatically (including VAT and payroll tax)
- Takes data directly from the bank, invoicing software, or point-of-sale system
- Daily transaction updates enable businesses to stay on top of bank reconciliations.
- Creates digital recordings of paper receipts using a picture taken with a mobile device.
Create a commercial opportunity out of Making Tax Digital.
It’s natural to perceive MTD as a necessary evil — something companies must comply with regardless of their desires. This should not be the case, however. While change may be frightening, particularly when imposed on us, it can also be beneficial.
Consumers have come to expect firms to meet their digital requirements. MTD provides small companies in the UK with a chance to expand and digitalize, therefore boosting their operations and customer service. With this in mind, small companies may discover that Making Tax Digital is a gift in disguise come April 2022.