Why there’s no reason to be concerned about Making Tax Digital for VAT.

Making Tax Digital (MTD) for VAT in the United Kingdom went into force on April 1; however, many businesses and accountants touched by the new legislation are still confused about what is genuine and false. People are unsure what they must do to comply with HMRC and what will happen if they do not.

MTD for VAT was the government’s first major step toward digitizing taxation to make it easier for businesses to keep track of their finances. By combining digital record-keeping and allowing businesses to develop and submit updates directly to HMRC via their preferred accounting software, the Act aims to improve tax administration efficiency and convenience for taxpayers.

The federal government praises this push toward digitalization as a beneficial trend. However, many small firms aren’t ready to abandon the days of digging through spreadsheets and data to assure accuracy.

What does MTD mean in terms of VAT?

MTD for VAT requires businesses with annual sales of more than £85,000 to keep their records digitally and file their VAT returns using MTD-compliant software.

What’s new in MTD for VAT in April 2022?

For the past two and a half years, HMRC has undertaken a VAT Making Tax Digital (MTD) pilot. As of April 2019, enterprises with annual sales of more than £85,000 VAT must file their tax filings electronically.

Businesses with taxable revenues of less than £85,000 must comply by April 2022 under the Making Tax Digital system. Around 1.1 million small enterprises will be affected by this round of MTD for VAT.

What does this mean for entrepreneurs?

Small businesses should stop filing them online and instead use licensed software when it comes to VAT returns. They risk receiving fines that aren’t required if they don’t do so, which would only serve to exacerbate their already dire condition.

It is never too early to begin implementing the new tax system systems. Businesses must start planning to meet the MTD for the VAT deadline in April 2022. Non-VAT registered firms and landlords must comply with MTD for Income Tax until April 2024. (ITS).

VAT penalties are now in effect.

If you miss a VAT deadline for the second time in a year, VAT surcharges may be imposed on your current payment. The amount of a VAT surcharge will be determined by the frequency with which a VAT payment is not made on time.

The following are the sanctions imposed by MTD:

If a VAT report is filed incorrectly, a penalty of up to 100% of the tax underestimated or overclaimed may be imposed.

* You could risk a penalty of up to 30% of the VAT assessment if you do not notify HMRC within 30 days after submitting an incorrect VAT assessment. If you are not exempt from completing an online VAT return, you could be fined up to £400 for submitting a paper VAT return.

How to Prepare for the Digital Transformation of Taxation

Small businesses can utilize the checklist below to verify compliance with the MTD standard:

#1 – Be aware of your deadlines and what MTD entails.

Organizations and their management teams must educate themselves on the law. Even though several resources to pick from, it can be tough to know where to start. HMRC has developed its own MTD webpage to assist firms in determining whether they are eligible for MTD for VAT.

Companies that pay their VAT quarterly normally have one month and seven days to complete their payments. The Annual Accounting Scheme has its own set of standards that must be followed. Those wondering when their VAT returns are due can use the HMRC’s online VAT payment deadline calculator.

#2 – Consult your bookkeeper or accountant.

Small firms can easily put a new digital tax system on the back burner. Even though April 2022 may be a long way off, now is the optimum time to hire an accountant or bookkeeper. You can digitize your paper-based system with their help.

#3 – Examine your software alternatives.

HMRC will request a flood of digital documents, including the company’s name, tax return revisions, and VAT rate applied to items. Spreadsheets can be used by businesses to compute or summarise their VAT transactions. When it comes to providing HMRC data, a proper piece of software will be required.

Unless you are exempted by law, you must use MTD-certified software to ensure that your VAT returns are handled appropriately. This tool should readily pull data from digital documents businesses keep as a time saver. You can use this list to start narrowing down your provider search.

Assume that something is considered an extra expense or responsibility. Even though this software requires compliance, it has the potential to assist small businesses in streamlining processes, increasing digitization, and enhancing cash flow.

Before purchasing software, businesses should ensure that it meets the following criteria:

1. Calculates your taxable income automatically (including VAT and payroll tax)
2. Data can be collected directly from the bank, accounting software (invoicing), or a point-of-sale system.
3. Automatically updates transactions in the database, allowing firms to keep track of daily bank reconciliations.
4. By photographing paper receipts with a smartphone, they can be transformed into digital records.