If you’re still filing your VAT Returns to HM Revenue and Customs (HMRC) through the post, we’ve got news for you. With Making Tax Digital (MTD) for VAT coming into effect on 1st April 2022 in the UK, you’ll need to start looking for MTD-compatible software to successfully send your VAT Returns to HMRC with ease.
In this guide, we’ll be breaking down everything you need to know about MTD for VAT, from what exactly it is and when it comes into effect, to how to register for MTD for VAT and the business records you’ll need to hang on to.
Need to submit and pay your VAT return? With Wise Business you can pay HMRC from anywhere in the world without stepping foot into a bank.
As part of a government initiative to make filing tax returns easier for taxpayers, Making Tax Digital for VAT requires all VAT-registered businesses to keep digital records and file their VAT returns using MTD-compatible software.
Commenting on the introduction to MTD for VAT, co-founder and COO Daniel Hogan of Ember, an MTD-compatible fully automated accounting and tax app, says “With HMRCs ambition to deliver a fully digital tax system that works closer to real time, MTD for VAT creates a great opportunity for business owners to invest in cloud-based software to ensure they are completely ready for the changes to come down the line.
“Although some see it as a further compliance burden, we see it as the time to improve the efficiency and accuracy of your bookkeeping that will in turn empower businesses to act on more timely information – always knowing how much they owe the taxman at the end of the day.”
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Since 2019, MTD for VAT has been compulsory for all VAT-registered businesses earning above the VAT threshold of £85,000. However, as of 1st April 2022, all VAT-registered businesses, regardless of turnover, will need to apply (although there are a few exceptions, which we’ll cover below).
As mentioned above, all VAT-registered businesses will need to register for MTD for VAT, irrespective of their annual taxable turnover. This is applicable to any VAT-registered business, including limited companies, sole traders and partnerships, as well as businesses who have registered for MTD for VAT voluntarily.
If you’ve already voluntarily registered your business for VAT but want to avoid MTD for VAT, you’re in luck. Any VAT-registered business with taxable sales less than the registration threshold — £85,000 — can cancel their VAT registration with HMRC.
This is what’s known as a voluntary VAT registration cancellation and can be done online, or if you can fill in and post a VAT7 form to HMRC, if you’d prefer.
Keep in mind that it can take up to 3 weeks for your cancellation to be confirmed, so be sure to continue observing VAT requirements up until HMRC officially confirms your business as no longer VAT-registered.
You’ll also need to submit a final VAT Return for the period up to the cancellation date, accounting for stocks and assets that you could reclaim VAT for when you purchased, and if the total VAT owed is above £1,000.
If you are making a taxable turnover above the VAT threshold, there are a few exceptional circumstances where you won’t have to register for VAT.
Your business is automatically exempt from VAT if:
- Your taxable turnover has not been above £85,000 since April 2019
- You’re already exempt from filing VAT Returns online
- You or your business are subject to an insolvency procedure
However, if none of the above are applicable to you, you can apply for exemption if, in the eyes of HMRC, it is “not reasonable or practical for you to use computers, software or the internet to follow the rules for Making Tax Digital for VAT.”
This could be due to any of the following reasons:
- Your age, disability or where you live
- You object to using computers on religious grounds
- Of any other reason why it’s not reasonable or practical
If you want to apply for an exemption to MTD for VAT, you’ll need to call or write to HMRC equipped with the following information:
- Your VAT registration number
- Your business name and address
- Details of how you currently file your VAT Return
- The reason you think you’re exempt from Making Tax Digital
- Authorisation from the business (if you’re applying on someone’s behalf)
HMRC will consider each application for exemption on a case-by-case basis, and will send you a letter with their final verdict. Until then, keep filing your VAT Returns the way you normally do.
To get started with the registration process, you’ll need the following information:
- Your business email address
- Your Government Gateway ID and password — if you don’t already have one, you can create one when using HMRC’s online services
- Your VAT registration number and latest VAT Return
Depending on the nature of your business, you’ll also need:
- Your National Insurance number if you’re a sole trader
- Your company registration number and Unique Taxpayer Reference (UTR) if you’re a limited company or registered society
- Your UTR and postcode where you’re registered for Self Assessment if you’re a general partnership
- Your UTR, company registration number and the postcode of where you’re registered for Self Assessment if you’re a limited partnership
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After you’ve signed up you’ll receive a confirmation email from email@example.com within 3 working days — just be sure to check your ‘Spam’ folder in case it falls in there.
If you already pay by Direct Debit, take caution — if you sign up too close to the date your return is due, you might end up paying twice.
To make sure this doesn’t happen, don’t sign up less than:
- 7 days before your return is due
- 5 days after your return is due
If you don’t already pay by Direct Debit, make sure you sign up at least 3 days before your return is due.
Failure to comply with the latest laws could see you facing fines from HMRC. From January 2023, HMRC is moving to a points-based system to ensure that only those who regularly miss deadlines and make mistakes are penalised, as opposed to businesses who only slip up occasionally.
Here’s how it works: every time a submission or deadline is missed, HMRC will attribute a ‘point’ to you, notifying you of every point you receive. After a certain number of points — which we’ll outline in the table below — you’ll be fined £200 for every submission you fail to make.
The ‘penalty threshold’ that determines the total number of points you’ll have to get before you’re fined by HMRC is based on how often you’re required to make a submission.
Since a big part of MTD for VAT is storing digital records, you’ll need to keep ahold of the following documents:
- Your business name, address and VAT registration number
- Any VAT accounting schemes you use
- The VAT on goods and services you supply, including everything you sell, lease, transfer or hire out (supplies made)
- The VAT on goods and receive, including everything you buy, lease, rent or hire (supplies received)
- Any adjustments you make to a VAT Return
- The ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
- The rate of VAT charged on goods and services your supply
- Reverse charge transactions — where you record the VAT on both the sale price and the purchase price of goods and services you buy
- Your total daily gross takings if you use a retail scheme
- Items you can reclaim VAT on if you use the Flat Rate Scheme
- Your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
You’ll also need to keep digital copies of documents covering multiple transactions made on behalf of your business by:
- Volunteers for charity fundraising
- Third party businesses
- Employees for expenses in petty cash.
While you’ll need to store these transactions digitally, you don’t need to worry about scanning paper records, such as invoices or receipts.
Before you settle on a software, double check that it’s compatible with HMRC’s online systems.
If you’re using more than one software package to keep your VAT records and submit your VAT returns, you’ll need to link them in one of the following ways:
- Using formulas to link cells in spreadsheets
- Emailing records
- Putting records on a portable device to give to your agent
- Importing and exporting XML and CSV files
- Downloading and uploading files
Alternatively, you could save yourself the hassle by signing up to MTD-ready software such as Ember. In doing so, business owners can benefit from real-time insights into the amount of tax owed to HMRC at any point, as a result gaining a deeper understanding of their cash flow.
Dan explains that having MTD-ready software won’t just prove beneficial for business owners adopting it from VAT:
“The next big shift that business owners and individuals will have to start thinking about is MTD for Income Tax. This is set to have a monumental impact on an estimated 4.3 million taxpayers who will be affected by these changes, 75% of whom are not currently using any software to help them file their Self Assessment.
“Although it will be slightly more onerous, using MTD-approved software designed specifically for the business owner and not the accountant will have the benefit of ensuring you’re never caught off guard or short of cash when the taxman comes knocking.”
Getting all the documents and data prepared for your VAT return is one of the most time-consuming tasks for small business owners. Thankfully, there are a range of Making Tax Digital compatible software options available to take the hassle out of the process and give you more time to spend on your business.
If you’ve processed your return and find you still owe money to HMRC, you can pay your outstanding VAT bill with Wise from anywhere in the world without having to stand in long bank queues.
With Wise Business you can get access to a GBP account and card, meaning you won’t waste extortionate fees on payments either. Transfers are at real, mid-market rate and up to 19x cheaper than PayPal.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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