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Making Tax Digital (MTD) for VAT

Summary of Key Points

  • From April 2019 the way VAT returns are submitted will change.
  • You only need to change your accounting system if you want to.
  • If you do your own VAT submissions, you have various options, all different to what you do now.

The Full HMRC Vision for MTD

This is HMRC’s vision of the future:

  • Every business and self-assessment taxpayer will submit their information using accounting software, at transaction level.
  • This, for example, will include a taxpayer with no business other than one small rental property.
  • There will be up to six submissions per year for self-assessment.  For the 2018-19 tax year, under MTD everyone would have until 31 July 2018 to submit the quarter ending 30 June 2018.
  • VAT returns will all be submitted direct from accounting software.

Why are HMRC doing this?

Very simple.  HMRC senior management believe that it will result in an extra £5 billion per year in tax revenue from the small business sector – that means us!

 This is utter baloney in my view.  But it has some obvious implications – more tax enquiries.  I expect these to become increasingly desperate once it dawns on HMRC that the money they are investing in this has not delivered any extra tax revenue.

MTD for VAT starts on 1 April 2018

For VAT return periods ending on or after 1 April 2019, an MTD submission must be made.  So the first standard quarter which is mandatory is 1 April 2019 to 30 June 2019.  There are various options:

  • You can file directly from compliant software.  Some Oaktree clients already run such software, Xero and QBO being the two most common.  These two will be fine when it comes to MTD.
  • VT software is the product Oaktree uses to file the majority of client accounts.  It will be fully compliant for MTD for VAT.
  • Bridging software can be used to “bridge” from a VAT return currently prepared on a spreadsheet to a submission which complies with MTD.  Oaktree has bought 40 filing licences for one of these products, namely Absolute Accounting Software. 

Teething troubles are inevitable

Whichever method is used, this will not be plain sailing:

  • HMRC are using “agile software development” which is HMRC-speak for “we’re making this up as we go along, and constantly changing things right up to the go live date.”  In other words, just about the stupidest approach to software development you can possibly imagine.
  • Not content with that, existing Government Gateways will not work for MTD, we all need new ones.
  • Likewise, existing links between tax agents and clients won’t work, new linkages need to be created in order to file.  So for many business owners just getting to the stage where the database will accept a submission is going to be a challenge.

Accounting Software

The Oaktree policy has always been, and will continue to be, to have accounting systems for each client which:

  • Enable complete and accurate accounts and tax returns to be produced.
  • Keep time clients and staff spend on these systems to a minimum.

As a result the following methods are in use:

  • No method, just collecting paper records.
  • Manual book-keeping using weekly cash books.
  • Spreadsheet records.
  • Book-keeping software such as VT, Xero or Quickbooks Online (QBO).

It’s worth noting that the level of record-keeping directly affects accounting fees.  So if there are two identical businesses and one just brings a pile of paper records but one is using software, the one using software will be paying several hundred pounds a year less in accountancy fees.  HMRC want everyone to use accounting software, which in my view says more about just how ignorant top HMRC management are than anything else.  If you have never used it before, there are some pitfalls:

  • Costs of the software.
  • Potential extra accountancy costs depending on how well you use the software.
  • You’ll need training.  HMRC thinks that 2 hours is enough which is just plain stupid. You don’t need to take my word for this, the House of Lords Treasury Committee agrees 2 hours is way too short.
  • Increased chances of big errors.  Probably the hardest task is getting the software bank record to agree to the bank statement, this can often be tens of thousands of pounds out in the hands of novice users.
  • If you are using cloud software, this means a lot of your most confidential data is up there in one or more servers in the “cloud”.  There have been various data security breaches and we can expect to see more of these.
  • As we have seen in point 3 above, by using cloud software you are more likely to get a tax enquiry once your data is transmitted item by item to HMRC in 2019.

I am not going to list the benefits of software.  Just look at the glossy adverts on TV, or Google any of the software companies, and no shortage of benefits will be right in your face!

Should you change your accounting methods?

The answer for the vast majority of Oaktree clients is probably not because they:

  • Already have a system that works.
  • Have a system which will comply in full in 2019.
  • Can therefore watch what happens in 2019 to other businesses who go to software.
  • Might not have to change at all if MTD is just one big car crash.
  • Will avoid the risks of accounting software.

But if you have a lot of points of weakness identified in your annual review, consider changing.  If you already have a weak system which won’t stand up well to an enquiry from HMRC, you have less to lose in switching than someone who has a robust system.

If for business reasons you want to do business software, I advise choosing your starting date as the first date of a new accounting year.  My two recommendations are:

  • VT for non-cloud software.
  • QBO for cloud software.

Both companies have been in the business more than 20 years, with tried and tested products.  Whilst VT is a small company it appears to be well run.  QBO is owned by Intuit Inc. which is a $50 billion dollar company, very well run with a strong balance sheet.

This matters because in my view some of the cloud software companies will go bankrupt in the next 5 years.