As of the 1st April 2019, all VAT registered businesses with an annual turnover greater than £85,000 must keep digital records and submit ‘Making Tax Digital’ VAT returns on software that is recognized by HMRC.
How MTD-compliant software works?
There are a number of different MTD-compliant software packages available and businesses can select the one that best suits their needs. There are some free packages available, but their functionality is limited, so selecting software based on price alone is not advised.
MTD-compliant software communicates directly with the HMRC online portal, uploading raw data via an electronic process rather than the more traditional manual data input. All figures entered into the software must have a full audit trail that leads back to the original transaction as the HMRC portal will specifically check that this is in place.
Making Tax Digital mandates that quarterly data submissions are performed, necessitating regular software updates to support making tax digital VAT returns.
Benefits to making tax digital VAT returns
Regularly updating your MTD-compliant software with financial information will save time in the long run because, provided that the data has been entered correctly at source, all calculations within the HMRC portal will be performed automatically, making the quarterly and annual submissions a simple three part process of upload, check and submit.
Because the MTD-compliant software records data in real time, you will not need to keep separate spreadsheets or paper records, which will save time on administration and ensure that nothing has been missed or double-accounted. This time saving can be directed towards handling more pressing business matters.
MTD-compliant software could even save you money, not only on tax, by ensuring that all allowances, to which you are entitled, are claimed. It also saves money through reduced penalties for incorrect submission of data as the system will highlight errors prior to submission, allowing you to rectify them at source.
Disadvantages of MTD-compliant software
There will be an initial time burden for business owners and finance staff to learn how to effectively operate the new software and to migrate over all existing financial data. There will equally be a financial investment in the purchase of the software and the need to train staff to operate it correctly.
There is a significant onus on correct data input as the information entered will be submitted in its raw form to HMRC, so ensuring that all staff with access permissions are appropriately trained and understand their responsibilities will be critical.
For businesses that previously relied on paper records, the time and financial investment in new MTD-compliant software will be greater and could even necessitate purchasing or upgrading their full suite of IT equipment in order to ensure that it is compatible with the new software that is chosen. There will also be a greater training burden for these businesses that may deem it more appropriate to outsource the preparation and upload their VAT returns to an accountancy firm rather than to do it themselves.
Outsourcing to an accountancy firm
As many MTD-compliant software options require an ongoing monthly subscription, it often makes sound financial sense for accountancy firms to spread the cost of maintaining this software across a range of clients. Because the costs of the software are shared across a number of client accounts, the total cost per client will be lower than if they bought the subscription by themselves.
This can make outsourcing the preparation and submission of VAT returns to an accountancy firm an attractive option for many businesses. Not only will this ease their own reporting burdens, but it is also likely to increase accuracy as the accountant will have a deeper understanding of the VAT rules that apply to the business and can help them to achieve efficiencies.
Summary
There are many advantages to the implementation of MTD and with a number of software options available, there is something to suit every size and scale of business. Whether you choose to run the software yourself or outsource your VAT returns to an accountancy firm, you should see a benefit in terms of greater data accuracy, improved financial forecasting and reduced likelihood of penalties.
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