Addressing the challenges of MTD for VAT

With the mandatory compliance of MTD for VAT rules just weeks away for businesses with a taxable, annual turnover below £85,000, business owners in the UK and their accountants are getting ready to be compliant.

In theory, MTD measures will completely modernise tax reporting, whilst simultaneously helping to close the government’s ‘tax gap’, reported to be £35bn in 2019/20.

According to the UK government, as of the end of last year, nearly 1.6 million taxpayers had joined MTD for VAT with more than 11 million returns successfully submitted. Around a third of VAT-registered businesses with taxable turnover below £85,000 have voluntarily signed up to MTD for VAT ahead of April 2022, and thousands more are signing up each week.

From an accountancy perspective, it’s certainly worth being aware of some of the potential challenges or hurdles which may need to be overcome. This will be for the sake of advisory or managed tax-filing services, or for reminding clients of key challenges they may run into as the deadline for MTD draws closer.

Breaking old habits

With a multitude of businesses still using paper accounting, the new policy comes as a challenge to those business owners who are not so tech savvy. Finding an app that’s intuitive and easy to use can not only make online tax filing manageable even for major technophobes, but also their accountants.

An online accounting system will provide a more effective platform to share data and improve collaboration between accountants and their clients. Businesses can just add their accountant as an additional user with role-based access. Moreover, most online accounting software offer direct integration with HMRC which can automate the tax filing process. The business owner or the accountant can view, generate, and submit the VAT returns to HMRC directly.

Checking in with clients and ensuring they know how to use their chosen software will give them an extra boost of confidence.

Keeping up with deadlines

This can be attributed to the fact that MTD provides businesses with the option to choose between quarterly and annual reporting. With quarterly filing, businesses can significantly reduce the risk of making errors, as it means they are not looking back on 12 months’ worth of data at the end of every year. This also means businesses are aware of how much tax they owe, avoiding any unpleasant surprises along the way.

However, it could mean more bookkeeping for business owners than they might expect. And, remembering new tax deadlines whilst trying to run a busy business is a change they will have to get used to, else they risk facing hefty fines.

Fortunately, accounting software can come to their aid in this regard and keep them in the loop with timely notifications.

Privacy fears

Privacy and ethical data usage is a huge priority for businesses and consumers in the modern day. With some online transactions and bank data being visible to HMRC, some business owners may be concerned about their data privacy.

However, it’s worth noting that HMRC complies with data protection laws including UK General Data Protection Regulation (GDPR) and the Data Protection Act 2018 (DPA). This means that the HMRC will keep your data secure, and use it lawfully.

It is also worth considering the security benefits businesses acquire as the trade-off of moving to MTD. For example, switching to online accounting software will provide an extra layer of security to their data and offer fraud protection by providing businesses with fine-grained user permissions and role-based access. This will prevent unauthorised access to their business’ financial information by setting access controls in place. These systems will also provide an electronic audit trail of transactions that have been carried out, making it easy to find out what actions have been performed by whom and when.

Preparing for the future

April 1 won’t be the end of new updates to MTD measures. In April 2024, these measures will be extended to self-employed businesses and landlords with annual business or property income above £10,000.

In April 2025, unincorporated partnerships with an income above £10,000 will be required to join MTD for ITSA, and, in April 2026, MTD is expected to be mandated for corporation tax.

All of these updates and changes including Import One Stop Shop (IOSS), and Construction Industry Scheme (CIS) are subject to change pending legislative changes and industry trends, which is why it is important to use MTD accounting software that has compliance built into the system to ensure that businesses are always are up to date with the continually evolving regulatory landscape.

In fact, robust accounting software and tools are the easy solution to a majority of the challenges associated with MTD and any other tax-based regulations enforced in the coming months and years.

The right tool can provide accountants and their clients with full and instant access to financial records, allow VAT returns to be filed to HMRC directly, bank statements to be reconciled, projects overseen by all relevant parties with full transparency, and compliance worries completely eliminated.

Many accounting firms and businesses will already vouch for the effectiveness of digital tax tools they have already implemented, and it’s hard to suggest that MTD will be anything other than a much-welcomed change in the UK.