In the latest update HMRC is now forecasting that the much-heralded Making Tax Digital for VAT initiative will cost, rather than save, businesses money. The cost saving element had been one of the ‘selling points’ of the new initiatives.

Simon Littlejohns, partner and Head of Tax at Friend Partnership urges businesses to plan for the new system, including the cost implications.

In addition to the increased costs for businesses, HMRC also expects Making Tax Digital (MTD) to net them less than had originally been forecast. It is a moot point whether there is any basis for the belief that HMRC will see the tax take increase because VAT submission errors are eliminated. If businesses are making errors, then some will surely be in the taxpayer’s favour. Might over-claims and under-claims cancel each other out? HMRC says not.

Business owners need to make sure that they understand the new rules and the implications for their business. The MTD for VAT initiative applies to VAT return periods starting on or after 1 April 2019 for all businesses with a turnover above the VAT threshold of £85,000.

After 1 April 2019, the manual submission of VAT return information using HMRC’s VAT gateway will no longer be possible.

Making Tax Digital will happen – so businesses should be preparing now.

Making Tax Digital – key questions that businesses must address:

  • Are the business’s accounting records computerised? If so:
    • Has the software provider issued MTD compliant upgrades?
    • If not, do they plan to do so?
    • If the answer to both points is no, then the business will need to look at alternatives.
  • If business records are maintained on spreadsheets, rather than a fully computerised accounting system, the business will either have to:
    • Put in place MTD compliant accounting software; or
    • Acquire ‘bridge’ software to access HMRC’s API (‘Application Programming Interface’) software platform.
  • If the business records are manual, the business will have two options:
    • Put in place an MTD compliant accounting package; or
    • Maintain records on spreadsheet and acquire API software to enable computerised transmission of VAT returns.

Businesses need to understand the cost implications of any new or upgraded software. The business will also need to ensure that staff who deal with VAT compliance are properly trained so that they can deal with the new rules. For many this may not be an issue. However, there are still many businesses who have been ignoring the issue or, sadly, are completely unaware of it.

Time is short, so I would urge businesses to examine the issues as soon as they can. This is not something that can be left until the last minute. Whilst HMRC have indicated that they will be lenient with businesses in the first year, that goodwill may be short lived.

It also should be remembered that the MTD for VAT is a precursor to MTD for income tax and corporation tax which will be progressed once the Brexit uncertainty has subsided. Forewarned is forearmed!

Simon Littlejohns is a partner and Head of Tax at Friend Partnership, and works predominantly with business owners, owner managed businesses, entrepreneurs and High Net Worth individuals.  For help and advice on Making Tax Digital or any other aspect of personal or business tax planning please do get in touch.