From April 2022, all UK VAT-registered businesses will need to comply with HMRC’s new digital tax legislation, known as Making Tax Digital (MTD). It means those still submitting paper-based records will have to shift to maintaining records online and filing VAT returns digitally, with around 1.1m smaller businesses likely to be affected. Damon Anderson, Director of Operations, UK & EMEA, Xero, discusses how businesses can get up to speed, access support and education and, most importantly, use MTD as an opportunity to digitise their business.
The more things change, the more they stay the same. While small businesses can breathe a sigh of relief that the challenges of the last two pandemic-dominated years are behind them, they can also point to an array of new issues set to take their place. If lockdowns are a thing of the past, the cost-of-living crisis – from inflation to rising energy prices – is very much alive and causing disruption.
Given this sense of déjà vu, it’s understandable that many small businesses are prioritising short-term goals over long-term planning, with Xero research finding that seven out of 10 SMEs remain focused on day-to-day survival, as opposed to how to better run their company for the future. This shift in business mentality has caused shockwaves that can be felt throughout the small business community, particularly as the obstacles seem to be arriving thick and fast.
Many SMEs will view the next phase of Making Tax Digital (MTD) for VAT as one of these obstacles. While some may have been able to keep the MTD deadlines at arm’s length so far – either due to an unwillingness to embrace digitalisation or a simple lack of understanding – it is now an urgent requirement, with compliance required from April 2022.
This means that SMEs submitting VAT through the online HMRC portal, or the post, must start maintaining their records digitally using HMRC-recognised software. This phase of MTD for VAT will affect all VAT-registered businesses that have a taxable turnover of under £85,000 and failure to comply may result in fines.
Despite this, many small businesses across the UK that fit the criteria have continued to delay the transition to MTD, with recent research showing that more than 600,000 of them risk compliance failures for not adequately preparing for MTD before the government deadline.
Of course, a government mandated change to the tax system may well be very daunting for some and even serve to push small business leaders away from adopting digital processes all together. But the change can be a positive one – a catalyst for further digital adoption to gain a greater edge.
The steps outlined below can serve as a guide to help small business leaders comply with MTD for VAT and with as little friction as possible.
Understand the ins and outs of MTD
Like most legislative changes, MTD for VAT includes multiple moving parts that business owners must get their heads around. A great place to start is the dedicated HMRC website, outlining everything from how to sign up, to whether one’s business is even eligible.
Even those small business leaders who already feel comfortable with digital technologies should run through these resources with a fine tooth comb to understand precisely what is required of them. Most importantly, HMRC will only accept VAT returns sent using HMRC-recognised software, unless you have a legal exemption.
For eager businesses that have already begun digitalising their tax process, it is worth checking if their supplier is also MTD ready, as this will help narrow down the search and ease potential complications further down the road.
Lean on your accountant’s expertise
To make the transition towards MTD as smooth as possible, small business leaders should lean on accountants and bookkeepers wherever possible. Seeking an education on MTD is important as it will equip your business for the future, but falling back on the wisdom of the broader small business community is a necessary step that helps make this process less intimidating.
SMEs should work closely with their advisors wherever possible, as they are likely already prepared for MTD for VAT and working with other clients to manage the transition without any hiccups. Furthermore, accountants are often able to translate much of the financial and legal jargon, enabling small business leaders to gain a better understanding of what MTD entails and how they can better prepare their business.
Our recent research showed that just under half (45%) of small businesses believe their accountants are more important than ever. They will have practical advice on everything from cash flow management to digitalising documents and can be a vital sounding board during this period of disruption.
By taking advantage of the vast knowledge and expertise possessed by accountants, small business owners can overcome some of the MTD obstacles they will face on this journey. The road to MTD should be collaborative and should not feel like an isolating experience.
Know what technology is right for your business
The goal of MTD is very much in the name. The crux of the legislation is to completely digitalise tax and transition away from antiquated methods of carrying out this process. Naturally, many small businesses remain unsure about some of the details and are concerned about how this process will affect the day-to-day running of their business.
Whether debating which digital tools will be available to them, how they should be used and whether they will impact the business, making this change presents a lot of unknowns that small business owners must face one at a time.
HMRC will ask for a variety of digital records to be kept by small business owners. This includes everything from their business name, adjustments to return, rate of VAT charged on supplies made and much more. While many small business owners are familiar with using software such as Microsoft Excel spreadsheets to summarise VAT transitions, it is mandatory that all information be submitted to HMRC through their own approved software.
Once familiar with the software, small business owners should start to recognise the value of adopting such digital tools in their business. Gone are the days of accountants surrounded by sky-high piles of paper with ‘past due’ scrawled over them in red ink.
Using digital tools can not only help small business owners save time by automating traditional bookkeeping processes, but it will enable them to invest this time back into the running of their business, focusing on the bigger picture rather than wading through administrative tasks.
Use MTD as a chance to upgrade
With the multitude of challenges that small businesses have faced over the past 12 months, it is no surprise that MTD compliance might have slipped down the list of SME priorities this year.
However, MTD is not something that can be wished away and nor should it be. It is designed to make small businesses more efficient, rather than cause unnecessary disruption. By using it as an opportunity to explore wider opportunities for digital adoption, MTD can make a positive impact on affected small businesses across a variety of industries.
Ultimately, SMEs that view digital technologies as a help rather than a hindrance will better position themselves to thrive. With a range of difficult circumstances facing founders and entrepreneurs, digital adoption can have a role to play in easing the burden of running a business.
While MTD compliance can be daunting, it doesn’t have to be painful and could even serve as a launchpad for success.