Making Tax Digital – The Problem Areas...
The requirement for VAT-registered businesses to file VAT returns digitally came into force in April. However, many businesses are still seriously unprepared and struggling to understand the full impact on their accounting systems.
This lack of preparedness, paired with a lack of clarity on the part of HMRC, has resulted in the emergence of problems in 7 key areas...
1. When and how to register
Many businesses have found this confusing because either they were in the pilot scheme or they didn’t realise they needed to register.
The best time to register is after you have filed your last pre-MTD VAT return and made payment or had a refund and at least 7 days before the end of the next VAT period. This is because HMRC need time to switch businesses from the old gateway to the new MTD system.
Registering at the wrong time can result in not being able to submit VAT returns at all or to use direct debits. It can also result in long delays to repayments and refunds, which can cause significant cash flow problems when dealing with large sums.
2. The turnover exemption
HMRC have recently revealed that two thirds of exemption applications are from businesses below the £85,000 threshold. If your turnover is below that figure then you do not need to register for MTD and you don’t need to apply for an exemption.
The turnover assessment is based on the period of one year ending in the month before the current month. New businesses join when they reach the threshold.
3. Deferred start
HMRC have written to most businesses that qualify for a deferred start in October, however some businesses have not had letters even though they do qualify. Generally, those who have not had letters are VAT groups or those making payments on account.
Based on feedback from delegates attending our courses, approximately 20% of businesses that qualify have not had confirmation from HMRC. Steve Bicknell, our expert presenter, suggests writing to HMRC and informing them why you qualify and that you will be deferring your start date.
4. Software issues
Many businesses are still unaware that their software is not suitable for Making Tax Digital. There are over 600 UK accounting software providers and only around a third of them are approved.
Changing software or getting new software requires training and setting up. Accountancy Age reported on 21st May that one business had made £19,000 of errors on their first MTD return. There was an error in the software set-up process that meant the VAT return was calculated under the cash accounting scheme as opposed to the invoice-based scheme the business actually used.
The business overpaid output tax by £14,000 and overclaimed input tax by £5,000, i.e. total VAT errors of £19,000 had been made, with a net overpayment of £9,000.
5. Digital links
Many businesses are concerned that they have multiple files that are used to create their returns, for example reverse charges, partial exemptions, scale charges and adjustments.
During the soft landing period the rules for digital links have been relaxed to allow you time to get your systems working properly.
The reverse charge is a particular problem area for many accounting systems, which don’t automatically generate the necessary transactions. There is no VAT on the invoice but because it’s an EU purchase you need to create input and output transactions. For most businesses this feels like a pointless exercise generating unnecessary transactions. It's only partially exempt businesses that suffer VAT through this process.
6. Getting help and guidance from HMRC
1.2 million businesses will need to register for MTD because they are VAT registered and are over the threshold. HMRC will struggle to deal with the volume of questions that taxpayers will have. There are also 43,000 UK tax agents and they will have questions too.
HMRC has suffered severe cutbacks over recent years, with regional offices being closed and staff numbers reduced. They are under massive pressure and this means long delays in replying to letters and great difficulties in trying to speak to someone who can help.
7. Expensive consultancy services
Many consultants, including some of the best known accountancy firms, are offering expensive consultancy services often referred to as a GAP analysis. This will review your accounting systems and identify potential gaps in the way you prepare VAT returns. Quotes have been provided that range from £15,000 to £50,000.
Clients can often feel pressurised that it is something they have to do, which is not the case.
Clients will have had their processes mapped by their auditors and will probably have had a previous HMRC audit, so their processes are likely to be working well. These processes can continue and bridging software will allow multiple files to be combined.
According to the feedback from our delegates, the majority of businesses attending our course have decided that they don’t need GAP analysis - they just need the right bridging software!
Conclusion and how UK Training can help you...
Implementing MTD in any business is going to be a challenge and you will not be able to rely on your software provider to do all the work for you. You need to have an understanding of the practicalities such as when to register and how your chosen software solution will work with your current accounting practices. You also need to ensure that you have access to reliable and affordable sources of help and support.
To provide you with clarity and peace of mind on the key challenges we have discussed in this article, we present a four-hour course, which has so far been attended by nearly 500 people and continues to be hugely popular. Making Tax Digital helps you get to grips with everything you need to know about the changes and what procedural changes need to be put in place to ensure you are compliant now and in the future.