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Reality bites - Making Tax Digital

Nowhere to hide on Making Tax Digital

Making Tax Digital (MTD) was first introduced in the 2015 spring budget and has (broadly) been rolled out across businesses since April 2019.

To date, any VAT registered business with annual sales that exceeded the VAT registration limit (currently £85,000) had to follow MTD rules, but businesses that had voluntarily registered for VAT with annual sales below that limit, were exempt.

2022 sees that exemption disappear.

If you are a VAT registered business, then for all VAT periods starting on or after 1 April 2022, you must follow the Making Tax Digital rules. This means that you will need to:

  • File your VAT returns digitally, using MTD compatible accounting software
  • Keep your VAT records digitally, again using compatible software

There will no longer be an option to file through the Government Gateway. 

If you are not using the right software then you will simply not be able to file your VAT returns, meaning that you will trigger late filing penalties and also, probably, additional fines for simply not being compliant with the rules.

And there is nowhere to hide - MTD for Income Tax Self Assessment and Corporation Tax are all scheduled for roll out over the next few years.

So if you are setting up a business today, you need to also take out a subscription to a suitable accounting and bookkeeping software. 

But this does have some significant, additional benefits.

Should I simply not register for VAT?

Registering for VAT is either the right thing for your business or it is not. How you file your VAT return shouldn't really be a consideration.

As we covered in our blog 'Do I need to register for VAT?' there are various things to consider - but as a rule of thumb, it is probably beneficial for you to voluntarily register for VAT if your customers are other businesses and not private individuals.

VAT returns need to be filed regardless of the move to MTD. 

Filing your returns digitally is far, far easier than completing them manually. Yes, there is an additional cost in subscribing to suitable accounting software, but £15-£20 per month compared with the time saving is an easy sell as far as we are concerned.

In addition there are significant, knock on benefits to using accounting software to help run your business. More on that below.

Also, as mentioned above, MTD is already scheduled for both personal and corporate taxes. So at the very best you may be delaying the inevitable. 

If registering for VAT was the right thing to do pre MTD, then it remains the right thing to do now.

And don't forget, if your annual sales will exceed £85,000 you may have to register for VAT regardless. 

The knock on benefits...

It is a staggering fact that up until a couple of years ago, most small businesses simply didn't use any recognised bookkeeping or accounting software, relying instead on manual records and/or spreadsheets.

In fact more than 12% kept no records whatsoever, preferring instead to simply throw their receipts and invoices into a box for their accountant to worry about at year end.

Given that 82% of small business that fail put that failure down to poor cash flow management - not poor cash flow - poor cash flow management - and you can begin to see the knock on benefits of using cloud software to complete you bookkeeping and accounting and keep a handle on your financial performance.

Cloud accounting software can cost as little as £12 per month and can be transformational for you and your business.

Businesses that use cloud accounting software, rather than spreadsheets and paper, typically can expect: 

  • A doubling of their chances of securing finance (and monstrous increase in the quantity and range of potential financing options available) - BPiaB
  • Increase in their reclaimable expenses by 9% - NBS
  • To be paid by their customers around 17 days faster - XERO
  • Spend an average of 3 hours per week LESS on administration and bookkeeping - FBS

Research by Xero also showed that during the COVID pandemic, businesses using cloud accounting software were, on average, £32,400 better off than those that did not.

Having well maintained, books and records allows for not only better management of cash flow but also the ability to ask for help when things look a little odd.

  • Other great features include:
  • Automated invoicing 
  • Automated posting of transactions
  • Automated credit control
  • Bank reconciliation with direct bank feeds
  • The ability to invoice and chase payments from your mobile phone
  • Raise quotes and convert them to invoices

And, of course, keep on the right side of wrong when it comes to Making Tax Digital.

Getting it right from the start.

To capture all of the benefits of using cloud accounting software you need to ensure that it is set-up correctly right from the outset.

Doing so also gives you much greater autonomy in terms of your day to day bookkeeping and compliance, meaning less reliance on accountants and bookkeepers, and, therefore fees!

Bookkeeping services typically cost upwards of £15.00 per hour and you could easily expect a qualified bookkeeping service to need up to a day a month to keep everything up to date - over £1,200 per year.

By ensuring that your cloud accounting system is correctly set up from day one you could easily halve this amount or even knock it out all together.

Correct set up involves:

  • Connecting your accounting software to your bank account
  • Ensuring VAT codes are correctly allocated
  • Setting up bank 'rules' to allow for automated posting  
  • Creating your business invoice template
  • Setting up automated invoice reminders to chase for payments
  • Tailoring the 'trding' section of your Chart of Accounts

Doing so early can save a hole heap of problems (and costs) further down the line. Ask us for details of our Cloud Accounting Set-up Service.

The future's bright

So whilst you may, at least initially, think that having to comply with the Making Tax Digital rules is detrimental to you and your new business, the reality is that if you fully embrace cloud accounting, and ensure it is properly set up when you start trading you will find compliance a breeze whilst saving time, effort, money and, crucially, getting paid faster! 

ATN has already released its Budget 2021 summary which is available free of charge by contacting the office (01474 326 224). Alternatively, visit the website; tweet @atnpartnership or email info@atnpartnership.co.uk.