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Money Talk: VAT returns are changing very soon: is your business prepared?

You may have heard the phrase Making Tax Digital (MTD) a few times in the last couple of years. Admittedly not the catchiest of terms, so far it hasn't had much impact outside the accounting journals in fact it's hardly caused much in the way of comment even in the business sections of the mainstream media. But all that is about to change in particular as far as the vast majority of VAT-registered businesses are concerned. Because from April 1, those businesses will face a change to how they produce and file VAT returns.

Ever since 2012, VAT-registered businesses have been filing their returns by logging into the appropriate HMRC portal and effectively completing the equivalent of an old-fashioned manual return online, just by typing in the relevant figures into the appropriate boxes.

It hasn't mattered where those figures came from: it could have been a full accounting system, a home-brewed book-keeping spreadsheet, or just the back of an envelope. Other than the long-existing regulations in respect of adequate record keeping (for VAT purposes) which already applied to the old paper returns, HMRC was not particularly interested in how the figures on the electronic return originated.

But the imminent change under MTD will require most VAT-registered businesses (or individuals) to file their returns through a recognised, compatible accounting system.

In other words, rather than someone typing figures into boxes on screen, the accounting system will produce a fully-electronic VAT return and file that directly with HMRC.

Many of the most-popular accounting applications used by small- or medium-sized businesses such as Xero, QuickBooks and Sage, to name just three have already had the potential to do this for a while.

For VAT return periods starting from April 1, 2019 this method will become the required standard for most VAT-registered businesses. At this point it's worth stressing that there are no changes to either filing or payment deadlines it's only the method of submission that is changing.

We say 'most' businesses because there will be a few exceptions: Businesses where the turnover is below the current VAT threshold of £85,000 pa (ie those that are effectively 'voluntarily' registered) won't yet have to adopt this method. However any business which is currently above the threshold (and hence required to use MTD) but subsequently suffers a fall in turnover to below it, will have to continue with MTD unless they de-register for VAT.

why the change?

As usual the basic explanation for the change is to do with efficiency. If automated systems are capable of producing, transmitting and filing a VAT-return it makes some sense to take the human interface out of the process. However, there is another reason.

These accounting systems not only produce a VAT return; they produce numerous supporting VAT reports related to the return such as reports of sales or purchases by different VAT-rate categories. Now while nobody is currently suggesting that these reports will be either downloaded with the returns, or can be accessed remotely by HMRC, the simple fact that supporting documentation is always produced by the accounting system will make it easier for all concerned if there is any need for a VAT return to be examined in detail at some point.

you need to act now

If your business is VAT-registered and exceeds the registration threshold, but is being run without using a recognised/approved accounting system capable of generating and filing VAT returns starting from April, you need to act now. You have two choices: either you install an appropriate accounting application yourself, and learn how to use it so that you can enter all of your transactions from April 1, or you find an accountant to take your basic transaction data and run it through their accounting applications (usually Sage or Xero) and they will then complete the required automatic filing on your behalf.

Changing accounting systems isn't something that you should do without serious thinking and pre-planning.

For that reason we'd suggest that if your business isn't prepared for MTD then even if only as an interim solution, you speak to an accountant now.

They can provide a short-term fix using their own systems and perhaps, even more importantly, suggest an appropriate accounting package for the future and help you implement it to suit your business.

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