VAT changes for small businesses coming in April
Under UK VAT rules, businesses with a VATable turnover above the VAT threshold (currently £85,000) are required to register with HMRC for VAT.
Businesses below this threshold are not required to register with HMRC for VAT. But many choose to do so as this lets them reclaim the VAT paid on most purchases.
These are known as voluntary VAT payers or voluntary filers.
As part of the Making Tax Digital (MTD) for VAT roll-out in April 2019, HMRC required that all businesses above the VAT threshold submit their VAT returns using digital technology.
Essentially, this means these businesses must use MTD-compatible software.
Voluntary filers had the option to sign up to MTD and submit their VAT this way (although if they do, they must also keep digital records, as part of the wider MTD for VAT requirements).
But sign up wasn’t mandatory at the time, as it was for those above the VAT threshold.
Because of this, voluntary filers could continue to use the old accounting software for filing, via legacy technology unrelated to MTD for VAT.
This is known in technical language as the VAT XML channel.
And that’s the problem here: HMRC has announced that it’s removing the VAT XML channel in April 2021.
So what should you do now?
- Voluntary VAT changes: Registering for MTD for VAT
All VAT registered businesses – including voluntary filers – need to switch to MTD for VAT by April 2022. That’s the law.
Therefore, the best solution if you still use the legacy method to submit VAT returns would appear to be to register for MTD for VAT now, ahead of when you’ll be required to do.
Registering for MTD for VAT now, rather than later, means that two problems are solved.
Firstly, you avoid the problem of the legacy VAT submission method being deactivated while still being able to do VAT submissions in the same seamless way using software (provided your accounting software supports MTD for VAT – most do, but it’s worth checking).
Secondly, you ensure your business is ready well ahead of time for when MTD for VAT registration for voluntary registrants is mandatory.
In short, you’ll have to make the switch at some point, so it’s worth doing so now.
- Voluntary VAT changes: Delaying MTD for VAT registration
There’s a second solution to be aware of following April 2021.
It’s possible to manually make VAT submissions using HMRC’s website portal using your company’s Business Tax Account and your VAT online account.
This avoids the immediate need to register for MTD for VAT.
Although one of the older methods for making VAT submissions, the VAT portal (as it’s informally known) has remained online.
As some people are exempt from MTD for VAT, and businesses also use their VAT online account to do other tasks such as set up direct debit or report changes, it’s likely to remain available for the foreseeable future.
For businesses using accounting software, using the VAT portal will involve manually creating a VAT report for the relevant period, then copying and pasting (or manually typing) values into the HMRC website.
Needless to say, this process is prone to keying errors.
Making corrections must also be done via the VAT portal, which again is more complicated than simply using software.
It all sounds very complicated but the essence of it all is that from April this year, if you are VAT registered voluntarily then you will either have to adopt new digital accounting software OR file your VAT return by logging into the HMRC gateway and manually inputting your figures. By April 2022 you will need to have the digital accounting software in place anyway so why not go down that route now.
If you need more guidance or help then contact us here at Balance and we will be pleased to assist: flourish@balanceonline.co.uk or 01484 685413