What is Making Tax Digital?
From 1 April 2018, VAT-registered businesses with a taxable turnover of over £85,000 will be required to keep their VAT records digitally and submit VAT returns using Making Tax Digital (MTD) compatible software. At present, only 11% percent of VAT returns are filed with software. Under the new regulations, it will no longer be possible to submit VAT returns using HMRC’s online gateway.
If you do not currently file VAT returns using software, MTD could have a real impact on how you account for VAT. HMRC is currently working with more than 150 software suppliers who have said they’ll provide software for Making Tax Digital for VAT in time for April 2019. However, you also cannot assume that your current software is going to be MTD compliant. Many popular software providers for small businesses will not be updating older versions of their software and therefore will not be compatible with the new regulations.
Below, we have set out whether the most popular software providers we see for small businesses are ready for MTD:
Xero are a HMRC approved MTD software provider and are committed to supporting small businesses through the transition. Xero customers can already submit VAT returns using Xero, however, to be MTD compatible Xero are bringing a whole new experience to support the changes. Unlike a number of other software providers, these upgrades will come with no upgrade fees and minimal impact to the user. Users should be able to amend the return in Xero for adjustments that have previously been made manually such as partial exceptions.
Xero are currently part of HMRC’s beta testing stage and have confirmed that successful VAT returns have been submitted with Xero’s MTD functionality. The software functionality will be rolled out to all Xero subscribers before the first submissions for MTD VAT returns are due.
SageOne and Sage 50cloud will support the MTD VAT functionality. However, Sage have announced that they are ending their support for Sage 50 Desktop from 23 October 2018, meaning that this software will not be compatible. Therefore, desktop users will need to upgrade to the cloud version of Sage 50 or convert to another software provider.
QuickBooks’ cloud-based software is on the HMRC list of recognised software suppliers. They have confirmed that they will ready for April 2019. The desktop customers will need to be on the latest version (currently 2018) to receive the updates for the software to be MTD compliant.
The developers at FreeAgent have recently confirmed that their software will support VAT submissions for MTD. They have been working closely with HMRC to get their product up to the required standard over the last few months. The process of submitting VAT returns on the software will remain largely unchanged.
In order to use spreadsheets to submit VAT returns, you will need bridging software which will provide an API to link with HMRC’s system to allow MTD compliant submissions. It appears that some software houses are looking into providing this software, however, it is unlikely that a free software product with MTD for VAT functionality will be available.
We understand from literature released that unlike Xero, it will not be possible to manually amend the returns within all softwares. Therefore, where adjustments are made for partial exemption a spreadsheet may be the only method through which returns can be submitted. This will also be the case if you submit group VAT returns.
If you are not currently on a system that is MTD compatible and are interested in finding out more about Xero or another software provider and how we can assist you with the transition to the software, please get in touch. We are a Xero Gold Partner with advisory staff on hand to assist you with any MTD or Xero queries.