The implications of the next phase of VAT and Making Tax Digital for tradespeople
In this article, Old Mill’s Emma Swithenbank guides tradespeople through the next phase of the government’s Making Tax Digital (“MTD”) initiative by taking a look at what the changes are, when they will take place and what you need to do to remain VAT compliant as the next stage is introduced.
With lots of recent talk of MTD and the upcoming changes to record keeping requirements edging ever closer, you might be wondering what this means for you as a sole trader or small business owner in the trades sector.
27th October 2021
MTD is part of the government’s 10 year plan to digitalise taxation. It aims to improve the tax system, making it more efficient by reducing the scope for error and simplifying tax administration for business owners.
For VAT, this means that certain records must be kept digitally, such as any VAT charged and at which VAT rate, any VAT incurred on purchases, any VAT schemes used, etc. These records must be kept using compatible software which is either capable of connecting to HMRC systems itself, or is a bridging software, designed to connect non-compatible software, such as spreadsheets, to HMRC systems.
MTD has been introduced in phases and will be compulsory for all VAT registered businesses from April 2022.
Phase one was introduced in April 2019 and required all VAT registered businesses trading above the VAT registration threshold of £85,000 to sign up to MTD, with the exception of certain organisations such as charities which were granted a six month extension.
The second phase will impact the remaining estimated 1.1 million VAT registered businesses currently trading below the VAT registration threshold. From 1 April 2022, all businesses must sign up to MTD.
Many businesses in the trade sector have turnovers slightly below the VAT registration threshold, often being operated by a self-employed individual or as a small business, meaning they weren’t captured by the first phase of MTD but will soon need to sign up.
This means being aware of the records which must be kept digitally and ensuring that compatible software is in place ahead of the deadline.
- Check your level of turnover to ensure you have not breached the £85,000 threshold in any 12 month period since MTD for VAT was introduced in April 2019. If you have, you should sign up for MTD immediately. If your turnover is (and remains) below £85,000, you have until 1 April 2022 to sign up for MTD.
- Understand the digital record keeping requirements. There are no additional requirements being introduced by MTD but the way you record certain information may need to be changed. A full list of records that must be kept digitally can be found here.
- Check whether the accounting software you use is compatible with HMRC systems. You can find a list of compatible software here. You may wish to start using this sooner rather than later, so you are familiar with the software you have chosen before the MTD deadline.
- Remember we’re here to help. If you have any questions relating to MTD or think that the move to a digital tax system will cause you difficulties, please let us know. We can help resolve your queries and can discuss software options and assistance with preparing your VAT returns going forward.