Glen Foster, Director, Small Business and Accounting Partners at Xero looks at why MTD (Making Tax Digital) compliance could be an opportunity for business success in 2022
As we enter a New Year, small businesses in the UK will be hoping that their fortunes improve. The promise of a recovery from the stagnant pandemic economy in 2021 has been partly realised, only for new variants and looming restrictions to bring us all back down to earth. Like most businesses, SME owners have entered 2022 with an uncertain future.
Given the challenges they have faced, they would be forgiven for focusing on the short term rather than looking too far ahead. Our recent research showed that seven out of ten SMEs remain focused on day-to-day survival rather than how to better run their business. But pandemic or no pandemic, they must be alive to other key changes coming around the corner. One such change is the arrival of the next phase of Making Tax Digital (MTD) for VAT, coming into force from early this year.
This means that those businesses submitting VAT through the HMRC portal, or via the post, will have to start maintaining records digitally and file VAT returns through HMRC recognised software from April.
The next phase of MTD will impact VAT-registered businesses with a taxable turnover under £85,000, who must comply or face unwelcome fines. Although larger VAT-registered businesses have been complying with MTD since April 2019, the next phase will affect almost a million additional businesses.
The compliance process will have been triggered by many recently receiving a letter from HMRC, reminding them of the deadline. Those who fit the criteria and haven’t received one yet should expect to soon. This may have prompted action for some, but many continue to delay working towards MTD compliance.
Although a government-mandated change in the tax system sounds intimidating, perhaps pushing businesses away from a more manual system they are comfortable with, it does not have to be an onerous process. The following steps can help to ensure MTD compliance is as painless as possible and even turn it into a platform for business success in the new year.
- Do your research
As with most legislative changes, there’s a lot to get your head around when it comes to MTD. Therefore, it’s important that SME owners and their finance teams get up to speed on the implications for their business.
Thankfully, there is a variety of resources available to help business owners get educated on all-things-MTD, whether from HMRC itself or elsewhere. For example, HMRC has created its own MTD for VAT page, outlining everything from whether a business is eligible, to how they can sign up.
Even those SMEs that are more advanced in their technology adoption should look closely at what is required to ensure compliance. It’s important to note that under the new MTD rules, HMRC will only accept VAT returns sent using HMRC recognised software, unless there is a legal exemption.
For those already on their way to digitalising their tax processes, it’s worth checking if their supplier is MTD-compliant as early as possible. This list will help narrow down the search.
- Lean on support networks
Seeking an education on MTD is important, but there is no need to go through the transition alone. SMEs should be open to leaning on their accountants and bookkeepers as much as necessary. They are likely extremely prepared for MTD for VAT and are a fantastic asset when it comes to helping businesses during times of change.
Indeed, many are realising the crucial role that accountants and bookkeepers play. Recent Xero research revealed that almost half (45%) of small businesses believe their accountants are more important to them than ever.
SMEs can turn to their accountants and bookkeepers for everything from practical advice on cash flow management, to best practice on digitising documents, and even much-needed moral support. By tapping into their vast knowledge and expertise, they can drive their businesses forward.
- Get to grips with the digital tools
MTD does what it says on the tin – it’s about digitalising tax processes. But many SMEs are unsure which digital tools will be required and how they will be used. HMRC will ask for a number of digital records to be kept – from business name, adjustments to returns, rate of VAT charged on supplies made, and more.
While existing methods like Excel spreadsheets can be used to calculate or summarise VAT transactions, if preferred, all information must be submitted to HMRC through approved software.
Once small businesses are familiar with the chosen software, they will increasingly understand that it doesn’t have to represent just another burden that complicates matters. Using digital tools will save time for businesses, for example by pulling information from digital records to submit returns, giving SME owners more time to spend on running their business.
- Turn MTD into an opportunity for business success
It’s not surprising that many businesses see MTD compliance as a burden. Small businesses, which have had more than a fair share of challenges in recent years, would be forgiven for putting it off as another time-consuming chore.
However, this government mandate can’t be ignored and so SMEs might as well make the most of the opportunity to re-evaluate their tax and finance function. Beyond this, MTD compliance could be a useful springboard for accelerating other technology-driven initiatives, with processes updated that had previously inhibited digital change. Even for the smallest businesses, this is an important consideration.
When planning for the next stage on their digitalisation journey, SME owners might also consider signing up to the government’s scheme, Help to Grow. It gives eligible businesses access to free, impartial online support about how digital technology can help them, as well as a discount of up to 50% towards the costs of buying software.
Whether it’s MTD, or other digital initiatives, small businesses who embrace technology to drive success have the opportunity to thrive in 2022, whatever the circumstances.