On 1st April 2019, new tax rules come into force than mean VAT-registered businesses trading over the VAT threshold of £85,000 will be required to embrace Making Tax Digital (MTD), the HMRC initiative which requires companies to keep their records in a digital format and submit their VAT return information to HMRC using MTD compatible software.

However, new research from audit, tax and consulting firm RSM suggests there could be as many as 880,000 VAT-registered businesses in the UK that are still unprepared for the new regulations. Is your business one of them?

A third of affected businesses unprepared

Statistics from the Office of National Statistics (ONS) show that in March 2018, there were 2,669,440 VAT-registered businesses in the UK. RSM’s research, carried out by YouGov, indicates that around a third of these businesses are unprepared for compliance with Making Tax Digital.

Unless they come under one of the very few exemptions, all VAT-registered businesses trading over the VAT threshold of £85,000 will be required to ensure that they are using MTD compatible software by April 2019 and submitting returns to HMRC digitally.

Only businesses with taxable turnover that has never exceeded the VAT registration threshold will be exempt from Making Tax Digital, unless:

• Your business is run entirely by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers)

• It is not reasonably practical for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason

• You are subject to an insolvency procedure

If you think any of these cases apply to your business, you must contact HMRC to verify that your business is exempt.

Practicalities and the ‘Soft Landing Period’

Compatible software must include an Application Programme Interface (API) that creates a link between the business’s accounting software and HMRC’s systems, enabling businesses to submit their VAT return figures to HMRC directly through the software rather than using a separate system to file a paper-based or digital return.

However, HMRC has declared a ‘soft landing’ period between April 2019 and April 2020, during which:

• Businesses will not be required to have digital links between software programs (in law, a digital link is an electronic or digital transfer or exchange of data between software programs, products or applications. The use of ‘cut and paste’ does not constitute a digital link). The one exception to this is where data is transferred, following preparation of the information required for the VAT Return, to another product (for example, a bridging product) that is API-enabled solely for the purpose of submitting the 9 Box VAT Return data to HMRC. The transfer of data to this product must be digital.

• Where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.

• If a set of software programs, products or applications are used as functional compatible software there must be a digital link between these pieces of software.

• This digital link is required where the data to be included in any of the boxes of the VAT Return has been prepared within a software program, product or application, and this data is then transferred to another program, product or application in order to submit the VAT Return data to HMRC via the API platform.

John Forth, VAT partner at RSM said:

“With just six months to go before the rules come into force, there’s a worrying number of VAT-registered business that are completely unaware of the changes. And many of those that are aware have an awful lot of work to do to get ready.

‘VAT-registered businesses really need to make the next six months count, to ensure that their software, systems and people are all ready for the change.”

Are you prepared for Making Tax Digital? If you’re not sure where to start, Pandle has an excellent downloadable guide that will ensure your business is ready for the change and complies with HMRC’s legal requirements.