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Is your business ready for digital VAT?

Updated 22 December 2022

2min read

Nick Green
Financial Journalist

From 1 April it is compulsory for businesses to file their VAT online, as part of the government’s campaign Making Tax Digital. However, with 1.2 million UK companies expected to be affected by the new format, there are serious questions about whether organisations across the country are efficiently prepared. Article by Nick Green.

Filing VAT digitally

The government is making it mandatory for businesses above the VAT threshold (i.e. a turnover above £85,000) to file quarterly VAT returns online. This rule becomes effective on 1 April, though at the most recent count only 70,000 had registered for digital VAT returns, out of more than a million qualifying businesses. Though uptake has accelerated as the deadline nears, the shortfall suggests that many thousands of businesses remain at risk of being penalised by HMRC.

Why is the change happening?

The switch on online VAT filing is part of a wider government initiative called Making Tax Digital (MTD). A key aim of MTD is for the UK to offer one of the most advanced tax administrations in the world, and make it easier for businesses and individuals to pay their taxes and to do so accurately.

The current phase of the changes focuses on VAT for businesses, with the exception of a small minority of VAT-registered businesses that have more complex requirements. The vast majority of businesses over the VAT threshold will need to use MTD-compatible software to file and submit their tax records.

What is the risk of not signing up? 

HMRC can issue fines for businesses that fail to respond to the MTD requirements. In fact, HRMC has implied that it will seek to penalise companies that purposefully avoid making the changes.

However, not all businesses that have yet to make the change need to panic. A spokesperson for HMRC has explained that April 1 will not be a ‘cliff edge’, as the first actual filing through MTD won’t actually happen until August. ‘Businesses will join as and when it’s right for their VAT period,’ said the spokesperson. HMRC has also acknowledged that the changes will take some time to bed in, so during the first year there won’t be any filing or record keeping penalties for businesses that are clearly attempting to comply with MTD. However, late payments will still be penalised in the same way.

A complete re-evaluation of the UK accounting system

There are concerns that MTD will create more work for accountants who will need to submit records four times a year. However, there are clear benefits of the digital transition.

Mel Stride, Financial Secretary to the Treasury, explains, ‘[Making Tax Digital] will give businesses more control over their finances, allowing them to spend their time focusing on innovation, growth and the creation of jobs.’

Quarterly submissions are designed to encourage an ongoing review of tax payments, helping businesses to understand how tax affects their yields. The digital aspect enhances this visibility with greater access to records and by providing reliable human error detection. Another stated aim of MTD is to allow businesses to streamline processes and proactively chase payments in a simpler way.

Although the transition period will inevitably experience teething problems, a digital tax system should make VAT returns less of a burden in the long term. Find out more ways to make your business tax-efficient.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.