As a small business owner, you will find that all VAT refunds are digital, i.e. online, for some time. But you may not realize that HMRC’s plans don’t stop there. The requirements that must be met within a year are very diverse.
Phase 1 of the new Make Tax Digital process will start as early as April 2019. So, start planning this tax year and plan for the next change.
Tax Digitization – Implications
Authorities are now trying to make it mandatory to buy or rent anything described with feature-compatible software like Clearbooks to make everything real-time. (Note to Mac users: make sure the solution you choose works in the UK).
This may mean scouring paper records quarterly or yearly, but it also means you (or the person doing your accounting) will need to identify and record all forms of expenses you incur. Of course with your invoice.
If (in the words of the Small Business Group) the spreadsheet is electronically linked to the HMRC, it will remain usable. However, this is a temporary measure and can be problematic in practice.
An initial step towards a full business tax transition by 2021 is for VAT records to be digitally completed so that they can be continuously reported from April 2019.
VAT refund currently only lists total sales and purchases. After April 2019, every single item representing a VAT item must be digitally recorded. Zero rate, standard rate. You must also indicate any adjustments you may make, including cancellation fees for income, car leasing, living expenses, entertainment, etc.
There are potential advantages and disadvantages.
Reduce physical paperwork and collate/transform spreadsheet information
Avoid VAT Record Errors and Potential Fines
Additional cost of cloud accounting software (currently for non-users)
Continuous recording replaces quarterly or annual work.
Accountants may charge extra hours for transitions and compliance
Organizations with annual turnover of £85,000 are subject to VAT registration. If you are below that level, you may choose to register if you feel you may exceed the amount now or soon.
This applies not only to limited companies, but also partnerships, private merchants, public institutions, schools and charities.
People who are close to but below the threshold can now choose to withdraw their VAT registration or not join if they are not. There are pros and cons, and every situation is different, so if you’re uncertain, it’s a good idea to discuss it with your local accounting department.
VAT registrants have an initial 12-month ‘honeymoon period’ during which there is no penalty. Small operations without external financial support will definitely need an adoption phase.
The vision of the HMRC is that the organization as a whole will be better off in the future, with other taxes due to be ‘fully digital’ by 2021. The devil, as always, will be in the details.