Making Tax Digital for VAT practice preparation guide

Following the introduction of Making Tax Digital (MTD) in April 2019, you need to submit VAT returns on behalf of clients with VATable sales above the VAT threshold (currently £85,000) using compatible cloud accounting software. From April 2022, you will also need to do this for clients with VATable sales below the VAT threshold.

This guide explains exactly what you need to do to get set up for MTD for VAT with HMRC.

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The next phase of MTD

MTD for VAT

HMRC no longer accepts VAT submissions made using the XML facility. This means that accountants who use accounting software to submit their clients’ VAT returns must do so via the software's MTD connection.

The scope of MTD for VAT will expand in 2022. VAT-registered businesses with a taxable turnover below £85,000 will need to follow Making Tax Digital rules for their first VAT return starting on or after 1st April 2022.

MTD for Income Tax Self Assessment

[Making Tax Digital for Income Tax Self Assessment](/glossary/making-tax-digital-for-income-tax-self-assessment/) (MTD for ITSA) will be introduced in 2023. It will require self-employed businesses and landlords with annual business or property income above £10,000 to follow the rules for MTD for ITSA from their next accounting period starting on or after 6th April 2023.

MTD for Corporation Tax

MTD for Corporation Tax is expected to be the next phase in the initiative. However, HMRC has advised that MTD for Corporation Tax rules won’t come into effect until at least 2026.

Find out more on HMRC's website.

Moving to the cloud

Migrating to a cloud accounting system is a chance for your small business clients to modernise their record keeping, simplify their finances and reduce time spent on admin. It's also an opportunity for you to take advantage of the latest technology; we see improved workflows and impressive growth among many of the practices we work with, including Chart Accountancy Ltd.

“Our practice is achieving great working relationships with all of our clients using FreeAgent. With FreeAgent, we are confident that all of our clients are able to seamlessly submit VAT returns to HMRC to meet the new requirements.” Teodora Dimitrova, Chart Accountancy Ltd

What does this mean for you?

If your practice and all your affected clients are already using FreeAgent to submit VAT returns, you'll still need to make sure that they’re ready to file. You'll need to set up an agent services account with HMRC and, if you’re planning to file VAT returns on your clients’ behalf, ensure they have given you permission to do so.

In FreeAgent, the VAT return process will remain familiar but there are still a few things that you need to do. Here’s a guide on how to prepare your practice and clients for MTD VAT filing in FreeAgent.

Getting ready for MTD for VAT

1. Make sure your team is up to speed

Your existing clients are likely to be concerned about MTD, while prospective clients will want to know that your practice is able to keep them compliant in the digital era. Ensure that you and your staff can answer these questions and address clients' concerns about MTD.

Our MTD for VAT Q&A answers many of the most common questions.

We also have a collection of informative MTD guides and resources for both your team and small business clients.

2. Segment your clients

Not all of your clients will be affected by MTD for VAT, so it can be beneficial to segment your client base. First, identify all your clients with VATable sales above and below the VAT threshold. If any of your clients use FreeAgent for VAT return filing already, keep them in a different segment.

You also need to know when each client’s VAT period end is in order to know when they have to start complying with MTD.

We’ve created a handy client segmentation spreadsheet that can help you identify which clients can be moved to FreeAgent's MTD-compatible software.

Your affected clients

Once you know which of your clients are affected by MTD for VAT, you need to review their current systems to make sure they're ready for their first MTD VAT submission. This will help you to tailor your client communications.

3. Contact your clients

After the segmentation steps outlined above, you’re likely to have four main groups of clients:

  1. VAT-registered clients who are already using FreeAgent
  2. VAT-registered clients below the threshold who are not yet using FreeAgent (or accounting software)
  3. clients who are using FreeAgent but are not VAT-registered
  4. clients who are not registered for VAT and are not yet using FreeAgent (or accounting software)

You’ll need to send each of these groups a slightly different message. To help you get started, here are some suggested messages that you can copy and paste into your emails:

Group 1: VAT-registered clients who are already using FreeAgent

Email template:

Making Tax Digital - we’ve got it in hand!

Dear [client name],

As you may be aware, HMRC will be rolling out the next phase of Making Tax Digital (MTD) for VAT in April 2022. Don’t worry - you won’t need to do anything differently. We’ll sign you up for MTD for VAT so you can continue to use FreeAgent.

If you’ve got any questions, please give me a call.

Best wishes,

[your name]

Group 2: VAT-registered clients below the threshold who are not yet using FreeAgent (or accounting software)

Email template:

Making Tax Digital is coming!

Dear [client name],

As you may be aware, HMRC will be rolling out the next phase of Making Tax Digital for VAT in April 2022. In order to stay compliant you will need to start using accounting software. This will not only keep you in line with HMRC’s new regulations but will make it far easier for you to share your business figures with us.

We recommend FreeAgent as the accounting software package for your business as it’s very easy to use. I’d love to set up a video call so I can show you how FreeAgent works. What day/time would be convenient for you?

Best wishes,

[your name]

Group 3: clients who are using FreeAgent but are not VAT-registered

Email template:

Making Tax Digital - we’ve got it in hand!

Dear [client name],

As you may be aware, HMRC will be rolling out the next wave of Making Tax Digital for VAT in April 2022, which will affect all VAT-registered businesses. As you’re not VAT-registered yet, there’s nothing that you need to do.

HMRC will be introducing Making Tax Digital for Income Tax in 2023 but don’t worry, we’ll guide you through it nearer the time.

If you’ve got any questions, please give me a call.

Best wishes,

[your name]

Group 4: clients who are not registered for VAT and are not yet using FreeAgent (or accounting software)

Email template:

Making Tax Digital for Income Tax is coming in 2023

Dear [client name],

Making Tax Digital (MTD) is a government initiative that aims to implement a fully digital tax system in the UK.

As part of the next phase of MTD, HMRC will digitise Income Tax in 2023. As a [business type], you’ll need to comply when the new legislation rolls out.

Although 2023 might seem a while away, we’d like to set you up on accounting software as soon as we can so that you’ll be ready when Making Tax Digital for Income Tax comes into effect.

We recommend FreeAgent as the accounting software package for your business as it’s very easy to use. I’d love to set up a video call so I can show you how FreeAgent works. What day/time would be convenient for you?

Best wishes,

[your name]

4. Educate your clients

Your clients might not know much about MTD - or accounting software - so once you’ve let them know about the legislation, it’s a good idea to start educating them about it.

The easiest way to do this is to let them know the benefits of using accounting software. You could focus on benefits such as control over finances, recurring invoices, 24/7 access to data and useful reporting features.

Explain to your clients that learning how to use the software now - rather than waiting until the last minute - is a good investment of time. Acting quickly will give them (and you) more time to sort out any issues together.

To help you get the message across, we’ve created a range of resources specifically for small businesses that you can use on our Making Tax Digital hub.

5. Find a software solution

For all your clients not using FreeAgent or a suitable alternative for MTD, you need to find an accounting software package that suits their needs. Here's why one of our accountant partners chose FreeAgent to help his practice prepare for MTD for VAT:

“I have chosen FreeAgent because, most importantly, it is very easy to navigate and understand; it has clear layout, friendly graphic design and it does what it is designed to do. It is also flexible, so even for more demanding entries or transactions there is always a way to work it out. Even the best software on the market will be useless if the end user does not know how to work with it. I found FreeAgent the most user friendly and therefore easiest to learn for my clients. By choosing software that is easy to learn it helps me to save that time as training becomes quicker. Therefore FreeAgent is my preferred accountancy software and I recommend it to my clients.” Tomasz from SAFI Advisory

6. Set up an agent services account with HMRC

The agent services account is different to your prior Government Gateway account and is the one you use to access the majority of HMRC online services when Making Tax Digital rolls out. This is the account that you’ll link to FreeAgent or your chosen accounting software in order to comply with MTD.

In most cases, in order to subscribe a client to MTD with an agent services account you’ll need their:

  • VAT registration number (VRN)
  • Company registration number (CRN)
  • National Insurance number (NINO)

You can set up your agent services account here.

In order to subscribe your affected clients, they will have to confirm that they can be added to your account from their own HMRC online account. You’ll be able to send them an invitation to do this. New clients and clients who have not yet given permission will also have to authorise you to submit returns on their behalf.

As MTD for VAT has already started you should aim to do this as soon as possible!

7. Reconsider your pricing

Making Tax Digital is not only a fantastic opportunity to bring on new clients, it’s a good time to update the services you offer and review your pricing. According to our research 37% of accountants are planning to do just that.

Our research suggests that most accountants will move towards charging a monthly rate. This is perhaps unsurprising, as monthly rates arguably offer greater transparency and are easier for clients to understand and compare against other services. In addition, monthly fees are easier for practices to manage and relieve staff of manual invoicing and billing tasks.

In a recent webinar Tomasz Wiadrowski of SAFI Advisory gave us his top tips for pricing in the Making Tax Digital era. He recommends a periodic review of prices to ensure your clients are billed fairly based on their size and the services they use. Tomasz and the team at SAFI have set up an internal system to review their prices quarterly.

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