Are you ready for MTD and VAT changes? Here’s what businesses need to know

As we grow closer and closer to the start of a new tax year, businesses all around the country are starting to familiarise themselves with upcoming changes. It can be difficult to stay ahead of new policies, but it’s important to prepare for what 2022 holds in advance, giving your business the best chance at transitioning as smoothly as possible into its next year of trading.

Whether you rely on the services of an accountant or not, the way your business pays VAT will impact your internal processes, budgeting and forecasting. Fortunately, despite tax returns often being confusing and difficult to understand, this year’s upcoming changes aren’t as complicated as you might imagine. However, if you are struggling to get the information you need, this blog will ease you into things.

First on the list is MTD, arguably the biggest change that businesses will face in 2022 and the one you should start preparing for now.

What is MTD?

MTD also referred to as Making Tax Digital, is a policy that has been gradually introduced by HMRC and is finally coming to fruition this April. The policy means that VAT tax returns will have to be submitted online using a VAT software solution that’s fully accredited and compatible with HMRC’s system.

MTD affects all businesses that exceed the £85,000 VAT threshold, though it’s useful for even smaller operations to take heed just in case they end up experiencing a higher turnover than expected. Up until now, MTD has been optional for businesses, but it will become compulsory from this tax year onwards.

It’s worth noting that MTD is currently only being enforced for VAT tax returns. However, come 2024 all businesses with an income over £10,000 per year will have to use the same system for income tax. Therefore, it’s worth thinking about making the switch to accounting software earlier rather than later to minimise disruption to your accounting practices.

What is the purpose of MTD?

While it might not seem like it at first, MTD is actually being introduced to make the whole process of tax returns much easier. It will not only help HMRC to process information more quickly but businesses will be faced with less admin, less likely to miss deadlines or make mistakes when filling out their return. MTD will also reduce the amount of tax avoidance and fraud, which has reached a total of £35bn this past year.

What businesses need to do

Regardless of whether this is going to be your first time paying VAT or not, all your business needs to do is start using VAT software. Doing this as soon as possible will mean you can avoid the additional admin of transferring spreadsheets over to the new system. Before subscribing to a provider, check that they are fully MTD compliant. Accounting software is typically very user-friendly and easy to get used to, however, if you have any concerns, you can consult an accountant or professional bookkeeper for advice.

Other VAT changes set to come in 2022

While MTD is the most widespread change that will impact businesses across industries, it’s not the only change in VAT charges this coming year.

End of reduced rate VAT for hospitality

During the pandemic, businesses that are part of the leisure and hospitality industry were granted a reduction in the rate of VAT they pay. When the policy was first introduced, the rate was 5% as opposed to the standard 20%. As the industry began to recover and trading started to resume to its normal levels, this was increased to 12.5%. However, from April, all hospitality businesses can expect to pay the standard rate of VAT on all relevant sales once more. This is based on the fact that people can now travel freely within the country and tourism has once again increased.

Despite this increase, hospitality can still enjoy reduced VAT rates on certain goods and services. These include things like cold foods that are not consumed on the business’s premises and food that has been heated before being cooled down.

Red Diesel taxed at a higher rate

This change is likely to impact the mining and construction industries the most, but it may also have a knock-on effect for businesses that rely on raw materials from these firms. The VAT rate for red diesel has previously been at a reduced rate of 5%, but this will now only apply to selected industries rather than act as a blanket rule. Farming and agriculture businesses will continue to pay a reduced rate, while most other industries will be charged at the standard 20% rate.

The reasoning behind this change is to help the UK to meet its climate change targets, improving air quality and reducing pollution. If you currently rely on red diesel to run your business, you will need to take into consideration this extra expense or find an alternate fuel source.

VAT late fees

On the last day of December, HMRC’s system of fines and fees for the late submission of VAT documents is going to be changed. While every business should always endeavour to submit their tax return on time to minimise consequences, it’s always best to be aware of what fines you could face should something go wrong. Fortunately, if you do find yourself in a difficult situation at the end of the tax year, the penalty system will be a much fairer one. Rather than issuing a default penalty, VAT fines will be based on the number of points a business has incurred.

Is there anything else businesses need to know?

Most of the major VAT changes have been covered above, but businesses need to make every effort to pay attention to changes in the coming tax year. Don’t forget that international trading may be affected due to Brexit, so it will be worth researching customs charges thoroughly before forecasting your expenses for the next financial year.