Making Tax Digital (MTD) is a government initiative to digitalize the UK tax system. Since April 2022, MTD rules have extended to all VAT registered businesses, irrespective of taxable turnover. In effect, businesses who fall within the thresholds must use compatible software to keep and maintain digital records and submit their tax return directly to HMRC.
According to Xero research, 45% of businesses believe their advisor is more important to them than ever. So, you need to make sure that your team is up to speed on the requirements of MTD.
Let's have a look at how you can make tax digital for VAT in 7 easy steps.
1. Get your firm up to speed
It’s important to ensure that your internal team is up to speed on the implications of MTD for VAT. To stay on top of the latest updates, take a look at useful resources from:
You may also want to consider setting up an MTD task force to identify who’s responsible for onboarding, training, and providing ongoing support to clients. If you have a bigger practice, it may also be worth hiring a formal project management administrator, a sponsor or decision maker, or a separate project manager.
2. Plan your segmentation
Making Tax Digital is a great motivator for going digital. And going digital is a great route to take if you want to stay relevant going forward. Using cloud software like Xero has a host of benefits, such as accessibility from anywhere with internet access, constant updates, automated input and output of data, and online support. MTD can be the first step on this journey.
An important part of your segmentation plan is to understand which of your clients you’ll need to migrate to digital accounting and when. MTD is mandatory for all businesses as of April 2022.
This provides a significant opportunity to migrate desktop software users to cloud accounting software. Moving accounts online may be met with resistance by some clients, but it’s easy to offset any concerns when you’re armed with the right information.
For more on segmenting your clients, complete Xero's migration specialist course which forms part of Xero’s MTD learning journey.
Moving clients to MTD compatible software? Easily convert up to two years of client data to Xero from select Sage and Quickbooks desktop and online products with Xero's free data conversion tool, Movemybooks.
3. Plan for communication
Communication to clients is absolutely key because this lies at the core of how you deliver your services, differentiate your firm from others, and how you market yourself. As Jeff Ryan, CFA noted in our interview about the future of accounting, it’s become more important than ever for accountants to be able to “translate financial information into ‘consumer speak’, especially for business people who don’t understand accounting jargon”. The ability to serve as a translator of important information is key not just as it pertains to MTD, but to the role of the accountant as a whole.
Pro tip 💡: To help you with the process of communicating to your clients, check out Xero's practice marketing and communications toolkit.
This toolkit provides guidance about how to communicate the change with your clients, so you can make sure they’re MTD-ready with minimal fuss.
You’ll find guidance and resources to help you with your marketing and communications strategy, including:
Why Xero for Making Tax Digital?
Getting your team up to speed
Communicating MTD and Xero to clients
For further tips and tricks, download the Beyond Analytics eBook on communication.
4. Client training
Your clients will appreciate training around Making Tax Digital for VAT. If you are looking at hosting your own training session, Xero can support you in a range of ways including:
Arranging for a Xero expert to be a guest speaker - They’ll be able to run a live demo, present the benefits of using Xero for MTD, and can help answer any questions your clients may have.
Using our ready-made presentation deck - To save you time creating your own presentation, we’ve created one for you. Download here.
Claim funding towards the cost of your presentation - Xero is willing to pay towards your associated event costs if you are a Xero accountant or bookkeeper, such as venue hire or catering if you are holding an event. Speak to your Xero Account Manager to find out more.
5. Agent Services Account
As an agent submitting Making Tax Digital VAT returns on behalf of your clients, you’ll need to sign up for an Agent Services Account. This is a process managed by HMRC. You only need one Agent Services Account for your organisation, and you can use this for all new digital services, including ones developed in the future.
Once you create a new account, you can link existing agent-client relationships to it. For more information read HMRC’s guidance here.
When you’re ready to sign clients up to MTD, visit the HMRC signup page. You will need to know:
Your practice’s Government Gateway ID and password for MTD services - these are the credentials you generated when you created your Agent Services Account.
Each agent Government Gateway user ID used by your practice for your VAT clients.
Each client’s VAT registration number.
Additional information about the client’s business.
The client’s email address.
Or else, clients can sign themselves up to MTD.
6. Review your VAT data on Syft
Before submitting tax returns, use Syft’s VAT Review tools in Audit to keep track of current VAT which is claimable, while also noting anomalous transactions that Syft has detected. Under VAT Review, there are 3 reports you can use to assess your VAT data:
Overview review: keeps track of the current VAT which is due or claimable, taking into account the anomalous transactions from the Account Defaults as well as new reports that are coming soon. Each drop-down displays information linked to that tax category and links to the various VAT/GST Review pages for further analysis. This review allows you to see where you may potentially be missing out on claimable VAT/GST or where you could be under-declaring VAT that you owe.
Account Defaults report: highlights transactions which have different tax codes assigned to them instead of the default tax code for that account. With this tool, you could potentially save a lot of money you were erroneously paying tax on. These mismatches could be an indication that the wrong VAT has been paid or claimed and so could save money overpaid to HMRC or avoid penalties for underpayment
Account Differences report: identifies any zero VAT transactions within a non-zero VAT account. The adjusted VAT amount is then further calculated using the most common tax rate detected in the account's previous transactions.
7. Ensure your VAT is accurate with Syft’s VAT reports
Syft’s VAT reports present tax movements grouped by accounts in a multi-period fashion. You can get a sense of your entity's VAT over periods determined according to your region. There are six different VAT reports available on Syft, which help you to identify any potential errors in your VAT using machine learning. This function helps filter and group your VAT to help you identify anomalies based on your knowledge of the entity and tax regime. The reports are:
VAT by account: identify movements in VAT in each account across your balance sheet and profit and loss over time
VAT by code: pinpoint VAT anomalies according to tax coding groups
VAT by source: find potential errors according to source documents
VAT by currency: discover anomalies according to currency
VAT by value: detect anomalies according to value
VAT by transaction: expose anomalies according to transactions
Once you have eliminated any anomalies from your VAT, you are all ready to submit!
If you want to learn more about how to prepare for Making Tax Digital, take a look at Xero’s MTD content hub, which contains guides, articles, and webinars covering all the key topics.