Upcoming VAT Changes for SMEs in 2021/22

Ross Bramble of Crunch reveals how small businesses can prepare for the upcoming changes to VAT rates and processes in the UK, including the delayed Making Tax Digital scheme

By Ross Bramble

Over the next six months, a few notable changes are coming to the world of Value Added Tax (VAT), of which all VAT-registered businesses- whether above or below the VAT registration threshold - should be aware.

The first of these changes is the VAT rate for leisure and hospitality businesses, which is only a matter of weeks away. Secondly, the Making Tax Digital (MTD) scheme is set to be rolled out to all businesses in April 2022. Whilst this has been on the cards for some time, an estimated 100,000 businesses are not yet registered. After a difficult year with endless announcements regarding government loan schemes, job retention programmes, local grant initiatives, and more, it's understandable that some key deadlines have been forgotten.

In this article, we’ll be exploring the two significant changes coming to VAT rates and filing regulations over the next six months, starting with an increase to the VAT rate at the end of September 2021.

End to the temporary VAT reduction

During the peak of the Covid-19 pandemic, the government announced a roster of economic measures to help support small businesses. These measures included a temporary reduction to the VAT rate from 20% to 5% for the hospitality and tourism sectors. As a result, businesses such as bars, restaurants, cinemas, theme parks, and hotels could reduce their tax payments while recovering from the impact of lockdown restrictions.

This VAT cut will come to an end on 30th September 2021. It will then rise to 12.5% for another six months before returning to the full 20% rate in April 2022.

With the VAT rate increasing on 1st October 2021, it’s important to set aside enough money to cover your upcoming VAT payments. It's also worth considering that this date will coincide with the closure of the fifth Self-Employment Income Support Scheme grant, followed closely by the end of the Recovery Loan Scheme in December. Therefore, you may wish to start building your cash reserves or seeking external funding to prepare for future tax bills.

Deadline for Making Tax Digital

As part of the government’s ongoing MTD scheme, all VAT-registered businesses will need to file their VAT returns online from 1st April 2022, regardless of whether their turnover is above or below the VAT registration threshold.

MTD is the government’s attempt to move all small business tax payments online. This scheme should streamline the filing process and turn the British tax system into the most advanced set-up worldwide - a transition that will delight any business owner who has sat on hold with HMRC ahead of an important deadline.

Currently, all businesses with an average annual turnover above £85,000 are required to store their records and file their VAT returns using online software. This is something that all online accountants, like Crunch, should already be doing for you if you fall into this category. From April 2022, this requirement will be extended to all companies beneath the VAT registration threshold. Therefore, it will no longer be possible for any VAT-registered business to submit returns manually.

Furthermore, if you are using more than one application or spreadsheets for bookkeeping, you won’t be able to manually copy and paste data from one system onto another. Instead, there must be a digital link to automate this process in order to avoid human error.

How to prepare for Making Tax Digital

For businesses below the £85,000 threshold that have not yet registered, you can either choose to voluntarily join the MTD service today, or wait until it becomes mandatory in April 2022. We'd definitely recommend the former, however, as the sooner you’re registered and familiarized with the process, the better your experience will be.

Getting set up for MTD is relatively simple: you need to get your hands on some MTD-compatible software that allows you to digitally send and store your records. This software must be in place before you register, and you'll need to keep digital records for the whole accounting period you are signing up for. Companies that already use online accounting software may be able to sign up and sync their accounts with HMRC immediately, but check your current software is compatible.

On the GOV.UK website, you’ll find a comprehensive list of software options that HMRC have approved, including Crunch's accountancy platform. All the listed providers are MTD-compliant, but beyond that, each platform will have different functionality. It's important to find the right software to suit your business requirements, so be sure to research thoroughly before selecting a vendor.

Once your business is ready, you'll need to register online. To find out more information before signing up, you can visit Crunch's Making Tax Digital Hub or speak with an accountant for tailored advice.

About the Author

Ross Bramble is a copywriter at Crunch - an award-winning online accounting service that supports freelancers, contractors, and practically anyone who’s self-employed. For over ten years, Crunch has combined easy-to-use, online accounting software with actual human beings, so that you’re always able to access your accounts and seek the support you need.

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