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The voice of Scotland’s vibrant voluntary sector

Published by Scottish Council for Voluntary Organisations

TFN is published by the Scottish Council for Voluntary Organisations, Mansfield Traquair Centre, 15 Mansfield Place, Edinburgh, EH3 6BB. The Scottish Council for Voluntary Organisations (SCVO) is a Scottish Charitable Incorporated Organisation. Registration number SC003558.

Making Tax Digital deadline looming for small charities

This opinion piece is about 2 years old

On 1 April, the final implementation phase of HMRC’s Making Tax Digital (MTD) for VAT comes into effect.

VAT-registered charities and businesses, regardless of turnover, will be required to maintain digital records and to submit their VAT returns digitally via the approved MTD accounting software, or face penalties if they fail to do so.

With no signs of HMRC allowing a soft-landing period for this final roll-out of MTD for VAT, sub-£85K turnover companies and organisations now have under a month to ensure they’re up and running with the new processes.

As well as affecting many small SMEs, these new measures are expected to have a significant impact within the third sector. Those charities which already manage their VAT digitally may incur relatively little cost in making the transition but others, which are less digitally-capable, may be more affected by one-off transitional costs as they move to MTD processes.

With many charities struggling to survive over the course of the global pandemic, there are growing concerns that a high number will not be prepared for these changes when they come into effect in April. This point was further underlined by HMRC when it reported in December that only a third of VAT-registered entities with sub-£85K turnover had signed up for MTD.

For those which are not prepared, they should firstly explore whether they are eligible for an exemption from MTD. If it is not reasonable or practicable for them to use digital tools for their tax, they may qualify for this. Likewise, if a business or charity has previously been granted an exemption for VAT online filing, this will carry over to MTD VAT requirements. More details on exemptions can be found here.

For those which are not exempt, they have under a month to register for the MTD VAT portal and get a compliant software package in place. HMRC has been working with the software industry to ensure that businesses and organisations needing to update their accounting systems now have access to affordable software products with the appropriate level of functionality required.

The support of a digital specialist accountant can prove invaluable in the MTD process by reviewing a charitable organisation’s position and setting out suitable options. This could include VAT de-registration, for example, and advice on other available schemes, such as annual accounting, which could make the compliance process easier. Along with preparing digital VAT returns on MTD software, an adviser can add further value by taking on the bookkeeping function to enable the charity’s directors to focus their attention on the day to day running of their organisation.

Putting aside the administrative issues of embracing the digital transformation, MTD is a broadly positive measure which, according to HMRC, is expected to deliver longer-term benefits. For small charities this will include reducing errors and the amount of time required to manage tax affairs. The immediate challenge to those generating under £85K turnover is to ensure they are compliant in advance of the looming 1 April deadline. 

Iain Masterton is Head of VAT at accountants Chiene + Tait