Starting from November 2022, all VAT-registered businesses have had to file VAT returns through the Making Tax Digital for VAT portal introduced by HMRC. Yet, many companies, especially eCommerce stores, continue to be unaware of how this works or how to transition from their old online VAT accounts, which opens them up to the risk of HMRC penalties.
There is, therefore, a massive opportunity for UK accountants like us to help eCommerce business owners to understand everything there is to know about MTD for VAT, and we wrote a blog post to discuss just that. Read on:
The dilemma
While eCommerce has long been a growing sector, the pandemic saw more online shops open up than ever before. People had more time on their hands and wanted to build an alternative source of income without worrying about maintaining social distancing. The variety of online marketplaces made it easy for pretty much anyone to set up an online store.
While these low barriers to entry are great for encouraging innovation, the issue arises when tax season comes around. Often, these eCommerce business owners are not even aware that VAT affects them until the online marketplace asks them to provide a VAT number before they can sell. At this point, they face further difficulties because they do not know how to register.
On top of that, the government looks at a rolling 12-month period so you need to know when you go over the £85,000 threshold in a 12-month period. Once you know you are about to cross the threshold, or realise you have gone over it, you must register for VAT. As per the Government website: You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold. VAT is then payable from the date of registration or the date you reached the threshold.
This necessitates the ability to monitor gross sales in real-time, which many do not have. You cannot just look at your accounts on an annual basis. If you cross the threshold without realising, you may incur a penalty and you will also be liable for the VAT on the sales from that point. As you won’t have charged your customers the VAT amount, your business will be liable.
Another point to consider is the cost (in both time and money) of transitioning to MTD software. Getting the upgrade to work with existing hardware, the time taken to transition old records to the new software and getting used to the interface have all added to business owners’ stress about VAT.
There is the monetary cost of overhauling existing systems and adding new ones - many small businesses, indeed, may not have had the budget to do so.
In addition, there is a new penalty to be aware of. For all VAT periods starting on or after 1st January 2023, there are fines for filing VAT late – even if the eCommerce business is filing a nil or repayment return. Clearly, taking VAT lightly is not a good idea.
What eCommerce businesses need to do for MTD
It is evident that eCommerce sellers must positively digitise their accounting and register for MTD as soon as possible. As we discussed, the core issue with many online stores is the lack of awareness about tax laws and the business owner’s obligations. If you are in a similar boat, here is how you can be MTD-VAT compliant:
1. Set up MTD-compatible software
This is a vital prerequisite to filing VAT correctly. MTD-compatible software comes pre-loaded with the ability to send and receive information to and from HMRC and expansive digital record-keeping capacity.
There are several HMRC-approved MTD software vendors to choose from that offer high security, automated tax calculations and usability on the go. And do not postpone this until March! It takes time to adjust to any new software, so implement this well in advance.
2. Keep complete financial records
Every business needs to maintain certain digital records. These can be stored on the MTD-compatible software itself, or in multiple locations linked digitally and from which data can be digitally transferred (no manual typing or copy-pasting) to the MTD software.
For eCommerce sellers, a helpful option is a multi-channel sales software that automatically imports data from online marketplaces and inventory management tools to the leading cloud accounting software. And remember – HMRC explicitly forbids copying and pasting data!
3. Hire an accountant
Ecommerce sellers should be free to focus on what they do best – selling – rather than bogging themselves down with accounting intricacies. Working with a professional accountant will save you both time and money, and keep you on the right side of the law.
Get Golding Accountancy to help you. We understand that eCommerce is a fast-moving and competitive market, and you must have someone who can help you achieve tax efficiency and run your business profitably. We specialise in that!
4. Submit records only via the MTD portal
It is perhaps superfluous to state that all VAT-registered businesses must submit their VAT returns through the MTD portal, with the help of their digital records. They no longer have the option to use the old VAT portal or send physical returns by post – attempting to do so may attract penalties. Ask your accountant to guide you in this.
5. Register for VAT as soon as possible
The rule is that all UK businesses who cross an annual turnover threshold of £85,000 must compulsorily register for VAT. Ecommerce sellers who may have crossed the threshold already should immediately contact their accountants for help with the registration.
Even if you have not reached the threshold yet, it is wise to consult an accountant about the benefits of voluntarily registering for VAT.
6. Stay tax-aware
While it is the accountant’s job to do all the submitting, you need to know what the tax numbers look like as the business owner. Establish a relationship with your accountant and get periodic updates on how things are and what opportunities exist for improvement.
Particularly for a small business just starting out, an accountant can be a valuable financial advisor on tax payments, tax benefits, and much more. Golding Accountancy works closely with you for all your eCommerce accounting and tax needs.
Over to you
In conclusion, many new eCommerce sellers continue to be unaware of VAT requirements, and even the more experienced ones continue to use outdated and error-prone accounting strategies. There is an ample opportunity for accountants to offer scalable and affordable solutions that help those sellers stay compliant.
The new MTD laws are strict, and handling accounts manually is tedious in any case – by making a smooth transition to digital records and submissions, everybody wins.
Anthony Burrell
Tax Director
Anthony Burrell is the Tax Director at Golding Accountancy, specialising in UK personal tax, compliance, and strategic tax planning. He works with business owners, landlords, and property investors across the UK, helping them navigate complex tax legislation while ensuring they remain compliant and tax-efficient. Outside the office, Anthony is a dedicated West Ham supporter and has been a season ticket holder for more than 40 years. He also recommends Dext to clients looking to simplify their bookkeeping and financial processes.
