In two previous articles, I discussed the topics of VAT and Making Tax Digital for income tax (“MTD”). While the introduction of MTD (which has been much delayed until April 2026) will impose an increased administrative burden on small businesses, I also think it could provide an opportunity with VAT.
Businesses are only required to register for VAT when their turnover reaches the threshold of £90,000. You can choose to register voluntarily at lower income levels, but that would only be advised where the business would likely recover input VAT (the VAT on expenses) and this exceeded the cost of the additional compliance costs.
The compliance costs are either in the time spent that could be better spent working on the business or in the actual cost of outsourcing the quarterly VAT work to an accountant or bookkeeper. For example, if you could save £250 a quarter, but the accountant charges you £500 per quarter, you would be worse off registering.
But this is where MTD makes things interesting. If you are now legally required to file quarterly income tax returns under the new MTD regime, how much more of a burden will it be to file a VAT return at the same time? MTD will require you to compile all your income and expenses, and in doing so you could easily record the VAT data at the same time at little extra cost. Any MTD compliant bookkeeping software will be able to file VAT returns too as MTD for VAT is already in place. It will just mean pressing a few extra buttons in the software and submitting an extra return to HMRC.
That said, this does not mean you should automatically register for VAT when MTD comes in. It will still depend on your client base. This is because being VAT registered requires you to add 20% (or the relevant rate, depending on the supply) to your income. This is fine where your customers are also VAT registered businesses as they will recover the added VAT on their own return so the overall net cost to them is the same.
To illustrate this point, imagine a musician. As discussed in my VAT article, a musician who mainly performs at weddings will be dealing with couples who are not businesses and therefore not VAT registered. If the musician registered for VAT they would either have to increase their price by 20% or pay 1/6th of their fee to HMRC. If instead the musician was selling their services to a popular bar, adding VAT to the fee would not impact the bar overall.
There will be added costs to all of this. Bookkeeping software is normally taken on a monthly subscription, with varying prices. There are loads available, with Xero and QuickBooks two of the larger providers (you’ve probably seen their adverts). For our clients, we are able to pass-on discounts if they take their subscriptions through us. There are free software packages available, but these can have limited functionality, so check it does what you need. Otherwise, certain software is offered heavily discounted or free with other products. For example, you can currently get a subscription to FreeAgent bookkeeping software with any bank account in the NatWest Group (including its modern, app-based bank, Mettle, which is currently free).
Furthermore, as we move from a world where we are filing once a year to five times a year under MTD, it is inevitable that the costs of accountancy will rise. However, where it suits your customers, at least registering for VAT will help recover some of that extra cost.
Tax law is constantly changing, so the issues discussed here might now be out of date. Each taxpayer is different; therefore, we recommend that you consider your options carefully with an expert before taking any action.
If you want to discuss any of the above, or any other matter, just contact us on info@kma-spotlight.com.
