Making Tax Digital for VAT

Learn here how the UK Government's Making Tax Digital for VAT initiative has mandated digital record-keeping and VAT submissions via MTD-compatible software.

Introduction

Making Tax Digital (MTD) for VAT is a UK Government initiative towards the digitalisation of the UK tax system. Making Tax Digital for VAT requires businesses to keep digital records and send VAT tax submissions using accounting software that is compatible with MTD and submissions to His Majesty’s Revenue and Customs (HMRC).

Who needs to comply with MTD for VAT?

Beginning in 2019, the initiative was voluntary, but as of April 2022, Making Tax Digital for VAT became mandatory for all UK businesses that are VAT-registered.

Which businesses need to follow MTD for VAT?

All UK businesses that meet the threshold for VAT registration of £85,000 annual revenue and become VAT-registered are automatically registered for MTD for VAT.

Sole traders

A sole trader is a UK business operator who runs and owns their own business and is not registered as a limited company. The VAT-registration threshold and compulsory MTD for VAT registration rules apply to sole traders as they do to all UK businesses.

Limited companies

A limited company is a UK business registered as a legal entity, and as with all other UK businesses, the same VAT registration and MTD for VAT rules apply.

Religious societies, clubs, and associations

Although distinct in terms of legal status, religious societies, clubs, and associations like, all other UK businesses must comply with MTD for VAT.

Exemptions from MTD for VAT requirements

Exemptions from MTD for VAT are made on a case-by-case basis by the HMRC and come under very specific rules and requirements.

Application for exemption can be made if it’s not reasonable or practical for you to use computers, software, or the internet. HMRC guidelines state that age, disability, and where you live will be considered, but it is expected that all VAT-registered businesses who use the Internet for any of their business activities conform. Exemptions based on the amount of effort required to keep digital business records and conform to MTD for VAT are not given.

Further, MTD for VAT exemptions may be granted if you object to using computers on religious grounds, and exemption is automatic if you are already exempt from online VAT returns or your business is subject to an insolvency procedure.

Getting ready for MTD for VAT

Getting ready for MTD for VAT requires several stages of planning, including understanding what is required by the HMRC and then putting the right systems in place to be compliant when submitting VAT returns.

Registering with HMRC

Registration with HMRC is required for all UK tax purposes, and the same registration credentials are used to connect your digital business records, accounting software, or cloud service to your HMRC account and MTD for VAT.

Choosing compatible software and online services

Compatibility with HMRC's requirements for digital record-keeping, software, or online service with MTD for Vn AT submissions is paramount for any chosen software. A clear idea of what VAT-related information is required by HMRC and whether your software can include it is essential. After this, considerations include whether the software is capable of storing all the correct VAT-related information; providing information to the HMRC via their API platform and receiving it; and what device you are going to use the software on, such as your phone or tablet, laptop or PC.

CSV import file format and requirements

Under the HMRC guidelines for the types of ‘digital link’ accepted in MTD for VAT, the CSV (Comma-Separated Values) import file format is permitted for businesses that require the use of this format.

Understanding the data you need to keep and record

Making accurate VAT calculations and avoiding penalties for not doing so involves understanding what data you need to keep, record, and submit. The right software can help with this. The inclusion of sales and purchase invoices, receipts, relevant transaction details and the tax rate are things your software must be able to provision for.

Going forward

As part of the UK Government’s broader drive to create a fully digital tax system, Making Tax Digital for VAT is an essential component. With benefits including better financial forecasting with the accurate prediction of VAT and the streamlining of the filing process, UK businesses stand to gain substantial benefits through the implementation of Making Tax Digital for VAT and the strategic adoption of the best digital record-keeping software or online service for your business.

FAQ

Is Making Tax Digital for VAT mandatory?

How do I file my VAT Return once I am registered for Making Tax Digital for VAT?

What will happen if I cannot file my VAT Return once I am in MTD for VAT?

If I am exempt, how do I file my VAT Returns?

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