Making Tax Digital for VAT: a basic guide

In November 2020, HMRC announced that Making Tax Digital (MTD) rules will be mandatory for ALL VAT-registered businesses with a taxable turnover below £85,000 from their first return on or after 1 April 2022.

Are you compliant?

In this blog, we cover the basics to help you get a better understanding and be more confident about MTD for VAT.

What is Making Tax Digital?

Making Tax Digital is part of a wider government initiative to make tax administration more efficient and effective. MTD replaces manual tax administration with two things:

  • An online system where you can submit VAT returns (with MTD compatible software)
  • The digitisation of business records

You can read more about the scheme here.

What records do you need to keep digitally?

As part of the rules, businesses will be required to keep a record of all accounting transactions digitally – handwritten records are no longer acceptable.

If you use a scheme you may be required to keep additional records:

  • Retail Scheme: total daily gross takings
  • Flat Rate Scheme: items that VAT can be reclaimed on

Although all your transactions must be archived digitally, you are not required to scan additional records like invoices or receipts.

Finding the right software

Compatible VAT record keeping software connects to HMRC systems.  It must be able to:

  • Keep and maintain digital records specified in the regulations
  • Prepare VAT returns using these records
  • Communicate with HMRC via a digital link

You can check your software, or find a compatible product here, If you are considering changing your accounting software we will be happy to guide and assist you.

Linking software

If you find that you need to link your software packages (e.g., if you use more than one software or if you are maintaining them using spreadsheets), you can use a digital link. But what does a digital link comprise of?

HMRC highlight the following:

  • Data is electronically transferred between software programmes, products, or applications. This may include using a formula to link cells in spreadsheets (e.g., where cells are linked by using a formula in one sheet that mirrors the source’s value in another cell)
  • The transfer is automatic (data cannot be manually moved between software or copied over by hand i.e., copy and paste).

Exemptions

For those who are unable to keep digital records of a business or use digital tools to submit VAT returns (may be impractical due to age, disability or location), you can ask HMRC for an exemption from MTD and follow the guidance in Section 3.4 of Notice 700/22.

Get in touch

If you have any questions in relation to becoming MTD compliant, (including reviewing your current VAT procedures, guiding you towards a suitable solution, assisting with quarterly submissions to HMRC and even providing training for your team), our team of digital experts in the PM+M cloud team can help! We have already helped hundreds of businesses become compliant – read some of our client testimonials by clicking here.  To find out more, get in touch with Jill Morris by clicking the button below.

Making Tax Digital for VAT – are you prepared?

From 1 April 2022, ALL VAT-registered businesses must comply with Making Tax Digital for VAT.  In our latest blog, we highlight some useful tips and reminders for those of you who still need to prepare.

What is Making Tax Digital for VAT?

Making Tax Digital for VAT (MTD) forms part of a wider government initiative to make it easier for individuals and businesses to get their tax right – simplifying the process. MTD aims to transform tax administration so that it is more effective and more efficient.

Who is affected?

VAT-registered businesses with turnover above the VAT threshold of £85,000 have been required to follow the Making Tax Digital for VAT rules since April 2019. From 1 April 2022, all VAT registered traders, including smaller businesses with turnover less than the threshold must adhere to the rules.

Examples of businesses which may be affected from April include those who are trading below the VAT registration threshold, those that make zero-rated supplies, on which no VAT is charged, or businesses who are only VAT registered to recover VAT they incur.

You may be able to apply for an exemption from MTD for VAT if you are unable to use a computer or access the internet due to age, disability, or remote location. If this applies to you, an application must be submitted by contacting HMRC.

What information must be kept digitally?

As part of the new rules, you will be required to keep a record of all your accounting transactions digitally. This means that handwritten records are not acceptable any longer.

You may already keep these records digitally, however, the difference with MTD is that you must use a compatible software package to submit your VAT return.  You will not be able to log on to HMRC and enter your VAT return figures on line.

 What is compatible software?

Compatible VAT record keeping software connects to HMRC systems and allows you to store and update records like receipts and VAT invoices digitally.

It must be able to:

  • Keep and maintain digital records specified in the regulations
  • Prepare VAT returns using these records
  • Communicate with HMRC via a digital link

Do I need to register for MTD for VAT?

You can sign up for MTD online, but you must have compatible software in place before you register.

To sign up, you will need:

  • Your business email address
  • Government Gateway user ID and password
  • VAT registration number
  • Latest VAT return

New VAT penalty regime

A new VAT penalty regime, which was due to come into force on 1 April 2022, has been deferred to January 2023. Read more about the new penalties for late submission and payment penalties in our recent blog.

Is MTD only for VAT?

At the moment, YES.  The next stage in the government’s plans for a digital tax system will be a change for Income Tax.  Self-employed business owners and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024.

Get in touch

If you have any questions in relation to becoming MTD compliant, (including reviewing your current VAT procedures, guiding you towards a suitable solution, assisting with quarterly submission to HMRC and even providing training for your team), please contact your usual PM+M adviser or get in touch with Jill Morris using the button below.