From April 2022, all VAT-registered businesses must follow Making Tax Digital (MTD) rules.
What is Making Tax Digital for VAT?
Making Tax Digital for VAT forms part of a wider government initiative to simplify the tax system, making it easier for taxpayers to get their tax right. Individuals and businesses who fall within the new thresholds must use compatible software to keep digital records and submit their tax return.
MTD for VAT was first introduced in 2019 for businesses over the VAT threshold (£85,000). Now, the rules have been extended to all VAT registered businesses, regardless of turnover. As such, all VAT-registered businesses must comply with MTD for VAT from April 2022.
Is Making Tax Digital just for VAT?
Yes, for now. From April 2024, MTD will be rolled out for Income Tax Self-Assessment (MTD for ITSA<). Businesses and landlords with an annual turnover above £10,000 will need to register for MTD for ITSA from April 2024.
MTD for Corporation Tax will not be mandated before April 2026 at the earliest.
Is Making Tax Digital for VAT compulsory?
Yes. All VAT registered businesses must comply with MTD rules from April 2022.
There are some exemptions to MTD, which you can take a look at www.gov.uk. People who are older, have a disability, or live in a remote location could be made exempt from MTD. Businesses run by religious societies where their beliefs prevent them from using computers could also be exempt.
HMRC will also consider cases where following the MTD rules is impractical or unreasonable. Exemptions already in place for online filing for VAT also apply to MTD. If you think you should be exempt from MTD, contact the HMRC VAT helpline.
What are the benefits of Making Tax Digital?
Research from HMRC on MTD for VAT shows existing participants feel more confident about filing their returns since the rules were introduced. Based on a recent survey run by Xero, 98% of those surveyed said they find it easier to prepare and calculate their VAT return.
Benefits of MTD include:
- Fewer reporting errors
- Less time spent on paperwork
- Reliable record-keeping
- Faster returns filing
What records do businesses need to keep digitally?
The records you need to keep for your VAT return have not changed. What has changed is where and how these records are stored.
For every item, you’ll need to record:
- The time of supply
- The value of supply
- The tax rate
How do you file a Making Tax Digital VAT return?
HMRC-approved accounting software has an MTD for VAT function, which you’ll need to use to submit your return.
If you still use spreadsheets for recordkeeping, you can use bridging software to file your return. MTD rules require digital linking so that information can transfer between different software.
This transfer must be digital - you can’t copy and paste records from one platform to another. Instead, you’ll need to use spreadsheet formulas to create digital links.
What is the best software for Making Tax Digital?
The best software for MTD will have an MTD for VAT feature that allows you to file your return directly through the platform, along with additional features to help you run your business and manage your finances.
You can still use a spreadsheet for recordkeeping, but you must use bridging software that connects it to HMRC’s system.
You can compare MTD compatible software and MTD bridging software on the gov.uk website.