Tax

Making Tax Digital for VAT: what your business needs to know

Find out how HMRC is making it easier to keep your tax affairs in order, and understand your obligations to Making Tax Digital

It’s May 2019, and that can only mean one thing…

Making Tax Digital (MTD) for VAT is here!

In a world where increasingly rapid digitisation is making the everyday systems we use more manageable, it’s amazing it’s taken HMRC so long to bring us MTD.

But as behavioural economists will attest, if there’s one thing that will make humans more likely to do something, it’s not reward or punishment – you just have to make it easier.

It’s a good thing, then, that HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world.

This article will cover the following:


What is Making Tax Digital?

We covered MTD on the site last year, but it's high time for a Making Tax Digital update.

MTD is making it easier for businesses and individuals to keep their tax affairs in order using digital systems and records.

This digital overhaul of the system will aim to transform tax administration, making the process:

  • More effective
  • More efficient
  • Easier for taxpayers to get right

Why was this necessary? Well, according to the latest government figures on the tax gap, avoidable mistakes are costing the exchequer more than £9bn every year…

Digital records should help to plug this shortfall by improving accuracy and avoiding transposition errors (as the information is sent direct to HMRC).

Once signed up to MTD, be aware that any subsequent VAT returns will need to be filed through MTD-compatible software. This includes returns for current or previous periods which have not yet been submitted. Paper records will no longer meet the legal requirements for tax regulation.

Find out everything you need to know about tax here


Making Tax Digital timeline

First announced in the Budget 2015, the government consulted “key stakeholders” to inform the development of MTD.

In 2017, MTD was delayed in response to concerns raised by MPs, businesses and professional bodies about the pace of change.

In light of this, it was decided that businesses would only be required to use MTD for VAT for the time being.

MTD for income tax and corporation tax is expected to follow by 2021 at the earliest. HMRC is also running an ‘MTD for individuals’ transformation project.


Who is required to use Making Tax Digital?

Any VAT-registered businesses with a taxable income over the VAT threshold – which currently stands at £85,000 – are now subject to the following requirements:

  • Businesses must use the MTD Service
  • Businesses must keep records digitally
  • Businesses must use MTD software to submit their VAT returns for VAT periods starting on or after 1 April 2019

Even if your taxable turnover drops below the threshold at any point after 1 April 2019, you will still have to keep digital records and send VAT returns to HMRC using MTD-compatible software.

However, even if your business is exempt, you may still volunteer to follow the MTD rules. You can do this by telling HMRC before the start of the next VAT period that you intend to use the service, as well as what date your next VAT period begins.

Who is exempt from Making Tax Digital?

All businesses will eventually have to use MTD. But, for a small minority of businesses deemed to have more complex requirements, HMRC has deferred their obligation until 1 October 2019.

Exempt businesses fall into one of the following categories:

  • Trusts
  • ‘Not for profit’ organisations that are not set up as a company
  • VAT divisions
  • VAT groups
  • Government departments
  • NHS Trusts
  • Local authorities
  • Public corporations
  • Traders based overseas
  • Anyone required to make payments on account
  • Annual accounting scheme users

There are also more extreme examples of individuals or businesses who may be exempt from MTD indefinitely. This could be because:

  • You cannot get internet at your home or business premises
  • It’s not practical for you to get internet access at another location
  • Your disability means you can’t use a device long enough to maintain digital records
  • Your religion prevents you using electronic devices

If you believe you are exempt, you must call or write to VAT: general enquiries explaining your reasons. When doing so, you should provide your VAT registration number, your business’ name, and the principal location of your business.


Making Tax Digital software

As previously stated, you’ll need to use software that’s compatible with MTD to submit future tax returns to HMRC.

HMRC’s current online system for tax returns will be defunct for businesses obliged to start using MTD.

There’s a range of Making Tax Digital free software and Making Tax Digital VAT software either already available, or in development.

You can find a tool to help you choose a suitable MTD-compatible software solution here.

Compatible software should:

  • Connect to HMRC systems
  • Allow you to report VAT information to HMRC
  • Allow HMRC to send information to you

If you’re already using software to keep digital records, then you should ask your provider if it plans on making the software compatible with MTD.

Find out more about HMRC-approved small business payroll software here


Signing up for MTD for VAT

If you’re required to sign up to MTD for VAT, you can register your business here.

Before you sign up, make sure you:

  • Get the right software – you must have software that lets you submit VAT returns, and is compatible with MTD
  • Authorise your software – ask your software supplier if you don’t know how

Note: if your business currently pays VAT by Direct Debit, you cannot sign up in the seven working days leading up to, or the five working days after your VAT Return is due

When signing up, you’ll need the following information:

  • Your Government Gateway ID and password
  • The VAT number of the business that’s signing up

If your business uses an agent for tax services, your agent is also permitted to sign your business up as a client. They’ll just need the Government Gateway user ID they got when they registered for an agent services account.

After signing up, you’ll receive a confirmation email from HMRC within 24 hours. Don’t send a VAT return until you’ve received this email.


Making Tax Digital for income tax

As mentioned before, MTD for income tax is not due to come into effect until 2021 at the earliest.

Currently, it looks like obligations will come into effect from the start of the first accounting period, during the year in which MTD for income tax becomes mandatory.

MTD for income tax will apply to the self-employed, partnerships, and to those who receive income from property.

MTD for income tax will require businesses to:

  • Maintain digital accounting records
  • Submit quarterly information to HMRC and finalise their tax position after the end of the tax year

Making Tax Digital summary

The above is a comprehensive look at MTD, and how it will affect your business. For a more granular account of the legislation your business will be expected to follow, you can find the VAT Notice 700/22 here on gov.uk.

If you still have questions, HMRC is running a series of ongoing Webinars to help you get your head round MTD. These will cover:

  • The fundamentals of Making Tax Digital for digital record keeping
  • Compatible software
  • Signing up for Making Tax Digital and submitting VAT returns

Register for a Webinar here.