Making tax digital: how to comply with MTD

The Making Tax Digital (MTD) legislation came into effect on April 1 2019. Since that date, all VAT-registered businesses – including those that are voluntarily registered – are now required to store their VAT accounting records digitally, using HMRC-recognised accounting software.

MTD was a move from the UK government to make it easier for individuals and businesses to get their taxes digitalised, and help the environment by going paper-free.

Although the MTD deadline was first announced two years ago, SMEs have had a lot to contend with in that time. There’s been Brexit, multiple changes of prime minister, the cost of living crisis and the continuing impact of a global pandemic, to name but a few.

If you’re one of those small business owners who are still a little confused about the MTD changes – you’re in luck. Startups’ expert financial team is here to help. In the below article, we’ll go through the new legislation and what it means, as well as take you through the two key steps to making your business meets all the new requirements.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) was a bold plan by HMRC which aimed to get small businesses and the self-employed to complete their tax records and returns entirely online.

The first phase of the MTD legislation saw only businesses with a taxable turnover of over £85,000 affected, but now we are in the ‘second phase’, which means all VAT-registered businesses need to register for Making Tax Digital.

You also need to ensure you are now keeping your tax records digitally (for VAT purposes only) and submit your VAT return information to HMRC only through MTD-compatible software.

HMRC’s eventual aim is for all tax filing to go completely paperless. From April 2024, Self Assessment taxpayers will too need to comply with Making Tax Digital for income tax.

Why has MTD been introduced?

As every small business owner knows, filing tax returns is a tedious process that often results in errors.

Unfortunately, such mistakes can be both time-consuming and costly to fix – particularly if they have been submitted using paper filing.

It’s estimated that these issues cause not only delays for SMEs, but also a large bill for HMRC. In fact, a ‘tax gap’ of around £10bn is estimated to be lost each year as a result of the current process.

Making Tax Digital has been introduced to reduce the likelihood of SMEs making such errors.

What is the penalty if you’re not registered?

Currently, HMRC can levy a fine of up to £400 should your business fail to submit a return under the MTD requirements.

Earlier this year, HMRC also announced that two new penalty regimes will be introduced in January 2023 – one for late filing and the other for late payment.

In a similar system to speeding fines, businesses will receive a ‘point’ each time their submission deadline is missed. Once you have accrued a certain number of points, a £200 penalty will be applied.

However, until this new system comes into place, VAT returns are still subject to the current default surcharge of £400.

How to register for Making Tax Digital

If you haven’t already, you’ll need to sign up to MTD on the gov.uk website.

This cannot be done less than five days before your accounts are due. If you haven’t registered already then the last day you’ll be able to sign up without a penalty is March 27th 2022.

You’ll need:

• Your business email address
• Government Gateway user ID and password – if you do not have a user ID, you can create one when you use the service
• Your VAT registration number and latest VAT return
• Your National Insurance number if you’re a sole trader 
• Your company registration number and Unique Taxpayer Reference if you’re a limited company or registered society 
• Your Unique Taxpayer Reference and the postcode where you’re registered for Self Assessment if you’re a general partnership 
• Your Unique Taxpayer Reference, the postcode where you’re registered for Self Assessment and your company’s registration number if you’re a limited partnership

You will need to have chosen the software you intend to use to file your returns before signing up for MTD for VAT. See our section below for our top picks.

This is a legal requirement. It is therefore imperative that you do your research properly,  and check you are subscribing to an MTD-compatible software package for VAT before purchasing.

Making Tax Digital accounting software guide

MTD-compatible software is any accounting system that directly connects to HMRC and maintains all digital records mandated by the new regulations.

That means your software must also calculate:

• The amount of VAT you pay on your products and services (both supplied and received)
• The source of your VAT transactions
• Any adjustments made to your VAT tax returns

Two options we recommend are QuickBooks, our top-rated accounting software choice for SMEs, and FreshBooks, the easiest to get set up with quickly.

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If you use a third-party accountant, they can also sign up to MTD on your behalf but remember: you’ll still need to store your VAT records digitally, and you will still need to use software for your VAT accounting.

Your accountant may therefore ask you to link your software to theirs to ensure it’s all HMRC-compliant.

Making Tax Digital exemptions

Despite the large number of business owners that are currently underprepared or even unaware of the upcoming MTD deadline, there is virtually zero chance of it being postponed.

This means that, if you are a VAT-registered company, the only way you will not have to register for Making Tax Digital is if you successfully apply for an exemption.

Exemptions are not commonly given. You will need to have a very good reason to not be able to file taxes digitally to qualify for one. They tend to be awarded on the grounds of age, disability, location or religious reasons.

If your business has already been granted an exemption to MTD, you don’t need to apply again. This will still apply beyond 1 April 2022.

Conclusion

Registering for MTD might feel like a chore, but it’s one that will definitely pay for itself. Businesses which fully embrace digital cloud accounting systems will be able to streamline their accounting tasks and save both money and time down the line.

Essentially, the Making Tax Digital registration process boils down to two key steps: you need to sign up to MTD on the Gov.uk website, and find MTD-compliant accounting software.

Once you have completed these two steps then you should be able to easily file your VAT returns online – with greater efficiency and fewer mistakes than under the previous system.

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