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 Henry Williams May 12, 2021 13 min read Our experts We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality. This article was authored by: Henry Williams Content Manager 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:01 | What is Making Tax Digital?02 | Making Tax Digital timeline03 | Who is required to use Making Tax Digital?04 | Making Tax Digital software05 | Signing up for Making Tax Digital for VAT06 | Making Tax Digital for income tax07 | Making Tax Digital summaryWhat 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 effectiveMore efficientEasier for taxpayers to get rightWhy 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 timelineFirst 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 ServiceBusinesses must keep records digitallyBusinesses must use MTD software to submit their VAT returns for VAT periods starting on or after 1 April 2019Even 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 companyVAT divisionsVAT groupsGovernment departmentsNHS TrustsLocal authoritiesPublic corporationsTraders based overseasAnyone required to make payments on accountAnnual accounting scheme usersThere 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 premisesIt’s not practical for you to get internet access at another locationYour disability means you can’t use a device long enough to maintain digital recordsYour religion prevents you using electronic devicesIf 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 softwareAs 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 systemsAllow you to report VAT information to HMRCAllow HMRC to send information to youIf 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 VATIf 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 MTDAuthorise your software – ask your software supplier if you don’t know howNote: 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 dueWhen signing up, you’ll need the following information:Your Government Gateway ID and passwordThe VAT number of the business that’s signing upIf 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 taxAs 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 recordsSubmit quarterly information to HMRC and finalise their tax position after the end of the tax yearMaking Tax Digital summaryThe 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 keepingCompatible softwareSigning up for Making Tax Digital and submitting VAT returnsRegister for a Webinar here. Share this post facebook twitter linkedin Henry Williams Content Manager Henry has been writing for Startups.co.uk since 2015, covering everything from business finance and web builders to tax and red tape. He’s also acted as project lead on many of our industry-renowned annual indexes, including Startups 100 and Business Ideas, and created a number of the site’s popular how to guides.