Chapter 2

A closer look at MTD for VAT requirements

How to comply with MTD for VAT requirements, covering the software you must use, how you keep digital records, and more.

Person in office setting works on spreadsheet

Requirements for HMRC-compliant MTD software

MTD compliant software must allow you to store and update your records digitally, with the software pulling the information directly and connecting it to HMRC in order to file the returns. Alternatively, bridging software can be used to file MTD returns for those still using spreadsheets.

It’s worth noting that there are many benefits to using MTD software. Along with making managing your tax obligations easier, many business owners also find that cloud-based accounting means it’s easier to liaise with their accountants and that it gives them better overall financial control of their business too.

Requirements for MTD bridging software

Businesses not using MTD compliant software - and instead using spreadsheets and bridging software - must use tools that ‘digitally link’ them when making MTD for VAT submissions. This will also apply if you use more than one software package to keep accounting records.

Software can be linked in a number of ways, including:

  • Using formulas to connect cells in spreadsheets
  • Emailing records
  • Downloading and uploading data with XML and CSV files

These connections must be set up in time for a business’ first MTD submission. Learn more about bridging software here.

Requirements for digital records

MTD for VAT requires businesses to keep accurate, complete and readable digital records. The only businesses registered for MTD for VAT who do not have to keep digital records are companies using the VAT GIANT service (eg. government departments of NHS Trusts).

Records that must be kept digitally include the following:

  • Your business name, company address and VAT registration number
  • VAT accounting schemes used
  • VAT on goods and services supplied
  • VAT on goods and services received
  • The rate of VAT charged on services supplied

Specific VAT schemes also have their own additional requirements. For example:

  • Retail scheme users will need to record total daily gross takings
  • Businesses on the Flat Rate Scheme will need to record the items that they can reclaim the VAT on.

Take a look at the HMRC website for a full list of all requirements.

Just like the existing VAT regulations, records have to be kept for six years from the end of the tax year they took place, or ten years if a business was previously using the MOSS scheme.

Most accounting software will store and back up all invoices and receipts, so you shouldn’t need to keep physical copies of these documents.

MTD for VAT-registered businesses

From April 2022, all VAT registered businesses must maintain digital accounting records and use MTD compliant accounting software to submit their VAT returns, unless they have been granted an exemption.

Businesses that have cash takings will no longer be able to enter these on a weekly or monthly basis in their accounting software. Daily totals must be recorded to comply with the new regulations. However, these can be entered at a given point in the future, instead of needing to be completed at the end of each day.

The VAT Flat Rate scheme will continue to be in place. This scheme helps to make the admin around VAT easier for sole traders and small businesses, who pay a simple fixed rate of VAT to HMRC. This rate is based on a percentage of total business sales. You can find out more about your rate on HMRC’s website.

MTD for non-VAT Registered Businesses

At the moment, it is not necessary for non-VAT registered businesses to comply with Making Tax Digital.

However, by December 2021 around a third of VAT-registered businesses with a taxable turnover of less than £85,000 had already voluntarily signed up to MTD for VAT. This is because there are many advantages to becoming voluntarily VAT registered, like claiming back tax from qualifying suppliers.

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