MTD for VAT: What is Making Tax Digital?

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.

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

Along with time savings, one of the key benefits of Making Tax Digital is improved accuracy. Manual processes can be automated through software, so transactions are imported correctly, and errors are automatically identified. This means business owners can spend less time on paperwork and more time focusing on driving success.

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, which you can explore here.

What happens if I don't comply with MTD?

If you don’t comply with the rules and meet Making Tax Digital deadlines, you could face a fine.

From January 2023, HMRC is moving to a points-based system so that MTD for VAT penalties are only given to those who regularly make mistakes and miss deadlines. The new system means taxpayers who make the occasional error will not be penalised.

Points are calculated based on how regularly you submit. You can find more information about penalties here.

Who does Making Tax Digital apply to?

All VAT registered businesses must comply with MTD rules from April 2022. This includes sole traders, limited companies, partnerships and landlords with at least one property in the UK. MTD for VAT also applies to VAT registered charities and trusts. Businesses can find out more about what MTD means for them here.

Take a look at our FAQs to understand more about what Making Tax Digital means for accountants and bookkeepers.

Making Tax Digital and Brexit

Changes to import VAT have affected Making Tax Digital. Brexit has impacted how you should record imports and exports from EU countries. If you import goods into Great Britain from an EU country, they’ll be subject to import VAT the same as non-EU countries.

Great Britain (England, Scotland, and Wales) is no longer part of the EU VAT area, so imports from the EU are subject to import tax. The rules are different for Northern Ireland, check here if you think that could affect you.

Who is exempt from Making Tax Digital?

There are some exemptions to MTD, which you can take a look at here. 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.

Can I opt out of Making Tax Digital?

It has previously been possible to opt out of MTD for VAT if you registered voluntarily. However, as MTD for VAT is mandatory from April 2022, all VAT-registered businesses must comply, unless they are exempt.

If I am exempt, how do I file my VAT returns?

If you’re exempt from MTD rules, you’ll need to use the existing gov.uk website to submit your return. If you’re digitally exempt, you might be able to submit a paper return. To request this, contact HMRC.

What is the timeline for MTD for VAT?

  • In 2019, MTD for VAT became mandatory for VAT registered businesses with a taxable turnover of £85,000. There was a brief soft landing period where businesses could still manually import their data.
  • The next step in the Making Tax Digital VAT timeline starts from April 2022. All VAT registered businesses must follow MTD rules from this date.
  • 1 April 2022 marks the first MTD VAT period start date. Depending on your VAT start and end dates, your first MTD VAT period begins on or after 1 April 2022.
  • In April 2024, MTD for Income Tax Self Assessment (ITSA) will be rolled out. MTD for Corporation Tax will not be rolled out until April 2026 at the earliest.

There is no soft landing period announced for MTD for VAT, from April 2022.

What is the deadline for Making Tax Digital?

All VAT registered businesses must be signed up for MTD for VAT by April 2022. Those who believe they should be exempt must receive confirmation of their exemption ahead of the deadline.

How to prepare for Making Tax Digital

The Making Tax Digital rules require that you:

  • keep and maintain your records digitally
  • send your returns to HMRC via MTD-compatible software.

Only specific software meets the Making Tax Digital requirements. Double check you have MTD compatible software before signing up to MTD.

Under MTD rules, you won't be able to submit your VAT return via the HMRC website. Instead, you’ll need compatible software with an MTD for VAT feature and submit your return from the platform.

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 to sign up for Making Tax Digital

If you’re wondering how to sign up for MTD, you can register for MTD for VAT on the gov.uk website. If you’re creating an online account for the first time, you’ll automatically be registered for MTD.

To sign up for MTD for VAT, you’ll need:

  • Your business email address
  • Your Government Gateway login
  • Your VAT number and most recent VAT return

If you’re a sole trader, you’ll need:

  • Your National Insurance number

If you’re a limited company or registered society, you’ll need:

  • Your company registration number
  • Your Unique Taxpayer Reference (UTR)

If you’re a general partnerships, you’ll need:

  • Your Unique Taxpayer Reference (UTR)
  • The postcode your registered for under Self Assessment

If you’re a limited partnership you’ll need:

  • Your company registration number
  • Your Unique Taxpayer Reference (UTR)
  • The postcode you registered for under Self Assessment

If you pay tax via direct debit, HMRC states you should sign up at least seven days before your return is due, or at least five days after your return is due. Otherwise, you could end up paying twice.

If you don’t pay via direct debit, sign up a minimum of three days before your return is due. You can find out more about signing up for MTD on the gov.uk website.

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.

Is Xero compatible with Making Tax Digital?

Yes. Xero is MTD-compliant and HMRC-recognised. You can keep digital records and submit your VAT return directly to HMRC from Xero. In fact, based on a recent survey run by Xero, 88% of those surveyed agreed that Xero has made Making Tax digital for VAT easy for them**.

Xero also makes managing your books and your business much simpler with additional features such as:

  • Live bank feeds
  • Bank reconciliation
  • Invoicing
  • Receipt capture
  • Payroll

Explore all of Xero’s features here.

How Xero can help you get ready for Making Tax Digital

If you want to know more about what Making Tax Digital means for you, check out our resources. Click here if you’re an accountant or bookkeeper, or here if you’re a small business owner.

You could also sign up for a free 30-day trial to learn more about how our software can help you stay MTD compliant.

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*based on a survey run by Xero in the UK in August 2021 of 321 Xero subscribers who agree/strongly agree that since using Xero, they find it easier to prepare their VAT return

**based on a survey run by Xero in the UK in August 2021 of 375 Xero subscribers.

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