What does MTD mean for businesses?

From April 2022, HMRC requires all VAT registered businesses to follow Making Tax Digital rules.

What is Making Tax Digital?

Making Tax Digital (MTD) is a government initiative to simplify the UK tax system. Businesses who fall within the new thresholds must use compatible software to keep digital records and submit their tax return. Overall, MTD should make it easier and quicker for taxpayers to get their tax right.

Do all businesses need to register for MTD?

All VAT registered businesses must register for MTD from April 2022. That includes sole traders, limited companies, partnerships, charitable trusts, and landlords with at least one UK property.

If your business isn’t VAT registered, you don’t need to sign up for MTD yet but you will need to sign up for MTD for Income Tax Self Assessment (ITSA) by April 2024.

Does MTD for VAT apply to limited companies?

Yes. From April 2022, if you run a limited company that’s registered for VAT, you need to follow MTD rules.

When will MTD for VAT be mandatory for my business?

That depends on whether your business is VAT registered. If you aren’t sure whether your business should be VAT registered, check out our handy guide to VAT.

MTD for VAT registered above threshold

For businesses above the VAT threshold, MTD has been mandatory since 2019. If your business is above the VAT threshold (£85,000), you should already be following MTD rules.

MTD for VAT registered but under threshold

All VAT registered businesses must follow MTD rules from April 2022, regardless of turnover. If your business is VAT registered, make sure you sign up to MTD for VAT before April 2022.

MTD for non VAT registered businesses

If you run a business that isn’t VAT registered, you don’t need to follow MTD rules. However, if your turnover goes above the VAT threshold you’ll need to register for VAT and MTD.

If your VAT taxable turnover goes above £85,000 on a rolling 12 month basis, you need to register within 30 days of the month ending where your turnover exceeded £85,000.

You can find out more about registering for VAT on this gov.uk page.

Is Making Tax Digital just for VAT?

Yes, for now.

From April 2024, businesses that file their tax returns via self assessment will need to register for MTD for Income Tax Self Assessment (ITSA). This will apply to businesses and landlords with total business or property above the £10,000 threshold. Some businesses can sign up voluntarily for MTD ITSA now.

HMRC has also stated that MTD will be introduced for corporation tax, which will apply to limited companies, foreign companies with a UK branch or office, and unincorporated associations. This will not be mandated until April 2026 at the earliest.

What are the benefits of Making Tax Digital for businesses?

Making Tax Digital for small businesses can result in a range of benefits. Using accounting software to submit your VAT return can save you time and help you get your tax right.

According to research by HMRC on MTD for VAT, current participants already feel more confident about filing their return under the new rules.

Benefits of MTD include:

  • Fewer reporting errors
  • Less time spent on paperwork
  • Reliable record keeping
  • Faster returns filing

You can use accounting software to automate manual processes, saving you time and improving the accuracy of your accounts.

What records do businesses need to keep digitally for MTD?

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 can I prepare my business before signing up for MTD?

Start keeping your records digitally. You can do this with MTD compatible software, or MTD bridging software (platforms that connect your spreadsheet to the HMRC system).

The gov.uk website has a handy search tool where you can find MTD compatible software.

How do I sign my business up for MTD?

Once you’ve selected your compatible software, you can sign up for MTD as a business on the gov.uk website. After you register for MTD VAT, you’ll receive a confirmation email from HMRC within 72 hours.

What information is required when signing up to MTD for VAT?

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 partnership, 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.

How to file a MTD VAT return

HMRC-approved accounting software has an MTD for VAT function, which you’ll need to use to submit your return.

If you still use spreadsheets for recordkeeping, you can use bridging software to file your return. MTD rules require digital linking so that information can transfer between different software.

This transfer must be digital - you can’t copy and paste records from one platform to another. Instead, you’ll need to use spreadsheet formulas to create digital links.

What happens if I don't comply with MTD?

You could face a penalty.

Making Tax Digital penalties are changing from January 2023. HMRC is moving to a points-based system so that penalties are only given to those who regularly make mistakes and miss deadlines. This 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 making tax digital fines here.

Need more information on Making Tax Digital for businesses?

Filing your MTD VAT return doesn’t need to be complicated. With features like payroll, invoicing, and receipt capture, Xero can help you manage so much more than your VAT returns.

If you want to know more about what Making Tax Digital means for you, check out our MTD resources for business owners. You can also sign up for a free 30-day trial to learn more about how Xero can help you stay MTD compliant.

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