Making Tax Digital FAQs

MTD for VAT is new legislation that requires all VAT registered businesses with a taxable turnover, above the £85k threshold, to keep their records digitally and submit their VAT Returns using MTD compatible software, such as Xero. Businesses affected by MTD for VAT will no longer be able to use HMRC Online Services.

VAT registered businesses below the threshold can join voluntarily. This will be mandatory from April 2022

The vast majority of businesses will have been affected from the first VAT period starting on or after 1 April 2019. For example, if your VAT Period started on 1 April then you must have kept digital records from that date and submit your next VAT Return using MTD compatible software. If your first VAT period started on 1 May 2019, then you must start keeping digital records from that date and submit your next VAT Return using MTD compatible software.

No, you won’t be automatically signed up to MTD for VAT.  This is because HMRC needs to verify your information and migrate your record to their MTD system.

You’ll need to sign up your business with HMRC using your existing Government Gateway Login and VAT Number. Once you’ve authorised Xero to connect with HMRC, you’ll be able to submit MTD VAT Returns directly from your Xero account.

HMRC has provided useful guidance on how you do this.

Firstly you will need to create an Agent Services Account (ASA) with HMRC and link all your clients to the account. You will then need to sign up your clients individually to MTD. Please note, you can only have one ASA account per practice and an agent user can only belong to one practice. HMRC’s guide on MTD for VAT as an agent will give you all the information you need.

Please check in with colleagues or clients who may have signed the business up with HMRC. The MTD for VAT feature will only appear after a business has signed up for MTD with HMRC. Xero can’t connect with HMRC without this happening.  

If you want your accountant to submit VAT Returns on your behalf, then you must authorise them to do so. Without the authorisation, they will not be able to access or submit your VAT Returns.

Xero keeps a log of all its agent users. If you login using an agent user’s credentials then Xero will assume you are an agent and acting on behalf of the business. If the credentials are not on the Xero log, Xero will assume you are a business user.

As a Xero practice user you can file MTD VAT returns for multiple practices. To do this, you need different email addresses for each practice: One that belongs to one agent and another to the other agent.

Once you have registered with HMRC, it can take up to 72 hours to receive confirmation from them. When you receive confirmation from HMRC, you will be able to use Xero for your MTD VAT Returns.

Please don’t attempt to submit a VAT Return in Xero before receiving confirmation from HMRC as this will result in an error.

We recommend that you sign up as soon as you can with HMRC, so you’re prepared before you need to be. If you pay HMRC by direct debit you must sign up at least seven working days before your VAT period deadline.

Yes,  there are very few exemptions: HMRC's Notice 700/22 provides more details of this. All VAT registered businesses will be mandated from April 2022.

No, you cannot leave MTD unless you de-register for VAT – even if your vatable turnover drops below the VAT threshold.

No, if you’ve been submitting VAT Returns through Xero you still need to sign up for MTD with HMRC. Once this is done, you’ll need to authorise Xero.

Xero has created a new VAT process making it easier for you to fulfil your VAT obligations. New features include a VAT Dashboard, extra reports, the ability to post VAT adjustments and submit in real-time to HMRC.  

All Xero subscriptions currently supporting the submission of a VAT Return will support MTD for VAT – and at no extra cost.

Businesses below the VAT threshold can choose to adopt MTD for VAT, but it’s not compulsory. They can continue to submit VAT Returns using the Government Gateway or software like Xero. It will be compulsory for all VAT registered businesses from April 2022.

No, businesses will need to continue monitoring turnover themselves. If a business is already VAT-registered, we recommend you sign up to MTD for VAT anyway.

The same information as before – the standard nine box values, plus details identifying your business. Additional information might be required in the future, but the details and timings haven’t been specified.

Yes, Xero’s new VAT functionality has comprehensive VAT adjustments features allowing businesses to file error corrections, partial exemption adjustments, pre-registration and post de-registrations expenses.

These features are not available with the Flat Rate Scheme. Xero will automatically post the Flat Rate Adjustment required when the VAT Return is submitted.

Yes, Xero's MTD-ready software will cater for the Flat Rate Scheme.

Xero doesn’t support specialist VAT Schemes directly. However existing features can be helpful – for example, the new VAT adjustment functionality and our bridging software, which allows users to import data using spreadsheets.

VAT Notice 700/22 outlines the requirements of digital record keeping and VAT calculation for adjustments (including partial exemptions, Margin and Retail schemes).

Xero doesn’t support VAT Groups directly. However existing features can be helpful – for example, agents can export their clients VAT Returns, combining these in a spreadsheet and our bridging software can be used to send clients VAT Returns to HMRC.

These show the link between the output and input tax in your records – as well as the output and input tax on your return.

Further information can be found in HMRC’s Notice 700/22 (the link is at the bottom of the Making Tax Digital for VAT section).

Xero is fully compliant with the digital record keeping requirements for MTD for VAT.

Spreadsheets can be used to keep digital records – businesses will still need bridging software to submit VAT Returns digitally. Xero’s bridging solution will be available in all Xero plans that support VAT.

Bridging software communicates with HMRC's systems for MTD purposes and allows the relevant information to transfer through to HMRC from a spreadsheet format.

Xero’s bridging software solution transfers relevant data from spreadsheets.

These businesses can use intermediary products as long as they’re digitally linked. For example, it’s possible to record sales and purchases in a bespoke product, transfer the totals into a spreadsheet and use Xero’s bridging solution to submit the returns to HMRC.

These businesses can continue using Xero as they do now.

Yes, HMRC lists Xero as software that is compatible with MTD for VAT.

MTD for Income Tax will be compulsory from April 2023.  The government plans to consult on the detail of extending MTD to companies.

HMRC recognise that businesses will require time to become familiar with the new requirements of MTD. During the first year of mandation, HMRC will take a light touch approach to digital record keeping and filing penalties where businesses are doing their best to comply with the law.

Businesses must continue to pay their VAT on time, as late payment penalties still apply.

There are tons of resources out there. We recommend the following:

Xero - Making Tax Digital

HMRC VAT Notice 700/22 Making Tax Digital for VAT

https://www.gov.uk/guidance/making-tax-digital-for-vat

https://www.gov.uk/guidance/making-tax-digital-for-vat-as-an-agent-step-by-step

https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat

ICAEW Making Tax Digital for Business

https://www.gov.uk/guidance/help-and-support-for-making-tax-digital