What is Making Tax Digital?
Making Tax Digital (MTD) aims to make it easier and more efficient for businesses and individuals to record and declare tax to HMRC. Under the new rules, HMRC will legally require eligible businesses to record transactions digitally and submit VAT returns to HMRC using compatible accounting software.
It’s a major transformation to the tax system that intends to improve accuracy and reduce avoidable error – and it means no more typing in VAT figures into the HMRC website
When is the deadline?
VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) are already required to follow MTD rules. This was introduced in April 2019.
All remaining VAT-registered businesses must follow MTD rules for their first return starting on or after April 2022. Unless exempt, this means you’ll no longer be able to submit manually.
You don’t need to wait until April 2022. If you’re currently below the VAT threshold, you can voluntarily register with the MTD service now and start using compliant software solutions. Signing up to MTD early means you’ll benefit from streamlined tax admin now and can relax knowing you’re already compliant.
What information must be kept digitally?
MTD will affect your accounting processes and the way you store information. As part of the new rules, you’ll be required to keep electronic records and digital copies of transactions.
You’ll need to record:
- Your business name and address
- VAT registration number
- VAT accounting schemes
- The amount of VAT on goods and services you supply
- The amount of VAT on goods and services you receive
- Adjustments that you make to your returns
- Source of VAT Transactions (UK, Europe and Rest of World)
- Time of supply and value of supply (value excluding VAT) for everything you buy/sell
- Rate of VAT charged on goods and services you supply
- Reverse charge transactions
- Total daily gross takings (if you use a retail scheme)
- Items you can reclaim VAT on (if you use the Flat Rate scheme)
I already keep digital records. What’s different about Making Tax Digital?
All VAT-registered businesses must maintain records and accounts, and many are already keeping these digitally. With MTD, the significant change is that you must use a compatible software package.
The software can prepare your VAT return for you using up-to-date records. You’ll then need to declare the information is correct and confirm the submission to HMRC.
What is compatible software?
You’ll need to keep these digital records using compatible VAT record keeping software that connects to HMRC systems and allows you to store and update records like receipts and VAT invoices digitally.
It must be able to:
- keep and maintain digital records specified in the regulations
- prepare VAT returns using these records
- communicate with HMRC through a digital link
Some of the MTD Solutions contain provide “Bridging software” or a “Bridging Feature” can also that lets you digitally link data in a spreadsheets to HMRC’s system.
Where can I find compatible software?
We're supporting small businesses and the self-employed to get to grips with new Making Tax Digital rules and stay compliant through our new FSB Making Tax Digital App.
As the first app approved by HMRC for the initiative and to submit an MTD return, it’s a cost-effective solution for small businesses. Users can submit their business accounts directly from the app to the online MTD portal.
- Create and record customer paymentsyour sales income
- Keep track of your expenses
- Store photos of paper receipts
How does it work?
Once you register a new Account on the FSB MTD App, you connect (authenticate) your FSB MTD Account to your HMRC VAT Account. This is a one off exercise that “grants” the FSB MTD permission to update HMRC with your VAT information without having to log in each time.
Once you have linked your FSB MTD App to your Account, the FSB MTD App will retrieve your Quarterly VAT Submission dates that includes submissions that may have been made using another MTD compatible product.
To make a submission, you simply click on a quarter and the App will calculate and populate the 9-box form. You will have the facility to make adjustments and to record notes against each box.
For customers using the ‘Bridging” feature to link VAT data recorded in a spreadaheet, they will need to download the Expel Template and incorporate it into their VAT spreadaheet. Uploading the updated spreadsheet into the App will automatically populate the ‘adjusted’ fields.
The final step is to click on the ‘Declaration’ confirming that you consent to making the submission. This will enable the ‘Submission’ button that will complete the VAT submission process.
Do I need to register for MTD?
Yes, your business will first need to sign up for Making Tax Digital, or you can have an agent do this for you. Don’t forget, you’ll need to have compatible software in place before you register.
To sign up, you’ll need to have the following to hand:
- Your business email address
- Government Gateway user ID and password (if you don’t have one, you can create one here)
- VAT registration number
- Latest VAT return
You can sign up for Making Tax Digital here.
Sending your VAT return
The new rules won’t change your normal VAT return deadlines or the information you need to send. You can check when your next return is due on your online VAT account. Our step-by-step guide to VAT returns takes you through the process of filling in paperwork with advice from our team of tax specialists.
Is Making Tax Digital only for VAT?
No. Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from their next accounting period starting on or after 6 April 2024. The legislation will also apply to partnerships.
What about Corporation Tax?
Making Tax Digital for Corporation Tax is currently under consultation but isn’t expected to be brought in until 2026.
Where can I find more information?
HMRC have useful resources, videos and webinars for business owners so you can learn more about how you’ll be affected and the steps you need to take.
Get ready for Making Tax Digital with FSB
Are you ready for Making Tax Digital? Get ahead of the curve and find out what you need to do to comply with expert resources and an HMRC recognised solution for small businesses and the self-employed.