Making Tax Digital for VAT: What you need to know

Blogs 13 May 2022

Are you compliant with Making Tax Digital for VAT? All VAT-registered businesses must comply with new rules for their VAT returns filed on or after April 2022. Find out what this means for you and how you can comply.

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What is Making Tax Digital for VAT? 

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 legally requires VAT-registered 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 on the HMRC website

When is the deadline? 

The new legislation is now in place for all VAT-registered businesses regardless of turnover, but it's estimated that 600,000 eligible businesses are yet to sign up and could face late payment fines from HMRC.

VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) have been required to follow MTD rules since 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 can check the Government website to find out when you need to start keeping digital records for your first Making Tax Digital accounting period. 

Do I need to register for MTD for VAT? 

Yes, your business will first need to sign up for Making Tax Digital, or you can have an agent do this for you. However, you’ll need to have compatible software in place before you register.  

To sign up, you’ll need to have the following to hand: 

You can sign up for Making Tax Digital here.   

What information must be kept digitally? 

MTD will affect your accounting processes and the way your business stores 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 for VAT? 

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.  

Will this change my VAT return deadline?

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.

What is compatible software? 

You’ll need to keep your 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 MTD solutions contain  “Bridging software” or a “Bridging Feature” that lets you digitally link data in a spreadsheet to HMRC’s system.

Where can I find compatible software? 

The Federation of Small Businesses is 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 payments and your 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 include 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 nine-box form. You will have the facility to make adjustments and record notes against each box. 

If you're using the ‘Bridging” feature to link VAT data recorded in a spreadsheet, you will need to download the Expel Template and incorporate it into your VAT spreadsheet. 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 make the submission.  This will enable the ‘Submission’ button that will complete the VAT submission process.   

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. 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 has 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.  

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