Your Essential Guide for Making Tax Digital (MTD) for VAT

MTD is HMRC's plan to digitise the tax system for VAT, Income Tax Self Assessment, and Corporation Tax for both businesses and individuals. The purpose is to make tax returns simpler and more efficient for everyone.

Since April 2019, VAT-registered businesses in the UK above the registration threshold (currently £85,000) have had to submit their VAT returns using “compatible software” and keep their VAT accounting records digitally. 

From 1 April 2022, MTD for VAT will be extended to cover all VAT registered businesses, regardless of their turnover. Consequently, this will bring many VAT registrations within the scope of MTD for the first time. The critical point is that it will no longer be possible to submit VAT returns manually via HMRC's website for the first full VAT period following April 2022. This process needs to be done through software. 

Not sure how to adopt MTD policies? Feel free to contact the expert accountants at Lawrence Grant to create a list of digital documents you need to maintain. 

MTD for Income Tax Self Assessment (MTD ITSA)

MTD ITSA for Income Tax Self-Assessment will start in April 2024 and applies to all self-employed business owners and landlords with an annual income of over £10,000. In April 2025, HMRC will apply this plan to most general partnerships.

MTD for Corporation Tax

Making Tax Digital for Corporation Tax to be introduced April 2026 at the earliest.

What do you need to do to register for MTD for VAT

Under MTD for VAT, businesses have to:

• Keep their records digitally.
• Use MTD-compatible software or other software (like spreadsheets) to submit their VAT returns to HM Revenue and Customs.
• Have 'digital links' in place between the pieces of software used to carry out those functions.

For businesses joining MTD this April, the requirements mentioned above will apply to their first VAT period starting on or after 1 April 2022.

The initial step towards MTD compliance for those businesses will ensure that they have the right software to meet their MTD requirements. They will then need to sign up for MTD for the VAT service at the right time. This is discussed further in more detail below.

Exemptions are available where it is not reasonable or practical for businesses to follow the MTD for VAT rules (for example, due to disability or age). Businesses that are already exempted from filing VAT returns online will automatically be exempt from MTD for VAT, but any other business must apply to HMRC for an exemption.

Software choices

An essential requirement of MTD is that the business has software capable of keeping digital records and submitting VAT returns to HMRC in the required format. Businesses who have voluntary registrations and use software to submit their VAT returns should check if the software is on HMRC's searchable list of MTD for VAT products.

Those who operate without software need to consider their options. Once more, HMRC's list of compatible software might be an excellent place to start. While this can be checked based on price, functionality, and accessibility features, it can still be overwhelming.

The solution for any business is likely to depend on its facts and circumstances, including a budget, level of tech awareness, and broader business requirements. MTD for VAT software ranges from free or low-cost bridging software which can take return information from an existing spreadsheet and submit it to HMRC to more expensive and sophisticated packages which you can use for record-keeping, accounting, tax, and more.

Voluntarily registered businesses coming into MTD for the first time need to ensure that they put the required digital links in place, whatever software option they use.

Will MTD VAT work for MTD ITSA

A question for unincorporated businesses is whether their chosen software for MTD VAT would also work for MTD ITSA when those businesses have to be registered from April 2024.

The software market for MTD for ITSA remains very limited, with only seven packages appearing on HMRC's list of compatible software and another 5 in development. If a business focuses on a specific software package for MTD for VAT, it should contact the relevant vendor to ask about their intentions regarding MTD for ITSA.

Importance of when you register for MTD VAT

After the voluntarily registered businesses have their software in place, the next step is to register for MTD for VAT by clicking “register for MTD” on the Gov.uk website. The timing of when they register for MTD VAT is essential.

Once a business signs up for MTD, all future returns need to be submitted using MTD-compliant software. It's therefore important not to sign up until the last non-MTD return has been submitted.

For example, a voluntary registration with a March quarter-end return, their first MTD period will be the quarter ending 30 June 2022. They need to wait until the last non-MTD return (i.e. for the quarter ending 31 March 2022) has been submitted before signing up, but also ensure they sign up in time to submit their first MTD return by the deadline of 7 August 2022.

The precise sign-up window will depend upon how the business pays its VAT. If the business already pays by Direct Debit, do not sign up too close to the date the VAT return is due, or you may pay twice.

To avoid this, do not sign up less than:

• Five days after the return is due.
• Seven days before the return is due.

If the business doesn't pay by direct debit, they will have a slightly longer sign up window, but should sign up:

• No earlier than the filing date of the last non-MTD return.
• No later than three days before the first MTD return is due.

The deadlines for sending the VAT returns will not change after signing up for Making Tax Digital for VAT. The MTD for VAT features for the accounting software will need to be activated once HMRC provides the sign-up details. Activation is not automatic.

Register now

To be ready for MTD VAT in good time, voluntary registrations need to start dealing with their MTD commitments and software choices. Businesses that don't submit their VAT returns on time using MTD compliant software will incur default surcharges under the old penalty system until the new VAT penalty regime commences on 1 January 2023. 

For all of your HMRC Tax Enquiry needs, contact our accountants to make your process easy.