Making Tax Digital for VAT

Introduction Making Tax Digital (MTD) for VAT is part of an initiative developed by HM Customs & Revenue (HMRC) to modernise tax collection in the UK. It requires most VAT-registered businesses with taxable turnover above the VAT registration threshold to keep certain records in digital form and submit their VAT returns using software that meets HMRC specifications.

VAT-registered businesses with a taxable turnover below the VAT registration threshold must start complying with MTD requirements from April 2022.

This factsheet explains the background of MTD, what its requirements are, which businesses are affected and how to start complying with MTD. The factsheet also provides sources of further information and support.

Background MTD is a programme of changes to the way that taxation is managed in the UK, intended to make the tax system more efficient and simpler to operate.

Eventually, MTD will be expanded to cover income tax and corporation tax. However, it is being implemented gradually, with VAT (value added tax) being the first tax to transition to the new system. Following voluntary pilots of MTD for VAT during 2017 and 2018, most VAT-registered businesses with a turnover above the mandatory registration threshold (£85,000 in 2021/22) were required to start complying during 2019.

Requirements of MTD for VAT

Digital record keeping All VAT-registered businesses are required to keep certain records. Under MTD, some of these must be kept digitally.

Records that must be kept digitally under MTD include the following:

The business name and address, its VAT registration number and any VAT accounting schemes that it uses.
The date and value of each supply made by the business, and the rate of VAT that the business charged.
The date and value of each supply received by the business, and the rate of VAT that the business paid.
'Summary data', such as total tax owed and reclaimed for each VAT period.

Compatible software Many businesses already keep their VAT records digitally. However, under MTD, there is a requirement to use 'functional compatible software' when keeping digital VAT records. This means software that can use HMRC's application programming interface (API) platform to submit information and returns to HMRC and also receive information from HMRC.

Digital links Many businesses use several different applications to manage their VAT responsibilities. For example, a business may store VAT records in spreadsheets and use separate tax calculation software to manage and submit their tax returns.

Under MTD, if more than one software application is used, the transfer of digital records from one application to another must be made by means of 'digital links'.

A digital link is an electronic exchange of data between applications without any need to input information manually. For example, a digital link between two applications is created when a business emails a spreadsheet to a tax agent, or gives it to them on a portable device such as a memory stick, and the agent imports the data directly into their tax calculation software.

'Soft landing period' for digital links Using 'cut and paste' to move information between applications is not considered by HMRC to be a digital link. However, for an initial period after businesses were required to follow MTD rules (known as the soft landing period), HMRC accepted the use of cut and paste in order to make it easier for businesses to make the transition to the new rules.

For VAT returns starting on or after 1 April 2021, the soft landing period no longer applies. Digital links must be fully in place and the use of cut and paste is not acceptable.

Which businesses must comply with MTD for VAT? A VAT-registered business with a taxable turnover above the VAT threshold must comply with MTD for VAT unless one or more of the following exemptions applies:

It is not practical for the business to keep digital records or submit digital returns - for example because it is in a remote location with no internet access, or because the business owner has a disability that makes it impossible for them to use a computer.
The business or its owner is subject to an insolvency procedure.
The business is run by a religious order whose beliefs prevent them from keeping digital records.

Voluntary compliance VAT-registered businesses with a taxable turnover below the VAT threshold are not required to comply with MTD requirements until their first return starting on or after 1 April 2022. However, they can choose to comply voluntarily. MTD is expected to be an easier and more efficient way of managing taxation, and HMRC encourages businesses to adopt it as soon as they can.

Registering for MTD Businesses that are required to comply with MTD, or that will be complying with it voluntarily, must complete a registration process by going to www.gov.uk/guidance/sign-up-your-client-for-making-tax-digital-for-vat.

Before registering, it is essential to have MTD-compliant software in place. Businesses that already use specialist software to keep their VAT records should check their software provider's plans for ensuring compatibility with MTD.

Businesses that do not already use specialist software, or whose software will not be compatible, must obtain compatible software. The type of software required will vary according to the needs of the business and the IT systems that it already has in place. For example, a business that currently relies on using spreadsheets should consider obtaining 'bridging software', which can extract data from a spreadsheet and upload it to HMRC.

If you you would like support about Making Tax Digital and appropriate software then contact Ashored for further information and advice.