Making Tax Digital for VAT: What you need to know

From April 2022, one of the biggest transformations in the UK tax system will come into play and all VAT-registered businesses must comply with Making Tax Digital for VAT to submit returns to the HMRC The aim of Making Tax Digital (MTD) is to make it easier and more efficient for businesses and individuals to record and declare tax to HMRC and to improve accuracy and reduce avoidable error.

Since April 2019, VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) were already required to follow MTD rules and from April 2022 all remaining VAT-registered businesses must follow MTD rules for their first return unless they have an exemption.

Businesses below the threshold can already voluntarily register with the MTD service now and start using compliant software solutions.

MTD will affect accounting processes and the way information is stored and as part of the new rules, businesses and tax professionals will be required to keep electronic records and digital copies of transactions.

These include business name and address, VAT registration number, VAT accounting schemes, the amount of VAT on goods and services supplied, the amount of VAT on goods and services received, adjustments made to returns, source of VAT transactions (UK, Europe and rest of world); time of supply and value of supply (value excluding VAT) for everything bought and sold, rate of VAT charged on goods and services supplied, reverse charge transactions, total daily gross takings, and items reclaimed on VAT (if using the flat rate scheme).

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 the VAT return using up-to-date records, which will then need to be declared correctly at the time of submission to HMRC.
HMRC has a list of compatible software for the MTD changeover or through the FSB Making Tax Digital App.

Businesses need to sign up for Making Tax Digital, or have an agent do this. To sign up businesses will need to provide a business email address, Government Gateway user ID and password, VAT registration number and latest VAT return.

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.using compatible software accounting.