Making Tax Digital (MTD) is a government initiative to modernise the tax system, making it more effective and efficient. It requires businesses to keep digital tax records and submit VAT returns using HMRC-approved software.
MTD helps businesses avoid common mistakes and stay on top of their tax obligations. Initially introduced in 2019 for businesses above the VAT threshold, the scheme now includes all VAT-registered businesses, regardless of turnover.
Over time, MTD will expand to cover Income Tax and Corporation Tax.
What You Need to Do
If your business is VAT-registered, here what you must do:
- Start using MTD-compatible software to maintain digital records
- Submit VAT returns through that software every quarter
- Store your records securely for at least 6 years
Make sure your systems use digital links, which means the data flows automatically between programs. Manual copying and pasting is not allowed.
Records You Must Keep
Accurate digital records are at the heart of MTD compliance. These include:
- Business name and address
- VAT registration number and schemes used
- VAT details on all sales and purchases
- Tax point (time of supply)
- VAT rate applied
- Adjustments made to VAT returns
- Reverse charge transactions (recorded as both sale and purchase)
- Daily gross takings (for retail schemes)
- Asset purchase reclaimable under the Flat Rate Scheme
- Records of multiple transactions carried out by others on your behalf
You can use spreadsheets for calculations, but they must connect to compatible software using bridging tools.
How to Register for Making Tax Digital for VAT
Visit the HMRC website and follow the steps to sign up. You will need your business name, VAT number and details of your chosen software. If you use an accountant or agent, they can register for you, just make sure they have the proper authorisation.
Choosing MTD-Compatible Software
You must use approved MTD-compatible software to stay compliant. HMRC offers a list of recognised options. Popular choices include QuickBooks and Xero. These tools help you calculate VAT and submit returns. Many offer extra features like invoicing and bank reconciliation.
Switching to digital systems may come with some cost. Businesses moving from paper-based methods might face initial setup fees or ongoing subscription charges. While the government estimates £70 a year in costs, some independent sources place the figure as high as £1,250.
Historical Dates for Making Tax Digital for VAT
April 2019 – MTD for VAT become mandatory for businesses with a taxable turnover above the VAT threshold.
April 2022 – All VAT-registered businesses where brought under MTD, no matter their turnover.
November 2022 – HMRC phased out the old VAT online account. All returns since have gone through MTD-compatible software.
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