What is Making Tax Digital for VAT, and how does it affect your business?

This article was originally published on 28/08/2019 

In 2022, HMRC urged VAT-registered businesses to sign up for Making Tax Digital (MTD) for VAT. Since November of that year, businesses cannot use their existing VAT online account and must use compatible software to keep their VAT records.

Here’s our guide to what SMEs need to know about the regulation and how they can best prepare their businesses. 

Businesses need to effectively manage their finances and meet tax reporting deadlines. In the UK, the implementation of Making Tax Digital (MTD) has sought to simplify and digitalise the UK’s tax system. However, what is MTD, and how does it affect SMBs?

What is Making Tax Digital? 

Making Tax Digital (MTD) is a government initiative to help make the UK’s tax system more effective, simple and efficient for taxpayers. HM Revenue and Customs (HMRC) seeks to do this by what is, in effect, top-down digitalisation. In other words, businesses, accountants and bookkeepers must use compatible software to digitally maintain records and submit VAT returns. The digitalisation of processes will make it easier for individuals and companies to manage their tax returns and keep on top of their affairs. 

You can find a full list of the records that must be digitalised under the new rules here.

What are the benefits of Making Tax Digital for VAT? 

There are several benefits of MTD for VAT. Along with supporting HMRC’s plans to digitalise the tax system, notable benefits include:

• Improved accuracy of digital records: By using software to automate manual processes, companies can carry out transactions correctly and automatically identify errors. This helps reduce the likelihood of mistakes in VAT calculations and ensures that businesses submit accurate tax returns.
• Reliable record keeping and control: By using digital records and software, businesses have better visibility and control over their financial data. It is easier to access and analyse VAT information, track transactions and generate accurate and reliable reports.
• Less time spent on paperwork: MTD can save businesses time by stealing the VAT return process. Automated calculations and digital records can save business time that can be focused on other aspects of their operations and not on paperwork. 

When do you need to comply with MTD? 

From 1 November 2022, businesses were required to sign up for Making Tax Digital for VAT and use compatible software to keep their VAT records and file VAT returns. Consequently, they were no longer able to use their existing VAT online.

These new requirements mean that businesses cannot use their previous VAT online accounts to send monthly or quarterly VAT returns.

Do all businesses need to register for MTD?

From April 2022, all VAT-registered businesses must comply with MTD. This includes limited companies. While businesses originally had to sign up manually for MTD for VAT, HRMS is now automatically signing businesses up to MTD. 

Therefore, as long as a business is registered for VAT, it won’t need to sign up for MTD for VAT separately. If your business isn’t registered, you won’t need to comply with MTD but may still be required to sign up for MTD for Income Tax Self Assessment (ITSA) by April 2026. 

There are a few exemptions from MTD for VAT. To be exempt, businesses must meet one of the following criteria;

1. Find it “unreasonably practicable” to use digital tools to keep business records or submit a VAT return due to age, disability or remoteness of location.
2. Have a business that is subject to an insolvency procedure.
3. Have a business run entirely by practising members of a religious society whose beliefs are incompatible with using electronic communications or keeping digital records. 

There is also guidance on how to claim an exemption from MTD for VAT. 

How do you comply with MTD?

On the face of it, achieving compliance is simple. All businesses need to do is implement a compliant software package that allows them to keep records and submit VAT returns. Alternatively, firms can install compatible ‘bridging software’ that links spreadsheet software to HMRC’s systems. 

However, with so many accounting software packages on the market, knowing which suits your business and complies with the Making Tax Digital rules can be challenging. This is where a trusted comparison site can help. Capterra’s accounting software listing allows you to search over 100 accounting software services, read user reviews and discover the best options for your business.

How do you confirm compliance with MTD for VAT?

While Capterra’s catalogue can help you identify the best solutions for your business, there are still some more steps to take when choosing your Making Tax Digital software. 

Once you have narrowed down a shortlist of options for your new accounting software, it is important to check that it complies with the new rules. Doing so couldn’t be easier. HMRC has produced a simple-to-use search function to check whether a given software package meets the Making Tax Digital criteria. It is recommended to use MTD-compatible software that allows for direct submission of VAT returns to HMRC. 

Cross-referencing Capterra’s catalogue with HMRC’s compliance checker is the best approach to finding high-quality software that adds maximum value to your accounting processes while also ensuring you’re ready for Making Tax Digital. 

The final step to sign up for MTD

Once you have selected and bought your software choice, you’re ready to sign up for Making Tax Digital using the Gov.UK site. For businesses that do not pay their VAT by Direct Debit, this needs to be done at least 72 hours before your return is due. For those that do, you need to sign up at least five working days before your return’s due date.

Making Tax Digital applies to nearly all Small and medium businesses, and you do need to act. But doing so couldn’t be easier – and by utilising the right search tools, you can ensure your compliant software performs to your requirements.