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Making tax digital

Making Tax Digital (MTD) is part of the government’s plan to modernise the UK tax system, by making it easier for individuals and businesses to get tax right and keep on top of their affairs, through the use of digital technology. HM Revenue & Customs (HMRC) rolled out the first part of this initiative with Making Tax Digital for VAT, which introduced rules for how businesses need to keep VAT records and submit VAT returns. In this article, we summarise the key changes.

What is it?

Making Tax Digital for VAT requires VAT-registered businesses with a taxable turnover at or above the current UK VAT registration threshold of £85,000 to:

  • keep records digitally (e.g. in a software product or spreadsheet: paper records are no longer permitted); and:
  • submit VAT returns to HMRC’s online platform using software compatible with the HMRC interface.

Taxable turnover is the total value of all goods you sell or services you provide that are not exempt from VAT.

When did the new rules start?

For the vast majority of businesses (including charities, unincorporated businesses, companies, and LLPs) the new rules applied to your first VAT return for the period starting on or after 1 April 2019 (all other business taxes will follow from 2021 at the earliest). From this date you needed to keep records in digital form and file your VAT returns using software compatible with Making Tax Digital. From April 2022, those businesses registered for VAT voluntarily will also need to join.

Digital record keeping

You will need to keep your business records digitally. If you already use software to keep your business records, check your software provider’s plans to introduce MTD-compatible software. Do note it is likely there will be extra costs for putting in place and maintaining the compatible software, processes or controls needed to be MTD compliant.

If you do not currently use software, or your software will not be MTD-compatible, you will need to consider what software is suitable for your requirements.

HMRC has published details of the software available for MTD.

Whichever software is used it must be able to:

  • Keep records in digital form (no more paper records will be allowed)
  • Preserve digital records in a digital form
  • Create a VAT return from the digital records
  • Provide HMRC with VAT data on a voluntary basis
  • Receive information from HMRC

If you use spreadsheets to keep business records, you will need MTD-compatible software so that you can send HMRC your VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible. The information must not be physically re-typed into another software package.

Your digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also keep all basic information about your business such as name, address as well as your VAT registration number.

Final thoughts

For a simple organisation, the changeover to MTD should be reasonably straightforward. A new digital age is absolutely upon us and MTD for VAT is only the beginning as the plan is for it to be introduced for all other taxes in the near future.

Additional information

HMRC has provided detailed guidance on its website

ISM members can also contact our free Tax Helpline on 01275 376 038 for advice (Monday to Friday, 9am to 5pm).