Making Tax Digital (MTD) for VAT

New Penalties for non-compliance

HMRC have issued guidance for VAT-registered business and their agents on how to avoid penalties for non-compliance with the Making Tax Digital for VAT (MTD) rules.

In particular, there is a new £400 per return penalty if you file a return but do not use 'functional compatible software'.

There are additional penalties if the business does not keep its records digitally. HMRC may charge you a penalty of between £5 to £15 for every day on which the business does not meet that requirement.

Key extracts from HMRC guidance include:

You must file your VAT return using functional compatible software

Functional compatible software means a software program, or set of software programs, products or applications (apps) that can:

• record and store digital records.
• provide HMRC with information and VAT returns from the data held in those digital records.
• receive information from HMRC

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Making Tax Digital (MTD) is now mandatory for VAT-registered businesses

MTD became mandatory for all VAT registered businesses on the 1 April 2022.

From 1 April 2022, all VAT registered businesses need to have signed up to Making Tax Digital for their first VAT return starting on or after 1 April 2022.

We can sign you up to MTD, although you will be responsible for meeting your VAT obligations. Those who do not join Making Tax Digital for VAT may be charged a penalty for failure to do so.

Previoulsy only VAT registered businesses making taxable supplies in excess of the £85,000 VAT registration threshold are mandated to comply with Making Tax Digital (MTD) rules. Those rules require the business to keep digital business records and send VAT returns using MTD-compatible software.

MTD for VAT is now being rolled out to all VAT registered businesses from April 2022 which may cause some traders who are VAT registered but below the threshold to consider deregistering to avoid having to comply with MTD for VAT. If you decide to do so you will need to complete Form VAT7 and account for output VAT on the market value of stock and assets still owned at the date of deregistration. This is where input VAT has been reclaimed on those assets.

There is however a £1,000 de-minimis which means that output VAT does not need to be accounted for where the combined market value of the assets is less than £6,000.

Unfortunately, deregistering for VAT will not necessarily sidestep MTD as the requirement to keep business records digitally will be introduced for income tax from April 2023. From then MTD for income tax will apply to businesses with gross income in excess of £10,000 a year which will include property landlords as well as traders and professionals.

What is "Making Tax Digital"?

Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account) and you will be able to pay tax based on your business activity during the year. You can upload and update your tax account in real time.

The government states that MTD helps taxpayers get their tax returns right by reducing common mistakes as well as saving time managing their tax affairs and is a key part of the overall digitalisation of UK tax.

Evidence shows MTD is succeeding in its central aims of reducing errors, while also making it faster to prepare and submit returns and boosting productivity for businesses. New research, conducted by HMRC and peer reviewed by independent academics, shows MTD is likely to have generated increased revenue for the Treasury, through reducing errors in both 2019 and 2020.

Nearly 1.6 million taxpayers had joined MTD for VAT as of December 2021 with more than 11 million returns successfully submitted.

VAT-registered businesses that have not yet signed up to MTD for VAT should do so now. All VAT-registered businesses must use MTD for VAT for their first VAT return period that starts on or after 1 April 2022. For any business concerned about this, we can help to choose the software that is right for you, whether that is one of the simple free options available, or a more advanced product for those with more complex affairs.

Please contact us about MTD – we are here to help!

Will it affect me?

If you own a business, you are self-employed and you pay income tax, national insurance, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your digital tax account. Eventually this will abolish the annual tax return. This will be the law and there will be penalties for non-compliance. 

Please talk to us about how we can help your business comply with the new rules. We can recommend the right software and provide the training and support you need.

VAT notice 700/22: Making Tax Digital (MTD) for VAT

This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.

Rules introduced under the Making Tax Digital (MTD) initiative mean VAT registered businesses with taxable turnover above the VAT registration threshold need to keep digital records and submit VAT Returns to HMRC using compatible software. This applies to all VAT registered businesses.

This notice explains:

• the digital records businesses must keep, and ways to record transactions digitally in certain special circumstances
• what counts as compatible software, and when software programs do and do not need to be digitally linked where a combination of programs is used.

MTD for VAT requires VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT Returns using software.

It is increasingly common for business records and accounts to be kept digitally, in a software program on a computer or tablet, or in a smartphone application, or maintained through such a device and stored using a cloud-based application.

The difference under MTD is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records and communicating with HMRC digitally through the Application Programming Interface (API) platform.

If your digital records are up to date, software will be able to collate and prepare your return for you. It will then show the return to you and ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received.

The notice provides further details of the Making Tax Digital rules. The overview of MTD can be seen here.

Government Resources

Below are useful references to guidance provided by the Government.

VAT record keeping

VAT registered businesses with a taxable turnover of more than £85,000 must follow the rules for ‘Making Tax Digital for VAT’ by keeping some records digitally, unless:

• your business uses the VAT GIANT service, for example if you’re a government department or an NHS Trust
• you apply for an exemption

Records you must keep digitally:

You must keep some records digitally within your functional compatible software. This is known as your ‘electronic account’. Your electronic account must contain:

• your business name, address and VAT registration number.
• any adjustments from calculations you make outside your functional compatible software for any VAT accounting schemes you use.
• the VAT on goods and services you supplied, meaning everything you sold, leased, rented or hired (supplies made).
• the VAT on goods and services you received, meaning everything you bought, leased, rented or hired (supplies received).
• any adjustments you make to a return.
• the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you bought and sold.
• the rate of VAT you charged on goods and services.
• your reverse charge transactions, where you record the VAT on the sale price and the purchase price of the goods and services you buy.
• copies of documents that cover multiple transactions made on behalf of your business, like those made by volunteers for charity fundraising, a third-party business or employees for expenses in petty cash.

All transactions must be contained in your electronic account, but you do not need to scan paper records like invoices and receipts.

How to keep digital records

You need to use a compatible software package or other software (like spreadsheets) that connect to HMRC systems.

If you use more than one software package to keep records and submit returns, you need to link them.

Some ways you can link your software include:

• using formulas to link cells in spreadsheets
• emailing records
• putting records on a portable device to give to your agent
• importing and exporting XML and CSV files
• downloading and uploading files

You must have links between the software you use by your first VAT period after 1 April 2022.

The deadlines for sending your VAT returns will not change after you sign up for Making Tax Digital for VAT.

Further details are here.

Making Tax Digital for VAT as a business: step by step

Follow these steps if you’re a business or sole trader and you need to follow the rules for Making Tax Digital for VAT.

Find software that's compatible with Making Tax Digital for VAT

Before you sign up to Making Tax Digital for VAT you will need either:

• a compatible software package that allows you to keep digital records and submit VAT Returns
• bridging software to connect non-compatible software (like spreadsheets) to HMRC system

We can help too, talk to us about what software you need.

Alternatively the gov.uk site has a service to search for record keeping software and bridging software.

Check if you can apply for an exemption or opt out from Making Tax Digital for VAT.

You are automatically exempt from Making Tax Digital for VAT and do not need to apply if:

• you’re already exempt from filing VAT Returns online
• you or your business are subject to an insolvency procedure

You can still sign up voluntarily.

Apply for an exemption

You can apply if it’s not reasonable or practical for you to use computers, software or the internet to follow the rules for Making Tax Digital for VAT.

This could be because:

• of your age, a disability or where you live
• you object to using computers on religious grounds
• of any other reason why it’s not reasonable or practical

HMRC will consider each application on a case-by-case basis.

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