What is Making Tax Digital for VAT?
Making Tax Digital (MTD) for VAT is the first phase of HM Revenue & Customs’ (HMRC) ‘Making Tax Digital’ programme. It has been introduced in stages since 1 April 2019 and now all VAT registered businesses other than those who are exempt are in scope of the MTD for VAT rules.
The main elements to the MTD for VAT rules are:
Does the Making Tax Digital for VAT regime apply to me?
The regime applies to all businesses who are VAT registered unless HMRC have agreed they are exempt. Anyone who newly registers for VAT will be automatically registered for MTD for VAT at the same time.
Most VAT registered businesses trading at 31 March 2019, other than those who registered voluntarily for VAT, had to to comply with the MTD for VAT rules with effect from their first VAT return period beginning on or after 1 April 2019.
A business that registered for VAT after 1 April 2019 due to its turnover reaching the registration threshold (so were compulsorily registered) had to comply with the MTD for VAT rules as soon as they became VAT registered.
All voluntarily registered VAT businesses trading at 1 April 2022 had to follow the MTD for VAT rules from either 1 April 2022, 1 May 2022 or 1 June 2022 depending on their VAT return quarters, as shown below:
VAT return quarters
Last VAT return due under the old system
MTD for VAT start date for digital records
First VAT return due under MTD
June, September, December and March
Quarter ended 31 March 2022
1 April 2022
Quarter ended 30 June 2022
July, October, January and April
Quarter ended 30 April 2022
1 May 2022
Quarter ended 31 July 2022
August, November, February and May
Quarter ended 31 May 2022
1 June 2022
Quarter ended 31 August 2022
Traders who should be filing VAT returns under the MTD rules but who had not registered for MTD by November 2022 were automatically signed up by HMRC at that time.
Who is exempt from the Making Tax Digital for VAT rules?
If you are already exempt from filing your VAT returns online then you continue to be exempt and you do not need to reapply for exemption.
Otherwise, exemption from the Making Tax Digital (MTD) for VAT programme is available if you meet one of three criteria:
- It is not ‘reasonably practicable’ for you to use digital tools to keep your business records or submit your VAT Returns because of age, disability, remoteness of location or for any other reason
- you or your business are subject to an insolvency procedure
- your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records
You should fully explain the reasons why you believe you meet one of the exemption criteria and then HMRC will write to you to advise whether or not your claim has been successful. If it is not successful you may be able to appeal against the decision and the way to do this will be set out in HMRC’s response to you. You do NOT have to comply with the new MTD for VAT rules while your claim is being considered or while an appeal is being made.
If a claim for exemption is ultimately unsuccessful you must then make every effort to comply with MTD as soon as possible going forward.
The government is helping small businesses located in rural areas with improving their internet connection through gigabit vouchers where businesses can claim up to £2,500 if certain conditions are met. There are more details, including the qualifying terms and conditions, on the gigabit voucher website.
How do I join Making Tax Digital for VAT?
Anyone who is newly registering for VAT will be automatically enrolled for MTD for VAT by HMRC.
It is important to note that once you join the MTD for VAT programme you must stay in the regime even if your turnover drops below the VAT registration limit unless you decide to cancel your VAT registration.
What are digital records?
The 'Making Tax Digital for VAT’ regime requires you to maintain business records digitally for VAT purposes in what is known as ‘functional compatible software’ and also to file your VAT returns using digital methods. This means that some kind of electronic record keeping system must be used. This could be an accounting software package, a spreadsheet-based system or maybe via an ‘app’ on a smartphone.
If you do not keep your records digitally now you need to decide how you are going to change to a digital system. This could depend on several factors such as:-
- How experienced or confident are you when using IT/software?
- Do you have access to the internet? If so, how reliable is your broadband service?
- Do you have anyone to ask if you need any help? If so, are they already using a particular product in their own business that they can recommend to you?
- What kind of budget do you have (if any)?
- What hardware you are most comfortable using (eg laptop, tablet, phone etc)? Does it have the necessary system requirements to run the software?
- Is there anywhere you can get some training? (YouTube videos/chat forums/local IT support group or local charity etc)
There is no record keeping software available from HMRC, therefore it will be necessary to purchase a commercial system you feel is suitable for your business and within your budget. The cost of the software packages varies between suppliers. Some suppliers offer free products but this may only be for a limited time or may only be for the simplest version of their product. Therefore, you must be careful when reviewing potential software products to try to ensure you get the most suitable product for your circumstances.
HMRC have published guidance relating to finding relevant software. This includes a tool which may help you to select a product which is most suitable for your business. The current version of the tool is rather basic but it is continuing to be developed and changes are made to it periodically by HMRC to improve its functionality.
Your digital record keeping system must also enable you to file the VAT return digitally with HMRC directly from within the software or by using bridging software.
Certain data from business invoices and receipts must be recorded digitally but the invoices and receipts themselves do not need to be scanned and saved digitally, although they can be retained in this way.
If you use more than one software package to keep records and submit returns, you need to link them digitally. There are examples of software digital links and more information on the data that must be retained digitally in functional compatible software on GOV.UK.
There are lots of different products on the market so it might be difficult to choose one that you think will work for you, both now and in the future. Some things to consider when choosing a product might be:
- Are you clear about the costs/charges associated with the product, if any?
- Does the product offer customer support if you have a problem/get stuck? If so, how is this delivered – eg email, webchat, phone? Are there any additional charges if you need support?
- Can you transfer all your data from the product to a new product easily if you decide to change systems? Does the system back up the data automatically or will you need to do this yourself regularly?
- Can you print reports from the system easily? Can you download/save data or reports etc easily from the system?
- Does it meet any accessibility need you may have?
- Do you need the product to have a Welsh translation?
- Do you want a system that links to your bank account and automatically downloads transactions?
- Do you have any particular requirements in terms of functionality of the product (eg Flat Rate Scheme VAT returns)
- How many transactions do you have each quarter? Is there a limit on the number of transactions (for example, per month or per quarter) the software will allow? Do you anticipate the number of transactions to increase as your business grows?
- Is the product useful for any other aspect of your business?
- Is the product fully compatible with your hardware/other software?
- Are software updates done automatically or do you (as the user) need to regularly check for programme updates?
How do I file my VAT return once I am in Making Tax Digital for VAT?
As part of MTD for VAT, you must file your VAT return using your software. You cannot use the HMRC VAT online service to file VAT returns unless you are waiting for a response from HMRC to an application for exemption.
The ‘functional compatible software’ must be used to file the VAT return with HMRC. Most accounting packages will have this functionality built in. However, if you use spreadsheets this will not be the case, and therefore you will need to purchase bridging software which will link your spreadsheet to HMRC’s systems and enable the VAT return to be filed. In these circumstances, the combination of the spreadsheet and the bridging software will constitute the ‘functional compatible software’.
Remember that the Making Tax Digital regime is an administrative system and so the figures required for the VAT return itself remain the same and so your VAT payments/refunds will continue to be worked out in the same way as under the previous filing system.
The due dates for submission of the VAT return and payment of the VAT all remain the same too.
What will happen if I cannot file my VAT return once I am in MTD for VAT?
Strictly, you will be in default if you do not file your VAT return on time once you are in MTD for VAT and so will be potentially liable for penalties. If you have tried hard to comply with the new digital record keeping and digital filing requirements and can show you have made a genuine effort to do so, but have slipped up somewhere along the way, then you may be able to appeal against any penalties on the grounds of reasonable excuse. However, if you have made little or no effort to meet the new requirements then it is less likely you will have grounds to successfully appeal against any penalties in due course.
You should contact the Payment Support Service as soon as possible if you will not be able to pay your VAT on time. If you are struggling to file the VAT return itself then you will probably need to seek help from the software provider in the first instance, as the problem is most likely to be to do with using the software itself rather than an issue which HMRC can help you with.
If I am exempt, how do I file my VAT returns?
If you have been able to file your VAT returns online in the past using HMRC’s online portal then you should continue to file in this way for future returns. However, if you cannot manage online returns at all then you will need to contact HMRC to discuss with them how they wish you to file returns in future. It is likely they will ask you to either call the helpline so that the figures can be taken down by HMRC and then entered onto the VAT system, or possibly allow you to complete paper returns. HMRC can offer specialist support with VAT to vulnerable taxpayers though its Extra Support (EST) Service.
Where can I find more information on Making Tax Digital for VAT?
GOV.UK has information on VAT generally including: deadlines for filing and payment, reclaiming VAT, VAT visits and inspections, and using VAT online services.
HMRC’s collection of guidance on Making Tax Digital for VAT is also available on GOV.UK.
VAT notice 700/22 has detailed information on the Making Tax Digital programme.
HMRC have developed a series of webinars and videos to help you understand Making Tax Digital for VAT.