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What does Making Tax Digital actually involve?

Making Tax Digital (MTD) came into effect on 1 April 2019 and all VAT-registered businesses with a turnover over the current VAT threshold of £85,000, no matter the legal setup (sole trader or limited) now need to store and submit their tax information digitally using compliant software.

What does ‘digitally’ mean in relation to MTD

It means no longer being able to login to the HMRC website to add VAT data for your business and instead using MTD-compliant software such as Crunch, QuickBooks or Xero. These accounting software packages are set up to send and receive information to HMRC and submit your VAT records digitally. 

MTD for VAT is designed to make tax administration easier for all taxpayers, with the aim to create a fully digitalised tax system by 2020. 

Is there a tax digital software that is HMRC approved?

No, because HMRC does not approve software. However, there is a variety of software solutions that have been tested with HMRC, but note that this does not mean they are responsible for any issues you may have with the software. The important thing is to make sure that your chosen software solution is compatible with MTD.

Do I need to keep different records?

No, the records you keep are the same as before. The only difference is that they must be stored and submitted to HMRC digitally.

Does MTD affect my business?

MTD is being phased in starting with VAT returns. From April 1 2019, all businesses with a taxable turnover above the VAT threshold are required to submit their VAT returns digitally. 

If your VAT period is either February-April or March-May, then your first MTD return periods will be May-July or June – August. MTD will not apply to any other tax until 2020.

What is a digital record?

A digital record simply means that records are stored digitally and can be viewed on an electronic device, such as your phone, computer or tablet. This can be done in two ways:

  • with an online accounting system or digital software.
  • a photo taken of your digital record clearly showing all of the necessary details, including the date, amount and category of every transaction.

What digital information do I need to keep a record of?

You will need to keep a record of the following:

  • Invoices (issued and received)
  • Self-billing agreements including details of suppliers
  • Debit and credit notes
  • Imports and exports
  • Non-VATable expenses
  • Stock taken for private use or given away for free
  • All VAT-exempt items bought or sold
  • VAT account
  • General business records (e.g. payment records and receipts)
  • Cash accounting scheme
  • VAT MOSS additional records if applicabl

I use an accountant

  1. Check they are fully up to speed on Making Tax Digital if they’ve not already spoken to you about it.
  2. Check they use compliant software.
  3. Check you are linked as a client to their HMRC agent services account.
  4. Check you are signed up to Making Tax Digital through your agent.

I do my own tax returns

  1. Ensure you are fully up to speed on Making Tax Digital.
  2. Register or check you are using compliant software and that it is set up ready for you to record and submit in compliance with MTD.
  3. Sign up to Making Tax Digital on the HMRC website.
  4. Use your software to record and submit your tax records (HMRC will email you to let you know when you need to submit if you have signed up to MTD in step 3).

What if I meet the criteria but am not currently compliant?

Make this a priority! You should have received a letter from HMRC already detailing what you have to do, so follow the steps above or within that letter and get compliant ASAP.

Whilst it is a legal requirement, HMRC state:

“HMRC knows businesses will require time to become familiar with the new requirements. During the first year of VAT mandation, HMRC will take a light touch approach to penalties by not issuing filing or record-keeping penalties where businesses are doing their best to comply with MTD.”

This shouldn’t be seen as a reason not to prioritise MTD, however, but an opportunity to get your head around it and get compliant ASAP.

What about Corporation Tax, National Insurance and Income Tax?

It is the ambition of HMRC for the UK to have “one of the most digitally advanced tax administrations in the world”. Over the next few years, MTD will be rolled out further and likely cover all tax returns and businesses.

However, for now, HMRC have pushed back these plans for MTD until at least April 2024.

Find out more about tax changes for the current tax year.

For more support, use our interactive online calculators: