The digital tax revolution is here.
If you have a VAT-registered business, you must use Making Tax Digital (MTD) for your VAT accounting.
You must submit VAT Returns using “functional compatible software” and digitally store your VAT accounting records.
This Making Tax Digital checklist will help you get up to speed with MTD for VAT.
The critical thing to know is that it’s no longer possible to submit VAT Returns manually via HMRC’s website. You must do it with software.
This is a significant change from before, and you need to know how to make a Making Tax Digital VAT Return submission.
This Making Tax Digital checklist covers the following:
- Figure out if your business is impacted by MTD for VAT
- Exemptions and deferrals from MTD for VAT
- Work out which business processes to adapt for MTD for VAT
- Ensure you have functional compatible software for MTD for VAT
- Work out when to switch to MTD for VAT
- Final thoughts on Making Tax Digital
Figure out if your business is impacted by MTD for VAT
You must use Making Tax Digital for VAT if your business is VAT-registered.
Making Tax Digital is about more than merely filing your VAT Return digitally. You’re also legally required to digitally store some of your VAT information (known as digital record keeping).
And if you use more than one piece of software to store your VAT information and do your VAT return, they must be “digitally linked”.
The transition might have been relatively straightforward if you were already using accounting software.
It could involve little more than activating the feature in your software.
Alternatively, your accountant might have done this for you.
However, this might not have been the case if you had used older software. You need functional compatible software.
If you’re using spreadsheets or other manual records to prepare your VAT Return, you should have replaced this with a software-driven approach for recording VAT details and filing VAT Returns.
Exemptions and deferrals from MTD for VAT
Your business can claim exemption from MTD for VAT if HMRC accepts you’re digitally exempt.
This includes people whose religious beliefs are incompatible with the requirements or those whose age, disability or remoteness mean it’s not reasonably practical for them to use digital tools.
Insolvency procedures also affect MTD for VAT.
Get in touch with HMRC via its VAT helpline for more information and arrange alternative measures.
Work out which business processes to adapt for MTD for VAT
Look at all your processes around generating your VAT Return. While this might be time-consuming, the investment might be necessary to avoid penalties.
Here are some examples:
- How do you raise sales invoices?
- How do you capture expenses?
- Do you use a cash accounting scheme, or are you invoice-based?
- What other areas of your VAT accounting are still paper-based or exist outside of your accounting software?
For example, you can still create paper-based notes or invoices with Making Tax Digital for VAT. But you must transfer some invoice-level data into your MTD-compatible software.
You can no longer update your accounting software with the monthly total of all invoices.
If you have access to an accountant, you might find it beneficial to speak to them about these issues and potentially use their experience to review your existing processes efficiently.
If your business uses an alternative VAT scheme such as the Flat Rate, Retail or Margin Scheme (including the Tour Operators Margin Scheme)—or group VAT—your requirements and processes will be different.
Ensure you have functional compatible software for MTD for VAT
Use software compatible with HMRC’s Making Tax Digital for VAT programme.
In addition to keeping digital records relating to your VAT, the software should be able to communicate with HMRC’s computers so you can file your VAT Returns.
In technical language, this is sometimes referred to as “connecting to HMRC’s APIs”.
If you’re using desktop accounting software (installed on your computer and data is stored there—which can make data sharing harder), you might need to update it for MTD if you haven’t updated it recently.
Speak to your software vendor immediately about this.
Older software might not have been updated for MTD, so you may have to transfer your VAT accounting (at least) to more modern software to file returns.
If you’re using a cloud accounting software package (where data is saved in the cloud and accessible in real time on any device—computer, mobile phone, tablet), it should update automatically for MTD.
Although again, you may wish to speak to your software vendor for details on accessing the functionality.
If you keep your VAT records using a spreadsheet, it might be possible to use MTD-compatible bridging software to file returns.
But the process will not be as robust or intuitive as accounting software.
It’s so easy to accidentally delete data in a spreadsheet or break a formula—and it could mean you’re no longer legally compliant with MTD for VAT.
Despite rumours to the contrary—and although MTD for VAT is legally mandated (and enforced with fines for failing to comply)—HMRC has never made any free end-user software available for MTD for VAT, or offered any software by other means, such as subscription.
Businesses must acquire functional compatible software from third parties.
Work out when to switch to MTD for VAT
MTD for VAT has been up and running since April 2019. If your business is VAT-registered, you should already be signed up to MTD unless you are exempt or have applied for exemption.
These are the four steps you need to follow:
- Step 1: Choose MTD-compatible software that’s right for you (such as Sage Accounting).
- Step 2: Check the VAT configurations in the software ahead of authentication with HMRC.
- Step 3: Keep digital records for current and future VAT returns.
- Step 4: Allow the software to work with MTD and file future VAT returns directly to HMRC.
Final thoughts on Making Tax Digital
Dealing with business admin and compliance can be a challenge.
But while adapting to Making Tax Digital for VAT rules may seem like a burden, there are definite long-term benefits to be aware of.
You can efficiently deal with your VAT Returns and stay on the right side of HMRC.
Perhaps, just as importantly, you’ll have better visibility of your business finances and will keep good records, so you know how things are functioning at any time.
MTD for VAT will be a help, not a hindrance, to you and your business.
Editor’s note: This post was originally published in October 2018 and has been updated for relevance.
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Making Tax Digital for VAT checklist
Download your free (and easily printable) Making Tax Digital checklist and follow the steps to help you with your VAT Return processes.
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