Making Tax Digital for VAT may have started on 1 April 2019 but if your business had a deferred start date, it won’t have applied to you until now. Since 1 October 2019, deferred businesses have needed to adhere to HMRC’s new scheme. The aim is to simplify tax for your business.
To get you up to speed on all things Making Tax Digital (MTD) and what it means for your company, this article will provide you with details on the following:
- An overview of the scheme
- Which businesses had a deferred start date
- When you can sign up for MTD for VAT
- Tips around what you need to do when submitting VAT returns.
What is Making Tax Digital?
HMRC would like all us all to do our taxes digitally, via software, including making payments to them. This scheme is called Making Tax Digital. The first step occurred in April 2019, when MTD for VAT became mandatory for most VAT-registered businesses.
Other types of business tax, such as income tax and corporation tax, will be included in the coming years.
MTD for VAT means businesses must file their VAT returns digitally, via compatible software. For the majority of eligible businesses, it’s no longer possible to file their returns via the VAT portal website, or via paper-based returns.
MTD for VAT also means you must keep accurate, complete and readable VAT records digitally. Therefore, you can no longer keep them as paper-based ledgers.
And even doing so in a spreadsheet can be problematic when it comes to accurate record keeping.
As with any change in tax legislation, the devil resides within the details of MTD, so take a look at our free guide: The Ultimate Guide to Making Tax Digital. HMRC’s own VAT Notice 700/22 lists everything you need to know.
Which businesses are deferred for MTD for VAT?
For businesses with what HMRC says have “more complex requirements”, MTD for VAT had a deferred start date of 1 October 2019—although these businesses had the option to join a pilot scheme before that date if they wanted to start earlier.
The businesses that had a deferred start date are:
- Businesses required to make payments on account
- Annual accounting scheme users
- Not-for-profit organisations that are not set up as a company
- VAT divisions
- VAT groups
- Public sector entities that are required to provide additional information on their VAT return
- Local authorities
- Public corporations
- Traders based overseas.
When can my deferred business sign up for MTD for VAT?
This is a little complicated and care needs to be taken. You can’t sign up for MTD for VAT until after you filed your last non-MTD for VAT return—and you have to take into account the rule that a VAT return and payment must usually be filed within a whole calendar month plus seven days after the end of the VAT accounting period.
Check the filing deadline in your online VAT account at HMRC’s website.
HMRC offers the following guidelines about when you can sign up for MTD for VAT and the earliest you can file your first MTD for VAT return:
- Direct debit payments: Allow five working days after the filing deadline for your final non-MTD return before signing up for MTD for VAT, and at least seven working days before the filing deadline to file your first return under MTD.
- Non-direct debit payment methods: Allow 24 hours after your last non-MTD return before signing up, and 72 hours after signing up before filing your first return under MTD.
Additionally, if you’ve filed your last VAT return late and you pay by direct debit, you must allow five working days after filing late before signing up.
If you pay by non-direct debit methods then, as above, you must allow 24 hours before signing up if you filed your VAT return late.
When should my deferred business submit its first MTD for VAT return?
Assuming your business hasn’t taken part in the pilot scheme (and we assume this is true through the rest of this article), the first VAT period that starts on or after 1 October 2019 will be the first that falls under the MTD for VAT requirements.
- If your VAT period had a 30 September end date, your first VAT quarter under MTD for VAT starts on 1 October 2019.
- If your VAT period has a 31 October end date, your first VAT quarter under MTD for VAT starts on 1 November 2019.
- If your VAT period has a 30 November end date, your first VAT quarter under MTD for VAT starts on 1 December 2019.
For this first and indeed all subsequent VAT periods, ensure you have the correct software in place to keep your VAT accounting digitally.
What happens if my deferred business misses its submission date?
The good news is that HMRC announced it is taking a ‘light touch’ to penalties in the first year of MTD for VAT. This includes the year following the mandation of MTD for VAT for deferred businesses, so for your business this grace period ends on 30 September 2020 (although for all other businesses it ends earlier, on 31 March 2020).
The light touch period means if your business misses a submission date during that time, HMRC will in the first instance send you a letter to make you aware.
If your business isn’t yet registered for MTD for VAT, but should’ve done so, then HMRC will email you a friendly reminder.
However, if penalties are in place and you miss your submission date, you might receive the following fine, depending on the gross turnover of your business:
How to register for MTD for VAT if you’re a deferred business
Registering your deferred business is no different from registering any other business in the initial wave of MTD for VAT registrations as of April 2019. If you’ve already done so, you’ll be aware of the steps. If not, read on.
You might think your business is automatically enrolled in MTD for VAT, but this isn’t the case. You must register your business with HMRC in time for your first VAT return deadline under MTD for VAT. This is true even if you’ve previously used HMRC’s online services, such as its VAT portal website.
The reason for this is that MTD for VAT is a completely new system. It even involves creating a fresh direct debit mandate, for example.
To register, you’ll need to log in with the Government Gateway account for your business. You might have used this previously when filing VAT returns via the portal website.
If you don’t have an account, you’ll be invited to create one, and will need an email address to do so. Once this process is complete, which will take a few minutes, you’ll be emailed a Government Gateway ID. This will consist of a series of numbers.
To register for MTD for VAT with HMRC, you’ll need to input the following information when requested upon visiting the MTD for VAT registration website:
- Your Government Gateway ID and password
- Your company’s VAT number (which you’ll find on your VAT registration certificate)
- The date your business became VAT registered (again, found on your VAT registration certificate)
- The postcode of the principle place of business (the place where your company carries out most of its business activities and/or keeps its financial and business records)
- The Box 5 amount from your most recent VAT return (the amount of your last VAT return)
- The month in which your most recent VAT return was submitted.
Once you’ve inputted these details, HMRC will immediately verify them. And if you’ve made any errors, you’ll be invited to input the details again.
Verification from HMRC that your business can start submitting MTD for VAT returns might take up to 72 hours. You should not submit your VAT return until you receive this confirmation.
This delay might run the risk of your submitting a late VAT return, so you should register sooner rather than later.
Read more about Making Tax Digital
- How to submit a Making Tax Digital for VAT return
- Making Tax Digital and its future: 10 answers from HMRC
Creating and submitting an MTD for VAT return for deferred businesses
Again, submitting the first MTD for VAT return for a deferred business following registration is no different from doing so for any other business registered as of April 2019, so if you’ve already done this then you’ll be aware of the steps. If not, read on.
Central to MTD for VAT is filing your VAT return using software. This will probably be via the accounting software your business uses, or potentially via bridging software if you calculate your VAT without the benefit of accounting software.
The accounting software should be Making Tax Digital for VAT-ready, and this will almost certainly be the case if you use cloud accounting software that will have been updated.
If your business relies on desktop software, you may need to update it using a submission or bridging tool. You might have to download a submission or bridging module, or even request an update CD/DVD from the software developer.
Again, this will take time, so ensure it’s done well in advance of your first MTD for VAT filing deadline.
Not all desktop accounting software has been updated for MTD for VAT, in which case you might have to migrate your accounting to an up-to-date MTD for VAT-compatible system.
How VAT returns are filed in various accounting software packages varies but generally, you should look for an option to create a VAT report or return, or something similar.
If you’ve used the accounting software to record your VAT accounting over the previous period then the report should be generated automatically—although don’t forget to enter any adjustments you might need to make.
If your first MTD submission spans or is after the period when the UK leaves the European Union (EU), you may need to make some additional adjustments, especially if you have any purchases or sales to EU countries as these will be likely to be reported differently.
You will probably then need to tell the software to start submitting using the MTD process. This is likely to be an ‘Enable MTD’ or similar option that is located in the settings, options or feature menu area.
Following this, select the option to submit the VAT return online to HMRC. At this point, you might need to enter your Government Gateway ID so your accounting software can log into HMRC’s MTD for VAT systems.
Alternatively, before commencing the above steps, you may need to first associate your accounting software with HMRC’s systems using an option found elsewhere, such as within your user account profile.
More support around MTD for VAT
There’s lots of help if you need it when signing up for MTD for VAT and filing your first return, including these sources:
- Sage’s Making Tax Digital hub contains resources to help your business adapt to MTD for VAT, including free webinars and other articles like this one packed full of information.
- Our free Ultimate Guide to Making Tax Digital guide features advice from entrepreneur and Sage Ambassador Peter Jones, who offers top tips to help your business in its Making Tax Digital preparations.
- HMRC’s general VAT helpline and webchat can help with MTD for VAT queries.
While the world of business is mostly getting used to MTD for VAT’s requirements, for deferred businesses what’s required might still come as a culture shock. Therefore, the key is to start preparing right now.
The guidelines here are only the essentials of what you might need to do. Your company might have to make other changes in the way it records VAT data digitally, for example, and this will require resources and investment from all parts of the business.
Editor’s note: This article was first published in September 2019 and has been updated for relevance.
The ultimate guide to Making Tax Digital
Need help getting ready for Making Tax Digital? Download this free guide to learn about MTD for VAT, Income Tax and Corporation Tax, and what they mean for your business.