Making Tax Digital for VAT
Making Tax Digital (MTD) for VAT requires VAT-registered businesses with taxable turnover above the VAT registration threshold (currently £85,000) to keep records digitally and submit their VAT Returns using MTD software. The majority of businesses have had to submit MTD VAT Returns for periods starting on or after 1 April 2019. This will be mandatory for the remaining VAT registered businesses by 1 April 2022.
If your taxable turnover drops below the VAT registration threshold before 1 April 2022, you’re still required to continue to keep digital records and send HMRC your VAT returns using MTD-compatible software. This obligation doesn’t apply if you de-register from VAT or are exempt from MTD for VAT. Further information can be found on HMRC’s VAT Notice 700/22.
What's changed?
Let’s first look at what hasn’t changed:
- VAT returns will continue to be completed monthly, quarterly or annually
- VAT payments will still be due on the current payment dates
- No additional records need to be kept for VAT purposes
- Spreadsheets can still be used to record business transactions
- Current exemptions from online filing will continue
So, what has changed? There are two main changes to VAT with the commencement of MTD:
- The need for digital records to be retained and the way in which VAT returns are filed with HMRC.
What happens if your taxable VAT turnover is below the VAT MTD threshold
Prior to mandation of all VAT registered businesses in April 2022, you can still sign up for MTD voluntarily. HMRC is encouraging businesses with a taxable turnover below the VAT threshold to sign up so they can also benefit from MTD. Businesses can also sign up for MTD for Income Tax. This means, subject to your business type, you can further streamline your business processes.
Software will help you stay on top of business record keeping, allowing you (and your agent, if you have one) to better understand how your business is performing.
Please note that from April 2021 if you have not signed up to MTD for VAT you will no longer be able to submit VAT Returns under the old XML based system. This means that you will no longer be able to use third party software. However, HMRC will be adding functionality to the Business Tax Account to submit returns until April 2022 or you can continue to use third party software by signing up for MTD for VAT early.
How Does It Work?
As with MTD for VAT, one of the main requirements of MTD for Income Tax is the necessity to keep a digital record of income and expenses. This can still be via a spreadsheet, as long as the data is imported digitally into the software used to send a summary of income and expenses to HMRC.
A summary of income and expenses must be sent to HMRC every three months. Using the information that has been sent, HMRC can then provide an estimate of the tax liability. A final report needs to be sent to HMRC, which confirms the income and expenses of the accounting year. At this point, a claim for allowances and reliefs can also be made and a final tax calculation obtained.
Although there is an obligation to send income and expense information every 3 months, it is possible to send an update to HMRC more often, for example, if a more up-to-date tax estimate is required.
