What is Making Tax Digital for VAT?

Definition of Making Tax Digital

Making Tax Digital for VAT (MTD) is the first major phase in the Making Tax Digital initiative, the government’s plan to introduce a fully digital tax system. Since 1st April 2019, affected businesses have been required to store digital records and submit VAT returns via MTD-compatible accounting software like FreeAgent.

Who does Making Tax Digital for VAT apply to?

All businesses with VATable sales above the VAT threshold need to comply with the MTD for VAT rules set out by HMRC. In short, this means that these businesses must store all records and submit VAT returns from MTD-compatible accounting software. If a business’s VATable sales subsequently fall below this threshold, the business must continue to follow the MTD for VAT rules until it deregisters from VAT.

The scope of Making Tax Digital for VAT will expand in 2022. VAT-registered businesses with a taxable turnover below £85,000 will need to follow Making Tax Digital rules for their first VAT return starting on or after April 2022.

Find out more on HMRC’s website.

How will MTD for VAT work?

In MTD-compatible accounting software like FreeAgent, filing VAT returns remains familiar from the customer’s point of view. However, there are many outdated accounting systems - such as basic spreadsheets - which businesses are no longer able to use.

The system you use to store accounting records and submit VAT returns needs to be API enabled. In other words, it needs to have the technology to communicate with HMRC’s systems.

Making Tax Digital for VAT exemptions

Only businesses with VATable sales that have never exceeded the VAT threshold are exempt, unless they meet the other exemption criteria for Making Tax Digital. These businesses, however, can still join voluntarily to make use of the new streamlined Making Tax Digital for VAT submission process.

Businesses with an accounting year that doesn’t match the financial year

If a business has a VAT period that spans the 1st April 2019 start date, the VAT return for this period won’t fall under MTD. In this case, the return for the next VAT accounting period will be the first to be completed using MTD-compatible software.

For example, if a business’s VAT quarter runs from 1st March to 31st May 2019, the VAT return for this period won’t need to be an MTD submission. The business’s first compulsory MTD VAT submission would instead be for the following quarter, ending 31st August.

Soft landing period

A “soft landing” period was originally in place between 1st April 2019 and 1st April 2020, during which HMRC advised that it would be lenient with penalties if businesses made sufficient efforts to comply with MTD for VAT. in response to the coronavirus crisis however, HMRC extended the deadline for putting digital links in place between a accounting software and their systems to a business's first VAT period starting on or after 1st April 2021.

Looking for advice?

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Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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