What is Making Tax Digital for VAT?

Definition of Making Tax Digital

Making Tax Digital for VAT (MTD for VAT) is the first major phase in the Making Tax Digital initiative, the government’s plan to introduce a fully digital tax system. All VAT-registered businesses are now 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?

MTD for VAT was introduced in 2019. It first required certain VAT-registered businesses to keep digital records and use MTD-compatible software to submit their VAT returns electronically. The scope of MTD for VAT expanded on 1st April 2022 and all VAT-registered businesses are now required to follow these rules.

Find out more on HMRC’s website.

How does 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 However, there are many outdated accounting systems - such as basic spreadsheets - that businesses are no longer able to use.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

Some VAT-registered businesses may be eligible for an exemption from MTD if it's not reasonable for them to use digital tools for their tax, or if they meet other exemption criteria.

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

If a business has to comply with MTD for VAT for the first time from April 2022, but it has a VAT period that spans the 1st April 2022 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 the business’s VAT quarter runs from 1st March to 31st May 2022, 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.

Looking for advice?

An accountant will be the best person to advise you on how to proceed. If you need an accountant, you can find one in our directory.

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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