Making Tax Digital (MTD) for VAT

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What is Making Tax Digital for VAT?

Making Tax Digital for VAT is a government funded innovation that terminates the paper history of accounting with the aim of making it more convenient for traders to stay updated about their affairs. The essential aim is increasing precision, preventing errors, and making reporting smoother for companies. It forces companies registered for VAT to keep computer records and fill in their VAT returns through software accepted by HMRC, streamlining tax processing in a digitised economy.

Currently, this requirement applies to businesses whose taxable revenue exceeds the £85,000 VAT registration threshold. Nevertheless, companies below this level must also be on their guard, as HMRC has signaled the possibility of future extensions of MTD requirements to cover smaller businesses in the next few years. Business owners must stay abreast of official announcements to stay ahead of regulatory developments.

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Making Tax Digital for VAT is now fully enforced ( April 2022 was the critical date when MTD for VAT became compulsory for all VAT registered businesses in the UK, as a result of a pandemic related delay ).

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Although VAT remains the main priority, HMRC has indicated plans to extend the scope of MTD to cover income tax and corporation tax, pending future consultations and preparedness evaluations.

Making Tax Digital: The Change Timeline

The shift from a regular tax returns system to a digital tax return system is drastic, to say the least. Many businesses and individuals might have a hard time understanding the changes that have been implemented now that they need to use the making tax digital system to file their tax returns. Here is a timeline to help you understand better.

  • April 2018: Pilot testing for MTD begins.
  • April 2019: All businesses with a turnover of more than the VAT threshold of £85,000 are needed to maintain digital records.
  • April 2020: HMRC expands the scope of MTD, with rules applying to sole traders and partnership businesses with annual income between £10,000 and £85,000.
  • April 2021: Making tax digital (MTD) rules apply to all businesses in the UK with a VAT taxable turnover beyond the £85,000 threshold. The choice to file VAT returns is removed from the official website of the HMRC.
  • April 2022: All Vat-registered businesses, regardless of their VAT taxable turnover, are subject to the making tax digital (MTD) rules. Businesses are required to utilise MTD-compliant software, which can directly connect with HMRC to file VAT returns.
  • April 2026: Making tax digital (MTD) for all Income Tax needs applies to all landlords and self-employed businesses with a yearly property or business income of more than £50,000.
  • April 2027: Making tax digital (MTD) for all Income Tax needs applies to all landlords and self-employed businesses with a yearly property or business income of more than £30,000.

How MTD for VAT Works

Businesses trying to stay in compliance and stay out of trouble must comprehend how Making Tax Digital for VAT operates. It requires a systematic approach to digital record keeping and a clear grasp of compatible technology solutions.

MTD VAT software

At the heart of MTD compliance is the necessity to employ HMRC approved software. This software must be capable of maintaining VAT records digitally and communicating directly with HMRC systems via Application Programming Interfaces (APIs). Popular options include Xero, QuickBooks, and Sage, alongside numerous industry-specific alternatives.

For businesses still reliant on spreadsheets, compliance is achievable provided those spreadsheets are integrated with MTD-compatible bridging software. This intermediary software transfers data from spreadsheets into HMRC’s systems, preserving compliance while allowing businesses to continue using familiar tools.

Digital Record-Keeping Rules

MTD introduces stringent requirements concerning how HMRC digital records must be stored and maintained:

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Retention Period: All digital VAT records must be preserved for a minimum of six years, ensuring that data is readily accessible for inspection or audit.

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Mandatory Information: The name and address of the VAT-registered person, plus their primary business address

  • Details of  VAT  schemes that are used.
  • The VAT registration number.
  • For both sales and purchases, details concerning: the time of supply; value of supply; and the rate of VAT charged (or the amount of recoverable input tax).
  • For the relevant accounting period, the necessary figures for the VAT return as well as any adjustments.
  • The values of the following outputs (exclusive of VAT): standard, reduced, or zero-rated, or those deemed outside the scope/exempt.

By implementing these provisions, HMRC hopes to provide more accuracy, cut down VAT fraud, and increase tax visibility overall.

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Submitting Returns

Under Making Tax Digital for VAT, businesses are prohibited from submitting VAT returns via the traditional HMRC online portal. At the same time, returns now need to be submitted directly by MTD-approved software. Under this digital means of submission, there is greater assurance of timely, secure, and precise transmittal with less possibility for clerical omission and errors.

MTD Compliance Guide

Making Tax Digital For VAT Compliance Guide

For businesses unfamiliar with digital tax reporting, achieving MTD compliance might appear daunting. The following steps simplifies the process:

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Register for MTD

  • Before submitting your first digital VAT submission, go to the HMRC portal and register for MTD.
  • Make sure your Government Gateway credentials and VAT number are handy.
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Choose Compatible Software

  • Examine HMRC’s published list of approved MTD software products.
  • Consider factors such as cost, user friendliness, integration with existing systems and customer support before making a selection.
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Link Software to HMRC

  • Allow your chosen software to communicate with HMRC via your Government Gateway account.
  • Complete the linking process before your next VAT return is due to avoid late filing penalties.
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Maintain Digital Records

  • Ensure all required data is entered and stored digitally, adhering to the six-year retention rule.
  • Where spreadsheets are used, connect them with approved bridging software for seamless submissions.
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Submit VAT Returns

  • File VAT returns directly via your software, adhering to submission deadlines.
  • Adopting these steps will position your company for full compliance with current MTD requirements while laying the groundwork for future digital tax reporting obligations.

Late filing? Avoid penalties. Get emergency MTD support today.

Is Making Tax Digital a Legal Requirement?

Making Tax Digital is a legal requirement for VAT registered companies in the UK. Regardless of their yearly revenue, all VAT-registered businesses were required to follow MTD standards. Non compliance may result in monetary MTD penalties, such as:

  • Late submission points that accumulate over time.
  • Once a certain number of deadlines have been missed, monetary fines are imposed.
  • Potential enforcement actions for persistent non-compliance.

Exemptions are available, but only in limited circumstances, such as:

  • Serious illness or disability.
  • Insolvency.
  • Religious beliefs preventing the use of technology.

Eligible businesses must formally apply to HMRC for exemption and provide valid evidence.

Explore More About VAT

What Are the Drawbacks of Making Tax Digital?

While Making Tax Digital for VAT offers notable advantages. such as streamlined processes, reduced errors and improved tax accuracy. It also presents certain drawbacks and challenges for businesses, particularly smaller firms and sole traders:

Initial Setup Costs

Businesses may face upfront expenses when purchasing or upgrading to HMRC-approved software, especially if existing accounting tools are incompatible with MTD requirements.

Training and Adjustment Time

It frequently takes time and training for employees and business leaders to become educated with new software and digital record keeping procedures.

Technical Difficulties

Issues such as software glitches, connectivity problems, or integration failures between existing systems and new software can cause delays in VAT filings.

Increased Administrative Burden

Smaller businesses or those unfamiliar with digital systems might perceive MTD as an added administrative task, especially in the early stages of adoption.

Potential for Penalties

Non-compliance, whether through missed deadlines or incorrect submissions, can result in penalties — adding financial risk if businesses struggle to meet new obligations.

Limited Exemption Criteria

The exemption from MTD is closely limited, with very few companies being able to opt out due to personal or operational reasons.

In summary, although Making Tax Digital represents a major milestone in the modernisation of tax administration in the UK, it also requires businesses to plan, invest, and make system changes to fully meet and benefit from its intended objectives.

Struggling with Making Tax Digital for VAT compliance? Let IBISS & CO. handle the complexities for you. Our tax specialists will ensure seamless software setup, accurate filings, and full HMRC compliance so you stay penalty-free.

MTD for VAT FAQs

HMRC use a points based penalty system for late submissions. Each missed deadline accrues a penalty point and reaching a set threshold results in a financial penalty. Additional enforcement action may result from persistent noncompliance.

Yes exemptions are granted in rare specific circumstances:

  • Insolvency
  • Disability or agerelated limitations
  • Objections based on religious grounds

Applications must be made directly to HMRC with appropriate supporting evidence.

Immediately contact your software provider for assistance. If resolution is not possible within the submission window, you must inform HMRC without delay. In some cases, HMRC may offer a filing extension or waive penalties, provided the issue was beyond your control and you took reasonable steps to remedy it.

Need Help with MTD for VAT?

Navigating the complexities of Making Tax Digital can be time consuming and technically difficult for many firms. Getting expert assistance allows you to concentrate on your main business operations while still guaranteeing complete compliance.

Our experienced team can

  • Recommend suitable MTD-compliant software, tailored to your business size and sector.
  • Handle your VAT return submissions to reduce your administrative load.
  • Provide ongoing advisory support to remain compliant with future digital tax legislation.

→ Book a Free initial Consultation today and safeguard your business against penalties, filing errors, and technical setbacks.

Future Proof Your Tax Compliance

As HMRC gradually extends the Making Tax Digital framework to encompass other taxes, early preparation remains vital. Even businesses currently exempt or under the VAT threshold would benefit from digitalising their financial processes in anticipation of broader MTD implementation. Proactive action today can mitigate compliance risks and operational disruptions tomorrow.