Making Tax Digital

This notice explains:

• the digital records businesses must keep, and ways to record transactions digitally in certain special circumstances
• what counts as compatible software, and when software programs do and do not need to be digitally linked where a combination of programs is used.

MTD for VAT requires VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT Returns using software.

It is increasingly common for business records and accounts to be kept digitally, in a software program on a computer or tablet, or in a smartphone application, or maintained through such a device and stored using a cloud-based application.

The difference under MTD is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records and communicating with HMRC digitally through the Application Programming Interface (API) platform.

If your digital records are up to date, software will be able to collate and prepare your return for you. It will then show the return to you and ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received.

The notice provides further details of the Making Tax Digital rules. The overview of MTD can be seen here: https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital

Below are useful references to guidance provided by the Government.

VAT record keeping

VAT registered businesses with a taxable turnover of more than £85,000 must follow the rules for ‘Making Tax Digital for VAT’ by keeping some records digitally, unless:

• your business uses the VAT GIANT service, for example if you’re a government department or an NHS Trust
• you apply for an exemption

You can choose to sign up to Making Tax Digital for VAT if your business earns less than £85,000.

From 1 April 2022 all VAT registered businesses must sign up, whatever they earn.

Records you must keep digitally

• You need to keep the following records digitally:
• your business name, address and VAT registration number
• any VAT accounting schemes you use
• the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
• the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
• any adjustments you make to a return
• the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
• the rate of VAT charged on goods and services you supply
• reverse charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
• your total daily gross takings if you use a retail scheme
• items you can reclaim VAT on if you use the Flat Rate Scheme
• your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme

You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:

• volunteers for charity fundraising
• a third-party business
• employees for expenses in petty cash

You must add all your transactions to your digital records, but you do not need to scan paper records like invoices or receipts.

You need to use a compatible software package or other software (like spreadsheets) that connect to HMRC systems.

If you use more than one software package to keep records and submit returns, you need to link them.

Some ways you can link your software include:

• using formulas to link cells in spreadsheets
• emailing records
• putting records on a portable device to give to your agent
• importing and exporting XML and CSV files
• downloading and uploading files

You must have links between the software you use by your first VAT period after 1 April 2021.

The deadlines for sending your VAT returns will not change after you sign up for Making Tax Digital for VAT.

See: https://www.gov.uk/vat-record-keeping/making-tax-digital-for-vat

Follow these steps if you’re a business or sole trader and you need to follow the rules for Making Tax Digital for VAT.

See: https://www.gov.uk/guidance/making-tax-digital-for-vat

Before you sign up to Making Tax Digital for VAT you will need either:

• a compatible software package that allows you to keep digital records and submit VAT Returns
• bridging software to connect non-compatible software (like spreadsheets) to HMRC systems
• If you use an agent or accountant, talk to them about what software you need.

See: https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat

You are automatically exempt from Making Tax Digital for VAT and do not need to apply if:

• your taxable turnover has not been above £85,000 since April 2019
• you’re already exempt from filing VAT Returns online
• you or your business are subject to an insolvency procedure

You can still sign up voluntarily.

You can apply if it’s not reasonable or practical for you to use computers, software or the internet to follow the rules for Making Tax Digital for VAT.

This could be because:

• of your age, a disability or where you live
• you object to using computers on religious grounds
• of any other reason why it’s not reasonable or practical

HMRC will consider each application on a case-by-case basis.

See: https://www.gov.uk/guidance/apply-for-an-exemption-from-making-tax-digital-for-vat

• How Making Tax Digital for VAT affects your business
• Getting ready for Making Tax Digital
• Getting compatible accounting software
• Keeping VAT records digitally
• Agent services and Making Tax Digital
• Signing up for Making Tax Digital for VAT
• Making Tax Digital for Income Tax Self-Assessment

See: https://www.gov.uk/guidance/help-and-support-for-making-tax-digital