Making Tax Digital for VAT: are there exemptions for my clients?

Heard about HMRC’s Making Tax Digital (MTD) legislation, and wondering if it’s something your clients need to comply with? Find out what you need to do and whether your clients are exempt in our summary of HMRC’s guidance.

What does the HMRC MTD guidance cover?

HMRC’s initial guidance for MTD was first released in 2019, to give businesses a clearer understanding of how to file their VAT returns online.

It explains in detail the three main criteria which could make businesses exempt from having to file an MTD VAT return. These criteria have not changed since phase one of MTD in April 2019.

You may be exempt from MTD:

• If you are insolvent If your client's business has filed for insolvency, or has an ongoing procedure in place, they could be deemed exempt from having to file a MTD VAT return.

• If you are unable to file on religious grounds Your clients may be exempt from filing an MTD VAT return if their business does not keep digital records for religious reasons, even if their accounts are handled by someone outside of your organisation who is able to do so.

If accountants feel the businesses they represent should be exempt from filing an MTD VAT return for other reasons, they will also be able to apply for official MTD exemption status with HMRC, with HMRC, who will take a “case-by-case” approach to determining whether this is appropriate.

Already exempt from online VAT submission?

If your client’s business is already exempt from having to file VAT returns online, then good news! HMRC’s guidelines state that “exemptions from MTD for VAT are the same as those that are already in place for online filing for VAT”.

However, if you haven’t checked your exemption status for a while, then you should do so now.

What are VAT exempt supplies?

Some products and services are exempt from VAT. If your client only trades in these areas, their business will be classed as VAT exempt.

Please note: if your clients are VAT exempt, it means they won’t be able to register for VAT on purchases or sales, or reclaim any VAT on your business purchases or expenses.

Products and services where VAT is not charged include:

• insurance, finance and credit

• education and training.

• fundraising events by charities.

• subscriptions to membership organisations.

• selling, leasing and letting of commercial land and buildings (although this exemption can be waived).

For more details on products and services where VAT is not charged, visit the Government’s online guide.

What is partial VAT exemption?

There are various ways in which a business can be classed as partially exempt from VAT. For example, you’ll be partially exempt if your client’s business buys or sells goods or services that the government classes as VAT exempt, but also sells products which are subject to full or reduced VAT payments.

There are a few things you need to bear in mind if your clients are classed as partially exempt:

• You can’t reclaim VAT you pay on goods and services that aren’t for business purposes. If your client buys something for both business and personal use, then you’ll need to split the VAT accordingly.

• If your client makes both taxable and exempt supplies, they will need to keep separate records of their transactions. This is to make sure that they pay the correct amounts of VAT on each.

Any exempt supplies should be recorded as such in your quarterly VAT return alongside your VAT taxable supplies.

What's the difference between zero rated and VAT exempt supplies?

There are some products and services that have a VAT rate of 0%. If your client is a supplier of zero-rated goods, you will still need to register for VAT through MTD. Any costs your client’s business incurs can still be reclaimed for VAT. However, if the company is exempt from VAT because it trades in products and services where VAT is not charged, then it can’t reclaim VAT on costs.

How to apply for VAT exemption for your clients

If you think your clients meet the MTD criteria for VAT exemption, contact the VAT Helpline by calling HMRC 0300 200 3700 to get confirmation. If they are indeed exempt from registration, read paragraph 3.11 of VAT Notice 700/1 to find out how to apply for VAT exemption.

Managing VAT

When it comes to your clients paying business’s VAT, be sure to work out a system for managing payments. That way you can make sure nothing comes back to haunt you. It makes sense to do your research early to make sure you’re helping them claim all the allowances they possibly can. 

Of course, HMRC-recognised VAT software helps you prepare for the MTD for VAT changes, which went live in April 2019 for businesses with a taxable turnover above £85k, and will apply to all VAT-registered businesses by April 2022. It will also help you keep on top of records, regardless of whether your clients are VAT exempt or not.

What is the threshold for MTD?

Since April 2019, Making Tax Digital for VAT has been mandatory for businesses whose annual taxable turnover exceeds £85,000. However, if you represent  a VAT-registered business with an annual taxable turnover below the VAT threshold, we recommend signing up to Making Tax Digital sooner rather than later. 

That’s because in April 2021, HMRC changed the way you can submit your VAT, and if you’re not complying with Making Tax Digital, you’ll need to submit your client’s VAT records manually through your agent service account. It makes sense to start complying with MTD now to avoid spending time on manual data entry and risk making mistakes.  

With HMRC-approved MTD software like QuickBooks, you can submit your electronic records directly to HMRC in a matter of minutes. 

By April 2022, almost all VAT-registered businesses will have to sign up to Making Tax Digital and use MTD-compatible software for their VAT returns. As of April 2024, the programme will also be expanded to cover Income Tax returns.

What are the penalties if your business is not VAT exempt?

As we mentioned above, businesses whose sales exceed the VAT threshold had to begin filing their VAT returns through MTD in April 2019. Initially, there was a planned year-long “soft landing period” so that the relevant companies could get organised and accustomed to the software. However, due to the COVID-19, this soft landing period was extended until 1 April 2021.

Following this, HMRC will penalise VAT-registered companies who don’t comply with Making Tax Digital for VAT through a points-based system. Missing a VAT return will incur one point, and businesses will eventually be fined if they neglect to submit their returns in accordance with Making Tax Digital regulations.

Read our dedicated blog for more information on the penalties for not complying with MTD regulations.