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What is Making Tax Digital

HMRC is Making Tax Digital. It’s already underway with VAT, but it will affect all taxes. Find out what Making Tax Digital means for your business.

6 min read

HMRC’s new Making Tax Digital (MTD) regulation is the biggest shake-up of tax laws in a generation, bringing tax into the digital age.

From April 2022, all VAT-registered businesses and organisations are required to follow Making Tax digital rules for their VAT return. This means it’s advisable to start keeping electronic records of your business transactions sooner rather than later - for example through QuickBooks’ Making Tax Digital software.

Just so you know, MTD doesn’t stop at VAT - income tax and corporation tax are to follow, but that’s another can of worms…

Let’s concentrate here on what MTD means for VAT.

From April 2022, all VAT-registered businesses and organisations are required to follow Making Tax digital rules for their VAT return.

So what’s changed with Making Tax Digital for VAT?

Here, Accountingweb’s Rebecca Cave spells out what MTD for VAT means for you right now.

If your business is VAT registered and your annual turnover is at least £85,000, you should already be using a MTD-compliant software.

If your business is VAT registered, but its taxable turnover is less than £85,000, you will be required to follow MTD rules from April 2022, when your tax return will need to have digital links between your accounting software and HMRC. It’s worth investing in an MTD-compatible accounting software now, so that your data will be tracked throughout the year and your first MTD-compliant VAT return will be as easy as checking the data and clicking the submit button.

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What will MTD change?

Under MTD you must keep all your VAT records in a digital format. You also have to submit your VAT return digitally, through MTD-compliant software. 

The point is that HMRC wants to reduce human error - digital tax means no more manual data entry when submitting VAT forms.

VAT registered businesses that fall outside the scope of MTD can carry on submitting VAT returns as they do now, using the online VAT return form on gov.uk.

“You will be responsible for keeping your business records in a digital form.”

What will stay the same?

The VAT return is due on the same day. For quarterly returns this is seven days after the end of the month that follows the end of the VAT quarter.

The VAT due is payable as it is now – by electronic transfer, BACS, direct debit or at a bank. Businesses using the VAT annual accounting scheme, or who make payments on account to HMRC, will generally pay the VAT due by standing order.

What digital records should I keep under MTD?

You’re responsible for keeping your business records in a digital form. This means recording at least these data points electronically for each transaction:

  • Sales: Rate of VAT charged

  • Purchases: Amount of VAT to reclaim

  • Sales: Value excluding VAT

  • Purchases: Value net of VAT

  • Sales: Time of sale (tax point)

  • Purchases: Time of purchase (tax point)

HMRC also require you to record the following information digitally so it knows where the VAT return has come from:

  • Your business name

  • Your business address, or principal business address

  • VAT registration number

  • Any VAT accounting schemes that you use

“If you are an active QuickBooks user, you already manage transactions digitally so you won’t notice much of a change.”

What about retail VAT?

Shops that use a VAT retail scheme can keep digital records of gross daily takings, and won’t have to record each sale separately. If a purchase invoice includes more than one item and all the items are charged at the same VAT rate, the invoice can be treated as a single entry. You’ll also want to record some additional information for credit control or accounting purposes, such as the name of the customer or supplier, and when the sale/purchase was paid for.

You don’t have to take a picture of each purchase receipt and sales invoice — recording the required data in a computer-based accounting system or on a spreadsheet will be sufficient. As long as the VAT data can be transferred from the accounting system or spreadsheet via a digital link to MTD-compliant software, which submits the VAT return to HMRC, you’re meeting MTD requirements.

The digital link can be as simple as sending the spreadsheet with completed VAT figures to your accountant by email or on a data stick, so the VAT data can be imported into the accountant’s MTD-enabled software. A simpler solution is to use a single software solution to record your VAT data, which also submits the VAT return to HMRC and is accessible by your accountant.

What does digital tax mean for me?

You need to be prepared. QuickBooks surveyed small businesses in March 2019 and found that only 25% had already taken all the necessary steps to becoming MTD compliant. An alarming number, but that’s changing fast as the rules come into force. And although it’s clear the transition to digital might be a little bumpy, it’s a huge opportunity to streamline operations and increase efficiency.

If you’re an active QuickBooks accounting software user then it’s good news. You already manage transactions digitally so you won’t notice much change. Here’s why:

  • For MTD you need to record all your transactions in “functional compatible software”. QuickBooks meets this requirement as it can connect directly to HMRC.

  • QuickBooks also captures all the information that HMRC asks for under MTD. So long as you keep using QuickBooks to manage your books, you’re compliant with MTD.

QuickBooks has been approved by HMRC as having passed the VAT test environment for MTD, so it can safely be used to submit VAT returns directly to HMRC.

Making Tax Digital for Income Tax and Corporation Tax

Far from it, VAT is just the start. Other taxes will also be affected by MTD. This is a rough guide of what to expect:

  • From 6 April 2023: Making Tax Digital rules will apply to the Income Tax return of self-employed businesses and landlords with annual business or property income above £10,000.

  • April 2026: Making Tax Digital rules aren’t expected to be obligatory for Corporation Tax until at least 2026.

Need help?

HMRC knows the switch to digital isn’t easy for everybody. If you’re not sure what to do, there’s help and support for MTD available. The ICAEW also has some useful advice on MTD and your business.

Or you can call the QuickBooks MTD advice line on 0808 168 4248.

Wouldn’t it be easier to use an accountant?

If the process of going digital seems just too complicated, it makes absolute sense to enlist the help of an accountant. This will take all the stress off you – you won’t have to worry about getting things wrong the first time you file under MTD.

Not only that, there’s a great deal more an accountant has to offer – in terms of useful advice on how to run your business smoothly, and help it grow. Just make sure you choose a professional who’s completely up-to-date and is using cloud-based solutions such as QuickBooks.

You can rest assured that QuickBooks are ahead of the game and have solutions for you and your business, in readiness for Making Tax Digital. We’re here to help you along the MTD journey.