Key takeaways
- Making Tax Digital (MTD) is an ambitious initiative to simplify tax management for individuals and businesses.
- It offers numerous benefits such as streamlining processes, improved integration with accounting software, and increased accuracy.
- Businesses must understand the key components of MTD including digital record keeping, compatible software, and regular updates in order to remain compliant with regulations.
In short: Making Tax Digital (MTD) is a UK government scheme, launched in 2019, that moves tax records and VAT returns online. Since April 2022, all VAT-registered businesses must keep digital records and file VAT returns using MTD-compatible software. Some exemptions apply, and penalties can follow if you don't comply.
Are you a UK business owner or self-employed person struggling with complex tax admin? The UK government brought in Making Tax Digital (MTD) in 2019. Its aim is to simplify VAT processes, boost productivity, and cut errors. This game-changing scheme has transformed the way businesses handle their tax affairs. It has made the process more efficient and easier to use.
In this post, we look at the main parts of MTD. These include who it applies to, what it requires, key deadlines, choosing VAT software, and more.
What is Making Tax Digital (MTD)?
Making Tax Digital (MTD) is a system designed to transform the tax system. It aims to simplify tax processes, boost productivity, and cut errors by linking up with Making Tax Digital software.
This ambitious scheme aims to make tax simpler for individuals and businesses. It links tax processes with other business tasks through MTD-compatible software. It also promotes digitalisation to help businesses be more productive.
What are the benefits of MTD?
Imagine a world where tax is simpler, errors are rare, and you get more done. That’s exactly the world MTD aims for. The benefits of MTD include simpler tax processes, better links with accounting software, and greater accuracy.
Some digital records and software products link straight to your bank account. This makes managing your finances seamless, which leads to higher accuracy and smaller tax gaps. Evidence from HMRC suggests that MTD has indeed helped to reduce the tax gap.
What are the key components of MTD?
MTD rests on three core parts: digital record-keeping, compatible VAT software, and regular tax updates. Businesses must keep digital records of their financial transactions. They must send them to HMRC through MTD-compatible software. This starts from the VAT period in which they must first comply with MTD.
Businesses must use digital links to connect the different parts of their records, such as invoices and receipts. This makes sure the records are accurate and complete. Businesses must also file their tax returns online using MTD-compatible software.
How does MTD for VAT simplify tax management?
Since April 2022, MTD for VAT has applied to all VAT-registered businesses, whatever their turnover. These businesses must keep digital records and file VAT returns digitally. With the launch of MTD for VAT, businesses must keep digital records, use compatible software, and send updates every quarter.
How does the VAT threshold apply?
The VAT threshold decides whether a business must register for VAT, and so follow MTD for VAT rules. Since April 1, 2024, the threshold has been £90,000 of taxable turnover. Once you are VAT-registered, you must follow MTD for VAT rules.
Businesses below the threshold that register for VAT voluntarily must follow MTD for VAT rules too.
What are the important dates for MTD for VAT?
MTD for VAT was first rolled out in April 2019. In April 2022, it was extended so that all VAT-registered businesses must now follow the new rules. This has big effects for companies. All eligible businesses have had to submit MTD returns since April 1, 2022.
Making Tax Digital for Income Tax started in April 2026. It applies first to self-employed people and landlords with qualifying income over £50,000.
What are the key components of MTD for VAT?
Digital record keeping: Under MTD for VAT, businesses must keep digital records of all their sales and purchases, using compatible accounting software. This removes the need for paper records and manual data entry, so there is less chance of errors.
Digital VAT returns: Businesses no longer fill out and submit VAT returns by hand on the HMRC website. Instead, they must use compatible software to create and submit their VAT returns electronically through HMRC's API (Application Programming Interface).
Bridging software: A business may already use VAT software that isn't fully compatible with MTD. If so, it can use bridging software to connect its existing systems to HMRC's API. This temporary fix lets data move digitally until the business adopts fully compatible software.
VAT account information: Businesses must make sure their digital records include the information needed to calculate VAT. This includes the rate of VAT charged on each sale or purchase.
Digital links: When data moves between different pieces of software, it must be done digitally with no manual steps. This 'digital link' rule keeps data whole and accurate.
What are the benefits of MTD for VAT?
Accuracy: Digital record keeping and automatic calculations reduce the risk of manual errors that can happen with paper-based processes.
Real-time insights: Businesses get more accurate and up-to-date financial information, which helps them make better decisions.
Convenience: Submitting VAT returns digitally is faster and easier than the old paper-based approach.
Reduced compliance burden: Automation and simpler processes reduce admin work. This frees up time for businesses to focus on their core activities.
Environmental impact: Going paperless fits with eco-friendly practices. It reduces paper use and harm to the environment.
How do you choose the right MTD-compatible software?
Choosing the right MTD-compatible software is crucial for compliance. It handles digital record-keeping, tax return filing, and bridging software for VAT returns. There are many VAT software options on the market. So businesses may find it hard to choose the right one for their needs.
In this section, we cover the key features to look for in MTD-compatible software. We also explain the role of bridging software in staying compliant.
What features should you look for?
When you compare MTD-compatible software, think about ease of use, how well it works with your existing systems, and regular updates. It's also essential to check that the software is built to comply with Making Tax Digital rules. It should also be recognised and approved by HMRC. If you choose VAT software that meets these criteria, you can comply with Making Tax Digital rules and enjoy smooth tax management.
How does bridging software help with VAT returns?
Bridging software plays a key role for businesses that keep digital records in spreadsheets. It helps them meet MTD for VAT requirements. The software links a business’s records to HMRC’s systems in an MTD-compatible way. This lets the business submit VAT returns in line with MTD rules.
With bridging software, businesses can keep track of their records and submit their VAT returns on time. This helps them comply with MTD for VAT requirements.
Taxually offers MTD-compatible VAT software that suits businesses and agents. With it, businesses can submit VAT returns, check what they owe, and view their payment history.
What exemptions and special circumstances apply?
MTD aims to simplify tax for most businesses, but exemptions are available for those who meet certain criteria. In this section, we look at the criteria for MTD exemptions. We also cover the support available if you're struggling to comply with MTD.
Exemptions are available for businesses that meet certain criteria.
What are the criteria for MTD exemptions?
MTD exemptions are based on existing exemptions, digital exclusion, or other special circumstances. Guidance is available on GOV.UK. Examples include being digitally excluded, for example if you can’t use computers because of religious reasons, age, disability, or location. Businesses going through insolvency can also be exempt.
To check if your business qualifies for an exemption, read the guidance on GOV.UK and VAT Notice 700/22.
What support is there if you're struggling with MTD?
If you're having trouble with MTD, there are many support options. These include HMRC's Online Services Helpdesk. HMRC also offers webinars, videos, and email updates to help people understand and follow MTD. Tax Aid, an independent charity, offers free specialist tax help for people on low incomes.
What are the MTD penalties and how do you comply?
Complying with MTD is crucial to avoid penalties. Since January 1, 2023, late VAT returns earn penalty points, and late payments lead to late payment penalties. These replaced the old default surcharge. Reasonable excuses are considered for appeals.
How does the MTD penalty system work?
The MTD penalty system includes several types of penalty. There are late payment penalties and penalties for not using digital links to transfer data. There are also penalties for not following MTD for VAT, and for filing a VAT return other than electronically. The amount of a penalty may vary depending on the circumstances. We cover this in more detail in UK VAT Changes 2023.
However, businesses can appeal these penalties if they have a reasonable excuse for non-compliance.
How can you stay compliant?
To comply with MTD, stay up to date with the latest MTD rules, use MTD-compatible software, and keep accurate records of your transactions. It's also wise to get professional advice when you need it. Make use of the support options available too, including webinars, YouTube guidance videos, and email updates from HMRC.
Conclusion
Making Tax Digital is transforming tax for businesses and the self-employed in the UK. MTD simplifies tax processes, boosts productivity, and cuts errors. This makes tax management more efficient and easier to use.
It's essential for businesses to understand the requirements, deadlines, and exemptions linked to MTD. They also need to choose the right MTD-compatible software. By doing so, they can comply with MTD rules and enjoy the benefits of simpler tax management.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
How Taxually handles this
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Frequently asked questions
Is Making Tax Digital compulsory?
Making Tax Digital is now compulsory for all VAT-registered businesses and they must keep digital records and file their VAT returns using compatible software. HMRC will sign up businesses to Making Tax Digital for VAT automatically unless they qualify for an exemption.
How do I set up Making Tax Digital?
To set up Making Tax Digital, sign into HMRC online services with your Government Gateway user ID and password, provide your VAT registration number, choose the business type, give other business information, select your preferred way of being contacted, and confirm and submit the information.
Once the information is submitted, HMRC will review the details and contact the business to confirm the registration. The business will then be able to access the Making Tax Digital service and start filing their VAT returns digitally.
Is Making Tax Digital good for businesses?
Making Tax Digital offers numerous advantages for both businesses and individuals, including integration with software and increased digitalisation.
What is the VAT threshold for adhering to MTD for VAT rules?
MTD for VAT applies to all VAT-registered businesses, whatever their turnover. The VAT registration threshold has been £90,000 of taxable turnover since April 1, 2024.
What are the key components of Making Tax Digital (MTD)?
Making Tax Digital involves digital record-keeping, the use of compatible software, and regular submission of tax updates.
