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What is ‘Making Tax Digital’ for VAT?

As part of their Making Tax Digital (MTD) plans to modernise the tax system, the Government has changed the way VAT registered businesses create and submit VAT Returns.

What’s Changing?

As of April 2019, businesses above the VAT threshold of £85,000 are required to file their VAT returns electronically using accounting software, and are obligated to keep digital records of their transactions. 

Manual submission through HMRC gateway for VAT will no longer be accepted for most businesses. 

What does it mean for businesses?

If your business is affected, the new VAT rules apply from 1st April 2019, and you must:

  • Ensure you have MTD for VAT compliant software.
  • Start maintaining digital business records for the purposes of VAT. 
  • Sign up with HMRC for MTD for VAT. 
  • Start submitting your VAT Return through your compliant software. 

Will MTD benefit my business?

There are four main benefits of MTD to businesses: 

  •  Improved quality of record keeping. 
  • Reduced likelihood of error (due to less manual entry).
  • More efficient management of business affairs. 
  • Less time gathering and inputting data. 

What's next for MTD?

The ‘soft-landing’ period for the majority of mandated businesses ends on 1st April 2020 (deferred businesses 1st October 2020). Once this period has ended, it is expected that all mandated businesses will comply with MTD or will otherwise face penalties or prosecution. 

From April 2021, we could see the remaining VAT-registered businesses with a turnover below the VAT threshold (£85,000) be mandated to comply with Making Tax Digital and digital filing procedures – however there is no official plan nor date for this yet. 

The pilot scheme for MTD for income tax has started, and Making Tax Digital is also expected to become mandatory for corporation tax and income tax reporting at some point in the future.

This will eventually affect the self-employed, partnerships, trusts and landlords – essentially, anyone who completes a self-assessment tax return, although there will be exemptions for those who are unable to use digital tools on the grounds of religion, disability, age and remoteness of location.  It is also likely that the very smallest businesses and landlords with annual turnover of less than £10,000 will remain outside MTD.