UK: Making Tax Digital for VAT: what is it and how does it affect you?

September 24, 2021

Making Tax Digital for VAT, also known as MTD for VAT, is a set of rules that apply to VAT registered businesses in the UK, and that govern the way they keep their records. 

In this article, we’ll look into the exact implications of MTD for VAT, and how it affects you. 

What is MTD for VAT? 

MTD for VAT is a set of rule that defines how businesses should keep their records and file their VAT returns. It aims to simplify VAT compliance and give HMRC, the UK tax office, a better overview of transaction and tax data in the UK, and close the VAT gap. 

According to the rules of Making Tax Digital for VAT, businesses who are VAT-registered and have an annual taxable turnover of more than £85,000 need to: 

  • Keep digital records
  • File their VAT returns online via the MTD API for VAT.

MTD for VAT has no impact on the frequency of filing VAT returns: you need to file them with the same frequency as before.

Are there any exceptions to the MTD for VAT rules? 

Yes, some businesses are exempt from Making Tax Digital for VAT, namely: 

  • Businesses that are under the annual turnover threshold of £85,000
  • Businesses that are enrolled in the VAT GIANT service, i.e. government entities and departments or NHS trusts. 

Businesses that fall in the first category could still decide to use MTD for VAT to file their VAT returns, at least for now. After April 1, 2022, all businesses that are registered for VAT in the UK need to use the MTD for VAT service, even if they haven’t reached the £85,000 threshold. 

How can I start using the MTD for VAT service? 

To use the MTD for VAT service, you need to sign up with HMRC, and then use software that integrates with HMRC, i.e. that is compatible and can connect to the tax office’s system. 

Since April 1, 2021, in case you’re using more than one software tool to file your VAT returns and keep records, you need to make sure they can integrate with each other automatically. The data exchange between the two systems needs to be automatic and with no human intervention, such as transferring files or records or copying and pasting information. 

How does the MTD for VAT system function? 

Making Tax Digital for VAT functions in the following way: 

  1. You submit data into your accounting software
  2. The software forwards it to HMRC via an API
  3. The API logs the information into the database of HMRC for safe storage. 

Which records do I need to keep digitally? 

You need to keep the following information in digital form: 

  • Your business name and address
  • Your VAT number 
  • VAT amount and VAT rate for all supplies you’ve sold or purchased
  • Timestamps and value of all supplies, sold or purchased
  • All reverse charge transactions
  • If you use a retail scheme, your daily gross takings (total)
  • If you use a flat-rate scheme, supplies on which you can reclaim VAT
  • If you use the gold accounting scheme, total amount of sales and VAT

You also need to keep records of all documents you receive from other businesses, employees (for expenses), or volunteers for fundraising for charity. 

All your sales and purchases need to be added to your digital records, but you don’t need to scan receipts or invoices. 

Fonoa can help you automate your VAT obligations