Making Tax Digital (MTD) is a UK government initiative aimed at modernizing the UK’s tax system and improving compliance. The initiative targets various tax types, including making tax digital for VAT, making tax digital for income tax, and making tax digital for corporation tax, and it applies to a wide range of taxpayers (small businesses, sole traders, self-employed, and large businesses).

What is Making Tax Digital for VAT?

Making Tax Digital for VAT is part of the UK government’s broader initiative to transition businesses to digital tax reporting. The goal is to improve compliance by digitalizing VAT records and reduce errors in tax returns by eliminating manual processes.

Under MTD VAT, businesses must:

1. Maintain Digital Records: VAT-related information must be stored electronically as part of compliant record-keeping and bookkeeping practices.
2. Use Compatible Software: VAT returns must be filed using software that integrates with HMRC’s API platform.

Is Making Tax Digital Mandatory for All VAT-Registered Businesses?

Yes, Making Tax Digital (MTD) is mandatory for all VAT-registered businesses as of April 2022. Exemptions are limited and apply only in specific cases, such as:

• Businesses undergoing insolvency.
• Taxpayers unable to use digital tools due to age, disability, or lack of internet access.
• Members of religious societies whose beliefs are incompatible with digital technology.

Failure to comply with MTD requirements can result in significant penalties, so businesses must ensure they meet the necessary obligations.

Do You Need Accounting Software for MTD VAT?

You don’t necessarily need accounting software to comply with MTD VAT, but you must use compatible software that meets HMRC’s requirements (Digital Records and VAT filing via HMRC’s API).

Businesses have options, including:

• Full Accounting Software: These systems handle all aspects of finance, including record-keeping, bookkeeping, and in some cases VAT filings.
• Bridging Software: A cost-effective option for businesses using Excel, allowing them to connect Excel spreadsheets to HMRC’s API platform for compliant Tax returns.

Choosing the right software depends on your business size, complexity, and budget. Whether you prefer dedicated MTD-compliant VAT software or a broader accounting solution, ensuring compliance with MTD requirements should be your top priority.

Is Excel compatible for Making Tax Digital for VAT?

Yes, spreadsheet programs like Excel are compliant with Making Tax Digital if paired with bridging software. This software ensures the preservation of the digital link when transferring the data between different software programs, applications or products, allowing businesses to submit their VAT returns in compliance with MTD.

Bridging software can be useful for smaller businesses that prefer to continue using spreadsheets for record-keeping and bookkeeping. However, manual processes like copying and pasting data from one software to another are not permitted under MTD requirements as these compromise the digital link.

Does HMRC Provide Free Software for Making Tax Digital?

No, HMRC does not provide free software for Making Tax Digital for VAT. Businesses must use third-party MTD-compliant software to file their VAT returns. This software will ensure digital records are preserved and allow you to submit VAT Returns directly to HMRC without needing to visit HMRC’s website.

You can find the list of compatible software on HMRC website. All these digital software have gone through HMRC’s recognition process.

Can a Third Party Submit VAT Returns on My Behalf Using MTD Software?

Yes, a third party, such as an accountant or tax advisor, can submit VAT returns on your behalf using MTD-compliant software.

To do this, the third party must:

• Have been authorized as an agent to handle VAT returns. If an agent was previously authorized to handle your VAT returns, this authorization remains valid under Making Tax Digital.
• Have access to your digital record-keeping systems. This is either direct access or when that is not possible the VAT data needs to be shared in a compliant way with the Agent.
• Use MTD-compatible software solutions to file VAT returns. The software must integrate with HMRC using the API platform.

Outsourcing VAT compliance to a third party may be a practical option for some businesses, especially those that already rely on external professionals for bookkeeping and financial management. By using MTD-compliant software, accountants and advisors can ensure that VAT submissions meet all regulatory requirements, reducing errors and penalties.

How Does Fonoa Help with Making Tax Digital?

Fonoa Returns simplifies VAT compliance for businesses under Making Tax Digital for VAT. It offers an intuitive and efficient solution to handle VAT filing, record-keeping, and reporting, ensuring a direct link with HMRC via API.

Here’s how Fonoa helps:

1. Automated Compliance: Automates VAT calculations and submissions, reducing errors and ensuring accuracy. Built-in checks identify issues before submission, preventing errors and penalties.
2. Direct Integration with HMRC: Connects to HMRC via API, ensuring seamless filing of VAT returns. Fonoa Returns underwent HMRC’s recognition process and it is listed as compatible Software for MTD.
3. Streamlined Record-Keeping: Manages all VAT-relevant information in one place, meeting digital bookkeeping requirements.
4. Digital Links Between Systems: Ensures integrity of the "digital journey" for data transfers between accounting tools and Fonoa’s platform.
5. Real-Time Insights: Provides advanced analytics on VAT metrics, giving businesses better control and visibility over their compliance process.

Why Compliance with MTD VAT is Essential for UK VAT Reporting?

Compliance with Making Tax Digital is more than a regulatory requirement—it’s an opportunity to modernize your business processes. By adopting compatible software, businesses can ensure accuracy, streamline operations, and reduce risks.

Whether you’re a small VAT-registered business or a large enterprise using HMRC recognised software can simplify your journey toward full compliance with MTD.

Additional Resources

Interested in learning more about Making Tax Digital?

• HMRC Website provides comprehensive resources and guides to assist taxpayers, including webinars and a list of recognised software to help taxpayers find the right tool for their needs.
• Indirect Tax Compliance Procurement guide: this guide is packed with information and additional materials. It also contains the most common questions asked by companies looking to buy an indirect tax compliance solution.
• Fonoa Country Tax Guides: this is one of our most visited (and praised) public resources. We have made available summaries of reporting requirements in easy-to-read tables.

Get in touch with Fonoa to learn how our solutions can support your business in navigating Making Tax Digital for VAT seamlessly.