Making Tax Digital for VAT – The Complete Guide for Small Businesses

HMRC has recently announced that tax errors cost the Exchequer over £9 billion a year. That’s right, more than £9,000,000,000 annually. The government it seems, can no longer afford to bear the cost of the current taxation system and ‘fall behind the crowd’.As more and more businesses manage their finances online and move to the ‘Cloud’, digitising tax appears to be a needed transition for HMRC, to align with the financial and technological shifts amongst businesses.

Why is it all relevant to your VAT registered company? 

Starting from April 2019, most VAT registered businesses will have to comply with the new ‘MTD for VAT’ regulations and submit their VAT returns via MTD compatible software. The current process of applying VAT records to your HMRC tax account will become a way of the past, as your invoices and transactions will be transmitted via what HMRC refers to as; ‘Digital Links’ and ‘Software Bridges’. So, to get a better idea about the adjustments needed and to help you get MTD compliant, we have put together the below, complete guide.

MTD for VAT - Launch Dates

April 1st 2019

All VAT registered businesses with an annual turnover of 85K and above will be required to adhere to the MTD for VAT regulations. The first VAT return that commences after April 1st 2019 will need to be MTD compliant. This requirement includes limited companies, landlords, sole traders, partnerships and charities. Deferred Businesses will be exempt from MTD until October 2019. Businesses below the 85K threshold will not be required, but could still opt-in to MTD on a voluntary basis.
Bear in mind that once opted-in to MTD for VAT, a business would not be able to opt-out, unless it de-registers from VAT. If after April 2019 your turnover drops below the 85K threshold, you would still be required to follow MTD guidelines unless you de-register from VAT or become exempt.

October 2019

All deferred businesses will no longer be exempt. More about deferred businesses.

April 2020

The earliest date in which the government will consider whether to expand MTD to other forms of taxes, such as Corporation Tax.

Making Tax Digital - What are Digital Links?

The primary requirement of Making Tax Digital relays on the exchange of data between two or more pieces of software, through ‘Digital Links’. Meaning, MTD for VAT requires that your invoices and VAT related transactions will be transmitted electronically, via two or more programs rather than submitted manually.
These types of ‘Digital Links’ with HMRC will replace the current process of login to your tax account and manually typing in VAT records, as your software will communicate with HMRC’ systems and transmits the relevant VAT data.

To put into practical terms, starting from April, VAT registered businesses with a minimum annual turnover of 85K will be required to submit their VAT records digitally, via an MTD compliant accounting software or an Application Programming Interface (API)

Digital Record Keeping

VAT registered companies will be required to store each invoiced transaction digitally. This could be done via scanning your invoice details or typing the transaction records manually, into your MTD compatible software.
In addition, businesses will be required to keep specific VAT related records digitally. However, not all of your accounts records will be required.
Bear in mind that by law, you will still be required to keep some invoices in their original form.

Which VAT Records You Will be Required to Keep Under MTD?

Designatory Data

  • Business name or organisation.
  • The address of the principal place of business.
  • VAT registration number (VRN).
  • Details of any VAT accounting scheme used.

Supplies Delivered

These records cover the supply you have made and should only include supply records you will submit on the VAT Return.

  • Time of supply.
  • The net value (exc. VAT) of the supply.
  • The rate of VAT charged.

Supplies Received

  • Time of supply.
  • The value of the supply received.
  • The amount of input tax you will claim.


Using Excel Under MTD for VAT​​

Storing and calculating your records locally on software such as Microsoft Excel is still an option; however, you will need to install a ‘Bridging Software’ onto Excel or transmit your VAT records directly through HMRC’ application programming interface (API).
As implementing ‘Bridging’ requires some advanced technical skills, it may not be the best option for most businesses. Choosing a good MTD compliant software might be easier to work with.

Tax and Dividends Calculations

Up-to-Date Tax Figures and Dividends Calculation​​

Having up-to-date figures of how much tax you may owe to HMRC, is one of the main benefits of tax digitisation. In simple terms, it means better budget management capabilities for your business. Applying scheduled updates of your transactions onto to the software should get you a real-time estimation of how much tax you owe, without having to wait for your year-end accounts completion.
This could be quite beneficial when trying to calculate at any given time, your expected dividends and take-home pay.

Tax Payments

Paying Bills as You Go

Up to date tax figures will allow you to pay your bill more frequently if it better suits your annual budget plan.

VAT Return Deadlines​

VAT returns submission dates will remain the same, so VAT returns need to be filed one month and 7 days after your VAT quarter end.
The first VAT Return submission would remain as one month and 7 days after the quarter end date. So, if your VAT return runs April 1st to June 30th, you have until August 7th to file the VAT return.

Late Payments Penalties​

HMRC will allow a “soft landing” for the first 12 months but only in relation to Digital Links for any transfer or exchange of data between software programs, products or applications.

Until April 2021, HMRC will impose default surcharges and there will be no “soft landing” period with regards to imposing these where VAT returns are filed late or payments not made on time. No surcharge is payable for the first default period.

After April 2021, a points based system is expected to be release for late submissions and late payment penalties. A future Finance Bill will provide full details on this new penalty regime.

Compliance and Exemption

Which Businesses Need to Comply with MTD for VAT?

All VAT registered businesses with an annual turnover of 85K and above will be required to follow the new digital regulations. This requirement includes limited companies, landlords, sole traders, partnerships and charities.

Which Businesses are Exempt from MTD?

Deferred Businesses

Around 3.5% of all VAT registered businesses will receive an extension of six months to adjust to the new MTD for VAT guidelines. Due to the more complex tax requirements of these limited companies, deferred businesses will be MTD exempt until October 2019.

Which business organisations will be exempt from MTD until October 2019?

  • Businesses required to make payments on account.
  • Annual accounting scheme users.
  • Trusts.
  • Not-for-profit organisations that are not set up as a company.
  • VAT divisions.
  • VAT groups.
  • Public sector entities that are required to provide additional information on their VAT return.
  • Local authorities.
  • Public corporations.
  • Traders based overseas.

Flat Rate VAT

Under MTD, business owners who are on the flat rate scheme will need to file their VAT returns through MTD compliant software. As the flat rate scheme is based on a percentage of the turnover, digital records of supplies received will not be required, unless they relate to capital items that cost more than £2,000 including VAT).

Other Exemptions

There are a few other cases when you wouldn’t have to enrol for MTD.

  • Inability to follow MTD guidelines, due to religious beliefs.
  • Inability to use digital tools due to age, disability, remote location or other reasons.
  • You are in the process of insolvency.

Income Tax Pilot

Sole Traders with a single business income and landlords with a UK based property can join the Making Tax Digital pilot scheme for income tax. Sole trader with an income from more than one business will continue to submit their records via the Self-Assessment Tax Return.
Once you’ve signed up, you’ll be able to have a more up-to-date estimation of your tax bill and pay it as you go, if it works better with your budgetary needs.

MTD for VAT - How to Sign up?

If you haven’t registered for VAT yet, you would need to create a Government Gateway account first.

Click Here to create a Gateway account.

Once you have completed creating your new Gateway account, or if you already have an account, login here and provide the below VAT details:

  • VAT number.
  • VAT registration date.
  • Principle or trading address of the business.

For your convenience, follow the next simple steps described in the video below and complete your signup for MTD for VAT.

Need Further Advice About Upcoming Digital Tax Changes?

Please don’t hesitate to get in touch. Our MTD specialists at Clever Accounts will be happy to assist. Call 0800 756 9786 or request a call back.

Posted by Editorial