Making Tax Digital - guide

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Date: 15 December 2021

Digital transformation is at the forefront of the age in which we live, and digital applications are offering businesses new, efficient processes - from data analysis to business administration.

HMRC are not too far behind.  

1. What is Making Tax Digital?

Making Tax Digital (MTD) is the UK government initiative to digitise the entire UK tax system (eventually). The digitised system aims to create a more effective, efficient, and compliant tax process for HMRC’s customers and businesses.

The initiative was launched on 1 April 2019 with the digitisation of the VAT return and compliance process known as phase 1.

Any VAT-registered business that exceeded the VAT threshold of £85,000.00 was required to register for MTD, ensure they maintained their business records digitally and needed to file their VAT returns using HMRC compatible software.

To be HMRC compatible, software must:

  • Maintain business records digitally including business name and details, tax identification numbers, sales and purchase invoices and so on.
  • Be able to prepare VAT returns using the digital data in the software.
  • Submit the VAT return via an Application Programming Interface (API) platform which will directly submit your VAT return from that platform to HMRC and give you confirmation of submission.

Using compatible software means that as long as all your records are up to date and stored digitally within the system, your data is collated, and your VAT return is calculated automatically with minimal human intervention (beyond a quick overview). The digital links must be maintained from when the data is first being imported all the way to when the VAT return is submitted to HMRC.

As of 1 April 2022, the MTD requirements for VAT will be extended to any VAT registered business within the UK - including those businesses below the VAT threshold.

There are approximately 1.1 million businesses under the VAT threshold that will be required to fulfil the MTD requirements.

2. Do I have to register for Making Tax Digital?

All VAT registered businesses whose annual turnover had exceeded the threshold of £85,000.00 were required to register for MTD by 1 April 2019.

But, as of 1 April 2022, if you are under the VAT threshold and voluntarily VAT registered, you will be required to register for MTD. Therefore, you should be prepared to make sure you fulfil the MTD requirements. 

3. What do I need to do to prepare for Making Tax Digital?

To be MTD compliant, a business must ensure they:

  • Maintain their business records digitally, including business name and details, tax identification numbers, sales and purchase invoices and so on.
  • Are able to prepare VAT returns using the digital data in the software.
  • Submit the VAT return via an Application Programming Interface (API) platform which will directly submit your VAT return from that platform to HMRC and give you confirmation of submission.

There are software packages like Xero that can help with this. However, these applications are quite sophisticated and micro-businesses may not find them cost effective.

There are a range of free tools available to help businesses comply with MTD requirements without extra cost. For example, ANNA Money offers a VAT-filing tool which has an in-built API for submitting your VAT return to HMRC. The service is completely free, which is impressive when you consider the annual subscription charges for some similar tools.

ANNA also offers a free MTD-compliant formulated Excel spreadsheet template. All business records can be digitally recorded in separate tabs depending on the type of transaction. The spreadsheet then automatically calculates the VAT return figures for the business. The spreadsheet can then be uploaded on to ANNA’s VAT-filing platform and submitted to HMRC directly.

4. How do I sign up to Making Tax Digital?

You need to register for MTD on the HMRC website. HMRC will ask for the following information:

  • Your Government Gateway user ID and password
  • Your business VAT number
  • Your company registration number

Once this information has been submitted and processed, HMRC will confirm the MTD registration.

For further guidance and a step-by-step guide, see ANNA Money’s handy article.

5. When is the Making Tax Digital deadline?

All VAT registered businesses must make sure they have registered for MTD before 1 April 2022 to ensure they aren’t penalised.

HMRC introduced a penalty system on 1 April 2021 for failure to fulfil the MTD regulations. A default will be recorded on file for the failure to comply with the MTD rules or for missing a VAT filing. After this, businesses will enter a 12-month surcharge period - and if they fail to comply during this period they will be charged a penalty. 

So, our advice is to make sure you're MTD compliant, save money by carefully choosing the tools you use, and avoid those nasty HMRC penalties.

Copyright 2021. Article was made possible by site supporter ANNA Money

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