Making Tax Digital for VAT
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Making Tax Digital (MTD) is a UK government initiative designed to ease accounting processes for VAT-registered businesses. It involves transferring all tax processes – from paying and managing tax to bookkeeping, tax planning, and account management – to a digital format.
Making Tax Digital has been mandatory for VAT-registered businesses since 2022, with few exemptions. If you’re an existing business or a new business that hasn’t transitioned, you run the risk of being fined. Other groups, like sole traders and landlords, will be brought into MTD under a separate timeline beginning in April 2026.
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How to Get Started with MTD for VAT
Transitioning to MTD can be complicated if you have complex accounting processes. You must take the following steps:
- 1. Check eligibility: You’re most likely eligible for MTD unless you have an exemption related to age, disability, or legitimate objections to using computers. If you’re a VAT-registered business, assume you are eligible.
- 2. Choose accounting software: You need to select the best MTD-compliant and HMRC-recognised accounting software for your financial processes. Ensure it has robust security features, complies with regulations, and has a tool for every tax process your company needs to do.
- 3. Transition to the software: The most complex step is migrating your invoices, tax returns, and other financial systems to the new software. To avoid errors, it’s worth consulting a professional accountant to guide you through the process.
- 4. Sign up with HMRC: Initially, you were required to sign your business up for Making Tax Digital for VAT with HMRC. All newly VAT-registered businesses must comply with Making Tax Digital and use compatible software from the outset. While the sign-up process may be streamlined, you are responsible for ensuring compliance.
- 5. Maintain accurate bookkeeping: You need to stay on top of your taxes. A well-monitored tax process will help with bookkeeping, VAT returns, company tax returns, and other necessary financial processes.
Benefits of Making Tax Digital for VAT
Making Tax Digital provides you with several key benefits to streamline your tax procedures for the long term:
- Precise bookkeeping: Digital bookkeeping reduces human errors arising from manual data entry, lowering the risk of miscalculations and missed deadlines.
- Visibility: Digital accounts provide convenience and accessibility to viewers of your tax accounts, making the process more transparent and manageable ‘on-the-go’.
- Streamlined tax processes: Digital tax records allow real-time updates on tax obligations like assessments and payments. You can find and view records and financial data easier.
- Tax compliance: Digital tax platforms follow – by law – tax regulations to ensure compliance, data security, and reporting accuracy.
- Business growth: Digital tax processes enable businesses to make strategic plans through real-time data insights – reducing administrative tasks frees up time to focus on growing your business.
- Sustainability: Digital tax submissions are paperless, promoting sustainability.
- Futureproofing: Transitioning to digital tax helps prepare businesses for a digital-first world and aligns with technological advancements in financial management.
- Customisation: You can integrate digital tax platforms with compatible software, implementing it with other tools and systems.
Is MTD for VAT compulsory?
Making Tax Digital is mandatory for most VAT-registered companies. From 2022, even companies below the £85,000 threshold were required to follow MTD. Without it you could face several potential penalties including:
- Tax return penalties: If you submit VAT returns without using Making Tax Digital software, you could face a penalty of up to £400.
- Failure to keep digital records: As of 2023, late VAT submissions and payments may result in a points-based penalty system. You may also face fines for failing to use digital links between software packages or spreadsheets, as this breaches digital recordkeeping requirements.
There are exemptions, including:
- Age: If you’re over a certain age and can’t use technology easily.
- Disability: If your disability makes computers impractical.
- Access: If you have no internet access.
- Religious grounds: You can get an exemption if your religious beliefs are incompatible with using computers.
- Legitimate objection to computers: Rare exemptions include having an objection to computers. This could be a mental health condition or long-term illness.
What income to include in your MTD VAT records
It’s vital to calculate your VAT turnover correctly for Making Tax Digital so it is submitted correctly through HMRC. When making the calculations, include:
- Goods and services sold.
- Rental income from commercial property or holiday lets.
- Commissions and fees that are VAT-applicable.
- Deposits
- Exports or sales to other VAT-registered businesses.
What about rental income?
- Commercial property: If you have opted to tax your property with VAT, the rental income is standard-rated (20%) and must be included in your VAT income for your return. It should be included alongside other taxable income like those described above.
- Holiday lets: These are often subject to standard-rate VAT, especially if you offer cleaning, breakfast, and linen services – making it more of a holiday stay.
- Residential: Property rental income that is residential is VAT-exempt.
- Mixed: If some of your rental income is VAT-taxable and some is exempt, separate them clearly in your records.
Making Tax Digital Timelines for VAT
Making Tax Digital has been a gradual process for VAT businesses:
- 2019: MTD becomes mandatory for VAT registered businesses with taxable income of £85,000.
- 2022: All VAT-registered businesses have to follow MTD rules as of April, regardless of turnover.
Making Tax Digital Software for VAT
It’s vital to use compatible software with Making Tax Digital. At Mollan & Co, we use Xero as it provides a stable, scalable solution for businesses with access to hundreds of third-party apps.
Our Xero and cloud accounting expertise has helped numerous VAT-registered businesses to migrate their tax processes to digital formats.
If you’re looking to change accountants or switch tax formats, Mollan & Co can ensure a smooth transition while staying compliant with regulations and efficient with accounting workflows.
Get in touch today to book your free, no-obligation consultation.
FAQs
Is Making Tax Digital just for VAT?
No, Making Tax Digital is for sole traders and landlords too, though their timelines are different. Read our other MTD blogs to find out more.
When did Making Tax Digital VAT start?
Making Tax Digital was first announced in 2015, but rolled out in April 2019 for VAT-registered companies with income over the threshold of £85,000. As of April 2022, VAT-registered businesses of all incomes are required to transition.
What is the threshold for Making Tax Digital?
As of April 2022, there is no longer an MTD threshold for VAT-registered businesses. You must comply even if you’re under the £85,000 threshold.
Author ProfileI'm the owner and Managing Director of Mollan & Co Accountants. I'm a skilled and efficient accountant with more than 20 years of experience in the industry.
I developed valuable skills in commercialisation through my work in the science and technology department at the Scottish University. Then, in 2002, I formed my own internet-based marketing company, producing and distributing 360° virtual reality tours for the Scottish tourism sector.
I now use my commercial skills, expert tax knowledge and first-hand experience to help other businesses grow and flourish through strong accounting practice.
Our success at Mollan & Co is directly related to the success of our clients.
