Your Making Tax Digital for VAT questions answered

Making Tax Digital (MTD) is arguably the biggest change to the UK’s tax system for a generation, so here’s a quick walkthrough of what MTD means for small businesses, together with five practical steps to help you tackle the changes.

What is MTD for VAT?

That’s a good question. The UK government introduced the MTD initiative in order to modernise the tax system and to make it more effective and efficient.

Under MTD for VAT you need to record all your business transactions affected by VAT digitally. You also need to file VAT returns to HMRC using MTD-compatible software such as FreeAgent.

Who will MTD for VAT affect?

Businesses with VATable sales above the VAT threshold, which is currently set at £85,000 per year. If your sales are below this amount and your business is voluntarily registered for VAT you can choose to take part in MTD for VAT, but you don’t have to.

When did MTD begin?

Businesses under the scope of MTD for VAT have to file their first MTD-compatible VAT return for the quarter starting on or after 1st April 2019.

If a business has a VAT accounting period that spans the 1st April 2019 start date, the return for this period does not come under MTD. Instead, the return for the following VAT accounting period will be the first that has to be filed using MTD-compatible software.

What do I need to do?

If MTD for VAT affects your business, the main thing you need to do is start using MTD-compatible accounting software. The software you choose must be able to:

  • Store records of transactions affected by VAT
  • Maintain a digital link between your VAT accounting records and HMRC’s systems
  • File VAT returns directly to HMRC

It’s up to you to find the best MTD software solution for your business – why not start with a 30-day free trial of FreeAgent to see if it’s the right fit?

If you decide it’s the perfect match for your business, you’ll also get the added bonus of a 55% Discount on your first 6 months and a 10% Lifetime Discount for ByteStart users.

Can I use spreadsheets?

HMRC has stated that spreadsheets might be OK for submitting the figures from your VAT return digitally. However, you’ll need to connect your spreadsheet to HMRC using so-called bridging software in order to do this.

On its own, however, bridging software does not fulfill the other requirements of MTD, such as digital record keeping and maintaining digital links between data. It’s also worth bearing in mind that there are a number of other reasons to ditch spreadsheets when it comes to your small business accounts.

What about VAT special schemes?

Eligibility criteria for VAT special schemes, such as the Flat Rate Scheme, will remain the same. Businesses that are eligible to submit annual VAT returns will still be able to do so under MTD.

MTD for VAT – 5 Top Tips

MTD is a big change in how small businesses submit and store VAT-related accounts. Here are five practical tips to help you make the changes and comply with the new rules,

1. Understand the basics

MTD for VAT is the first major phase of Making Tax Digital, the government’s plan to make tax administration more efficient through the introduction of a fully digital tax system.

If your business is VAT-registered and has VATable sales above the VAT threshold, you’re now required to submit VAT returns to HMRC using MTD-compatible accounting software.

2. Talk to your accountant or bookkeeper

Your accountant or bookkeeper will be able to advise you on MTD and what you need to do to ensure your business is compliant with the new legislation for VAT. They may also have some recommendations for suitable MTD-compatible software, like FreeAgent.

3. Get MTD-compatible software

If MTD for VAT affects you, the main thing you need to do is start using MTD-compatible accounting software. Basic spreadsheets simply won’t comply with HMRC’s new rules.

4. Link your accounts to HMRC

Maintaining a secure digital link between your records and HMRC means that HMRC will be able to calculate your business’s tax position in close to real time.

This will help prevent errors and stop tax due or repayments owed from building up and means that you won’t have to wait until the end of the year to find out how much tax you owe.

5. Look to the future

The scope of MTD is expected to widen to include Income Tax and Corporation Tax from 2021, but this is yet to be confirmed. Further details will emerge as the MTD rollout progresses.

Last updated: 18th February, 2021

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