Insights

HMRC will be introducing Making Tax Digital (MTD) for VAT as a mandatory requirement for all VAT-registered businesses from 1 April 2022. Every business affected must ensure they are ready for the reporting changes this new process creates. Our article explains everything you should be aware of to be fully prepared.

What is MTD for VAT?

From April 2022, all VAT registered businesses in the UK must file their VAT returns digitally through MTD. This is regardless of their level of turnover. Previously only VAT-registered companies with incomes over £85,000 had to file their VAT returns through MTD, a policy that became effective in 2019. Now it is every VAT registered business including those with a turnover lower than £85,000.

Every business affected should have signed up to MTD for their first VAT return starting on or after 1 April 2022. The first submissions through MTD may not take place until summer 2022.

To avoid potentially paying VAT twice for the first submission, businesses must sign up to MTD at the right time. This needs to be at least five days after their last non-MTD VAT return deadline date, and no less than seven days before the first MTD VAT return deadline date.

Under MTD for VAT every business will be required to maintain digital records using appropriate software e.g. Xero, Sage, QuickBooks. In some cases, your business might prefer to use ‘bridging software’ and where this applies, digital links must be in place to ensure information can easily be transferred between different platforms.

VAT registered businesses that do not sign up for MTD for VAT will face a penalty charge for failing to do so.

Why is MTD being introduced?

Every government has a tax gap and the UK is no exception. A tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. In the UK last year, it was estimated to be £35 billion, which is 5.3% of tax liabilities – a large sum. Total UK tax liabilities for the year were £674 billion.

MTD is a scheme designed to help reduce the tax gap by helping businesses eliminate common errors and helping HMRC to reduce tax losses through digitisation. MTD for VAT is part of the overall digitalisation of UK tax and many businesses have already voluntarily joined.

By December 2021, nearly 1.6m taxpayers had registered with MTD for VAT and over 11m returns have been submitted. Around a third of VAT-registered businesses with taxable turnover below £85,000 have voluntarily signed up to MTD for VAT ahead of the April 2022 deadline.

How to sign up for MTD for VAT

You can sign up to MTD VAT online as a business, or your accountant can do it on your behalf. This is what you will need to do:

1. Visit gov.uk and choose MTD-compatible software;
2. Keep digital records starting from 1 April 2022 or the beginning of the VAT period;
3. Log in and submit your VAT return through MTD.

If you ask your accountant to submit your MTD returns note that you as a business are still responsible for meeting your VAT obligations.

Some VAT-registered businesses may exempt from MTD, for example if it is not reasonable or practicable for them to use digital tools for their tax. If your business has already been granted an exemption for VAT online filing, this will carry through to your MTD VAT requirements.

What other MTD changes are coming up?

MTD for Income Tax Self-Assessment (ITSA) is going to be introduced in April 2024, a year later than originally timetabled. We have written about this in an earlier article: Changes to self assessment MTD ITSA

If you need help with any aspect of tax compliance, contact us via partners@rjp.co.uk.