Making Tax Digital: how to file a VAT return

The rules on how to keep VAT records and submit VAT returns changed on 1 April 2019

Making Tax Digital (MTD) is the government’s plan to transform the way taxpayers communicate with HMRC.

Here’s what you need to know to make sure you are compliant.

 

What is Making Tax Digital?

The government’s long-term goal is for all taxpayers – including businesses, sole traders and landlords – to file their tax information using digital apps on a quarterly basis.

It’s a big change. But MTD is being introduced gradually – and it started in April 2019 with VAT returns.

 

What is Making Tax Digital for VAT?

Since 1 April 2019, all VAT-registered businesses with a taxable turnover above the VAT registration threshold (currently £85,000) have been required to submit their VAT returns using an approved app. This system is called MTD for VAT.

MTD for VAT has affected more than one million businesses in the UK, with many having to change the way they keep their VAT records and submit their VAT returns.

If your business is required to register for VAT, you will be required to keep digital VAT business records and send returns using MTD-compatible software. This software is likely to be a cloud-based app that you can use from your smartphone.

It means you will have to input all your information to the app but you will also be able to communicate with HMRC at the touch of a button.

VAT-registered businesses had to report VAT quarterly before MTD was rolled out, so the frequency of the reporting has not changed; nor has the information you must input. The big change is the fact that it is now compulsory (with very limited exceptions) to use approved software.

Even if your taxable turnover drops below the VAT registration threshold, you will still have to keep digital records and submit your VAT returns using MTD-compatible software. However, this does not apply if you deregister or if you are exempt from MTD for VAT.

HMRC’s VAT Notice (VAT Notice 700/22) explains the rules for MTD for VAT.

 

When did the new HMRC rules for VAT start?

VAT-registered businesses have had to use HMRC-approved software to keep VAT records and submit VAT returns since 1 April 2019.

 

Does MTD for VAT apply to me?

MTD for VAT applies to all VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000).

If this is you, you must use an approved app to keep VAT records digitally and to submit your VAT return.

A small number of VAT-registered businesses with ‘complex requirements’ had until 1 October 2019, but all VAT-registered businesses are now covered.

 

How do I choose the right accounting software?

There is a wide range of compatible accounting software solutions. These are all commercial products; most work on a subscription basis.

The first step is to make sure that your preferred software is what HMRC calls ‘functional compatible software’. In other words, can it connect to HMRC via an application programming interface (API)?

If you already use software to keep your business records, check with your provider to find out if it is MTD-compatible.

There is a list of all MTD-compatible software on GOV.UK.

 

What should I look for in an accounting app?

There are some key functions and services that you may need to look for when choosing software. These are some of the questions you should ask:

  • Does it have VAT capabilities?
  • Does it automatically calculate the tax I owe?
  • Can it pull transaction data straight from my bank?
  • Can it also get information from my point-of-sale system?
  • Does it update my transactions every day?
  • Does it support payroll?
  • Can it handle different currencies?
  • Is training and support offered?

 

Can I carry on using spreadsheets for my VAT accounts?

The government has said that spreadsheets can be a part of digital record-keeping under MTD. However, they must be digitally integrated spreadsheets.

 

How do I prepare my VAT accounts now?

Once you have selected your chosen MTD software, you need to start inputting all your usual VAT records into the app. Key information includes:

  • the value of all the sales you have made (excluding VAT)
  • details of all your purchases (excluding VAT)
  • the specific rate of VAT charged on individual sales and purchases
  • the date of all transactions
  • any trade with EU countries
  • the name of your business and its principal address
  • your VAT registration number
  • details of any VAT accounting schemes you use

How much does MTD-compatible software cost?

Most MTD-compatible software solutions operate on a subscription basis. Costs vary but most packages cost between £10 and £30 a month, depending on functionality. For more basic spreadsheet bridging software, there are a few cheap options from £15 for a year, or even possibly free.

There may be some additional set-up costs for your business. You may want to invest in a new laptop or a better smartphone, for example. You will also need to consider the time it takes you to input information into the new system.

Does MTD affect how I use my accountant?

If your accountant normally files your VAT return for you, your accountant is an ‘agent’ who is acting on your behalf. Accountants can continue to make VAT submissions on behalf of their clients; they will be able to file other types of MTD return in the future as well. You just need to authorise them to act on your behalf.

It is also possible to input all your VAT information into an approved app yourself but then ask your accountant to check it before they submit it to HMRC.

If, like a lot of small businesses, you file your own VAT returns, then an accountant will be able to guide you when choosing the right software.

How will MTD affect my business in the long term?

If you’re not VAT-registered, you’re probably breathing a sigh of relief right now. But in time, MTD will apply to other taxes, including corporation and income, so you’ll need to start using an accounting app eventually anyway.