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Making tax digital

What is Making Tax Digital?

Making Tax Digital (MTD) is the government’s programme to transform the tax system and move it fully online. Introduced on 1st April 2019, VAT registered businesses with a taxable turnover above the £85,000 VAT threshold now need to use digital methods to store and submit their VAT information using a compatible software that connects to HMRC systems. From 1 April 2022, all businesses who are registered for VAT, even if their taxable turnover is below the threshold of £85,000, must follow the MTD rules.

The government is extending MTD to include the submission of information about Self Assessment tax returns (by April 2024) and Corporation Tax (date to be announced).

Even if you’re not VAT registered, you should think about starting to use digital accountancy software (such as Crunch) to record your business transactions. Get a free consultation from one of our expert advisors to see how we can help your business comply with MTD.

Making Tax Digital explained

Watch our webinar to learn the basics of Making Tax Digital, who it affects, and what to do if you’re concerned about it.

Your MTD questions, answered.

Do I have to register for MTD?

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If you are above the VAT threshold then you have to register for VAT, include VAT on all your sales invoices and submit quarterly returns to HMRC. If you’re using software for your business finances then your software provider should be looking after all of this for you. Crunch software has been compatible with MTD requirements since April 2019. If you’re not yet using software, then you’ll need to ensure your records are stored digitally and your VAT return is filed online to HMRC using MTD-compatible software.

What if I'm voluntarily registered for VAT - do I still need to file using MTD?

If you are VAT registered voluntarily – i.e. your company’s taxable turnover is below the £85,000 threshold – you will need to follow the MTD rules from 1st April 2022. At Crunch, we sign up all of our VAT registered clients for MTD for VAT regardless of their turnover and whether their registration is voluntary or mandatory.

HMRC requires you to register for VAT if you exceed the threshold over a rolling 12-month period, or if you expect to exceed the threshold over the next 30 days. So you must keep your business’ level of turnover under close review.

Do you know what your business’ turnover is? If not, maybe you should use online accounting software like Crunch that gives you a clear picture of your finances.

What is MTD compatible software?

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The MTD rules say you must use ‘Functional Compatible Software’ - that means a software program, or set of programs used to keep digital records, send information and returns automatically from data held in the digital records, and receive information from HMRC via an Application Programming Interface (API).

If you currently use Excel to capture information about your business’ VAT, then at the very least you would need API-enabled bridging software to connect to HMRC systems. However, you will probably find it easier to use an approved software provider like Crunch.

What records do I need to keep digitally?

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You need to store the following standing data as specified by HMRC:

  • Your business name
  • Address of your principal place of business
  • VAT registration number
  • A record of any VAT accounting schemes used

For each supply you make to customers (output VAT):

  • The date of supply
  • The value of the supply
  • The rate of VAT charged

For each supply you receive (input VAT):

  • The date of supply
  • The value of the supply including any exempt or zero rated VAT
  • The amount of input tax that you will claim

Your VAT account, including:

  • The output tax due on sales
  • The output tax due on acquisitions from other EU member states
  • The tax payable on behalf of your supplier under a reverse charge procedure
  • The tax that needs to be paid following a correction or error adjustment
  • The input tax claimable from business purchases
  • The input tax allowable on acquisitions from other EU member states
  • The tax reclaimable following a correction or error adjustment
  • Any other necessary adjustment required by VAT rules.

When do I need to start keeping digital records?

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Digital records have been required for VAT registered businesses with taxable turnover above the VAT threshold of £85,000 since 1st April 2019. From 1st April 2022, all VAT registered businesses, regardless of turnover, must keep digital records.

When do I need to have MTD ready software in place?

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The first changes were introduced on 1st April 2019 and affected VAT registered businesses with a taxable turnover above the £85,000 VAT threshold. These businesses now store and submit their VAT information via compatible software that connects to HMRC systems. From 1st April 2022, all businesses who are registered for VAT, even if their taxable turnover is below the threshold of £85,000 must follow the MTD rules.

What is the soft landing period?

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For VAT periods starting in the 2019/20 tax year, businesses will not need to have digital links for all software and will be able to manually transfer or cut and paste their records instead.

However, this does not include the submission of the VAT return itself, which **must **be shared with HMRC using an API.

For MTD, Businesses must have the digital record keeping in place, and an** API enabled product** ready to send their VAT returns after 1st April 2019.

Does MTD affect me if I'm a sole trader?

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Yes. MTD rules apply to sole traders.

Does MTD mean extra admin for business owners?

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Most business owners have found that by using MTD compatible software for VAT, their admin burden has reduced.

Are there fines if I don’t comply?

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Yes. All businesses required to follow MTD rules must submit their VAT information to HMRC using compatible software. You will face fines and penalties if you don’t.

Will MTD extend to other taxes other than VAT?

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The government is extending the MTD rules to include the submission of information about Self Assessment tax returns (by 2024) and Corporation Tax (date to be announced).

When and how can we register for MTD?

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The MTD for VAT service opened for business in April 2020. Businesses can sign up for MTD via the GOV.UK website.

Businesses who have an agent should discuss with their agent and ensure that actions are aligned. Businesses should only be signed up when they are ready, i.e. they have digital records and MTD compatible software.

I’m still using accounts, ledgers and paper receipts. Does that mean I have to change my whole accounting system?

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If the MTD for VAT rules apply to your business, you must submit information to HMRC digitally using compatible software, which could include spreadsheets with a digital link.

Paper invoices would remain valid, but if all the information is in the digital records they would not need to be retained.

Does digital record keeping go so far as having to keep a digital copy/picture of receipts even if they are entered into accounting software?

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If all the required information is held within the accounting software then there would be no need to keep copies.

Do we need to scan and store images of purchase invoices and expense receipts on our MTD compliant system?

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If the required information is held within accounting software there is no need to keep further copies. If you choose/need to keep copies, these can be paper or digital.

Learn more about Making Tax Digital with our expert articles