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. The first changes were for VAT registered business above the £85,000 VAT threshold. These business must now use digital methods to store and submit their VAT information to HMRC. Further changes to MTD are expected in 2021 and beyond.

Even if you’re not VAT registered, or close to the VAT threshold, 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 will 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?


If you are above the VAT threshold then you have to register for VAT, include VAT on all your invoices and submit quarterly returns to HMRC. If you’re using software for your business finances such as Crunch then your software provider should be looking after all of this for you. 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 – ie your company’s Vatable turnover is below the £85,000 threshold – there is no mandatory MTD requirement, although it’s probably still a good idea. 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?


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 to help keep your VAT records and filings future proofed.

What records do I need to keep digitally?


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?


Digital records will be required to be kept from 1st April 2019.

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


Digital records are required to be in place as soon as your business turnover is above the VAT threshold (£85,000 in 2019/20). It would be ideal, perhaps, to have accounting software in place at the same time.

However, it may be that some businesses may not have software in place at the outset and, theoretically, it could be possible to ensure that digital records are in place, and these could be fed into the software when it becomes available. It would certainly need to be in place to enable your business’ first VAT return for a quarter commencing after 1st April 2019 to be able to be filed under MTD.

What is the soft landing period?


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?


There are no different rules for sole traders rather than limited companies. If you’re VAT registered and your turnover is above the VAT threshold, then the rules apply whether you are a sole trader or a limited company.

Does MTD mean extra admin for business owners?


Many things are not changing: the same VAT return frequency, the same

payment deadlines, the same eligibility for schemes. So MTD for VAT is not changing what you do - but how you do it.

Are there fines if I don’t comply?


In a word, yes. HMRC have said they don’t issue penalties just to raise revenue, and that they will be lenient where businesses are doing their best to comply, but there are sanctions for deliberate non-compliance.

There are no loopholes – everyone who is VAT registered and above the threshold has to do it via MTD. You may face penalties if you don’t.

They are taking away the ability to use the old VAT filing system.

There are no transitional arrangements – though there is a soft landing period (see the question above) for links to other financial software, but not for your VAT filing.

Will MTD extend to other taxes other than VAT?


We believe that it’s very likely that HMRC will extend this out to other taxes as they look to transform their systems and improve compliance and efficiency. It isn’t called ‘Making VAT Digital’, so it’s likely that at some point in the future, MTD will expand to include personal tax information. As this would affect the 10 million people who currently submit an annual Self Assessment return, it’s perhaps unsurprising the government has delayed implementing MTD more widely for the time being.

When and how can we register for MTD?


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?


If a business has a taxable turnover above £85,000 then they are required to submit their VAT returns under MTD. This would require the business to have digital records and submit via MTD enabled 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 scanned/kept.

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?


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?


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.

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