Making Tax Digital is a government initiative launched in April 2019 to completely digitise the way the tax system works. It allows businesses and individuals to file their tax returns and make payments digitally. The aim of the scheme is to reduce the lost tax revenue of £9bn that happens every year because of incorrect tax submissions.

VAT was the first type of tax that used this scheme. Any VAT-registered business that has an annual turnover of taxable income above £85,000 had to make use of the digital links provided by the government to submit their VAT returns. The option to make an XML submission for these returns has now been completely abolished.

From April 2022, any business or organisation that is VAT registered will be required to follow the rules for Making Tax Digital when submitting their VAT returns.

How does this change things?

This changes things for those who have annual turnover below the £85,000 line. If your turnover is above this, you should already be compliant with the MTD scheme and using software such as Xero to help with your VAT returns.

If you have a business that is VAT registered but comes below the taxable turnover of £85,000 you will still be required to follow the MTD rules as of April 2022. This is when your VAT return will have to use the digital links that go between your compliant accounting software and HMRC. Now is the time to invest in an accountant and reliable accounting software so that your data can be properly tracked if you haven’t made an MTD VAT return before.

What does MTD change?

With more businesses entering the MTD scheme in 2022, a few things will change for them. You will be required to keep all records of VAT in a digital format. VAT returns also have to be submitted digitally.

The whole point of this is so that human error can be reduced. Making Tax Digital means that there’s no more data entry when it comes to submitting your VAT forms.

What stays the same?

The day your VAT return is due won’t change. If you submit quarterly returns then this will be seven days after the end of the month which follows the end of the VAT quarter. You can still pay any VAT due in the same way as you always have.

What digital records do I need to keep?

You will be responsible for keeping all of your business records in a digital format from April 2022. You will need to record the following points of data electronically for every transaction made:

  • Sales: Rate of VAT charged
  • Purchases: Amount of VAT to reclaim
  • Sales: Value excluding VAT
  • Purchases: Value net of VAT
  • Sales: Time of sale
  • Purchases: Time of purchase

HMRC will also require extra information from you that is stored digitally so they know where the VAT return is coming from:

  • Name of your business
  • Your business address or the main address for the business
  • VAT registration number
  • Any VAT accounting schemes you use

Making Tax Digital Deadlines

April 2022: Making Tax Digital for VAT

On the 1st April 2022 every VAT registered business has to sign up to the MTD scheme no matter what their turnover is. They will be required to use MTD compatible software that can connect to the HMRC systems. If you use more than one type of software or spreadsheets, these have to be digitally linked too.

April 2023: Making Tax Digital for Income Tax

On the 1st April 2023 anyone who is classed as self-employed as well as landlords who have an income of over £10,000 via their Self Assessment tax returns will have to register for the Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) scheme.

From April 2024 any Self Assessment and Income Tax returns will need to be submitted quarterly. Tax payment dates will remain the same as they are now.

April 2026: Making Tax Digital for Corpotation Tax

This will be the final tax to be included in the MTD scheme and you won’t see it happening before April 2026. There’s plenty of time to prepare. All businesses will have to maintain their own digital records. You will also be required to send quarterly updates of your income and expenditure to HMRC. Corporation Tax returns will have to be prepared and submitted using MTD compatible software.