Making Tax Digital for VAT: Your Questions Answered


Those running small businesses or running their own companies may recently have started to think about HMRC’s new tax digital scheme. The MTD for VAT accounting schemes were announced a few years ago, but with the pandemic and Brexit, many are confused about making tax digital for VAT schemes and what it means for them.


What is Making Tax Digital?

Making Tax Digital for VAT or MTD for VAT is a relatively new system launched by HMRC. It aims to make tax returns and financing easier for businesses by putting it all online and digitizing it. Since April 2019, VAT registered businesses with annual profits exceeding the VAT threshold of £85,000 have been using this system for their VAT returns and records. Now, from April 2022, any VAT registered businesses will have to do the same.

HMRC claims that these rules will make it simpler for businesses to keep on top of their taxes, financial and business records. Auditox Accountancy`s Newcastle branch have said they have had an influx of new customers and that many people were unhappy with the forced digitization of their finances, claiming that it adds more steps and effort to an already convoluted process. At the same time, it does make small businesses more innovative.


Is Making Tax Digital just for VAT?

For now, sole traders can relax. Making Tax Digital is only mandatory for VAT registered businesses, not self-employed sole traders. Sole traders instead must register online or via post for a Self Assessment form, wherein they can then complete a tax return to ensure they pay the right income tax.

However, from 2024, sole traders will also have to register for Making Tax Digital in order to fulfill their tax returns. For those interested, sole traders can currently try out digital tax returns through HMRC’s Making Tax Digital service. Sole traders can volunteer for the service to allow HMRC to test out the service and fix anything prior to the expansive rollout in 2024.


Do I have to submit VAT returns digitally?

At the moment, the VAT rules state that any VAT registered businesses have to file VAT returns online before the VAT deadline. Not doing so may lead to you and your business receiving a fine from HMRC. The fines are currently calculated using a point-based system. This allows people to make a few accidental mistakes when submitting their VAT returns, or to accidentally miss the deadline without receiving a fine. But if you consistently make such mistakes, you will receive a notice and a fine from HMRC.


Can you opt-out of MTD for VAT?

Most businesses and companies will not be able to opt-out of making tax digital. You will have to find a way to implement MTD in your accounting process in order to stick to the VAT rules. However, certain people may be exempt from having to register for MTD, such as older business owners, disabled people or those who live in remote locations and may be unable to rely on a consistent internet connection. There are also exemptions available for people who are unable to use computers for religious reasons.

If you believe that you might have a cause for exemption from the making tax digital VAT schemes, it might be worth contacting HMRC and filing for an exemption.


How to submit VAT returns digitally

MTD for VAT requires businesses to submit their VAT returns using accounting software that is able to connect to HMRC’s systems. You may also need to use a bridging software to convert VAT information into the correct format.

To submit VAT returns digitally, agents or businesses need to register for MTD for VAT.


How to register for MTD for VAT as an agent

  1. Check when your client must sign up for MTD
  2. Find and download the correct software. You will need one that is compatible with HMRC and also allows you to sign in using the Agent Services account
  3. Create an Agent Services account which will allow you to administer MTD for your clients. You will only be able to do this if you’re registered as an agent already.
  4. Link your VAT clients to your Agent Service account

This will allow you to file VAT returns for all of your clients.


How to register for MTD for VAT as a business

  1. Log into your Government Gateway account (or create a Government Gateway account)
  2. Provide HMRC with your Government Gateway and password, your company’s VAT registration number, your VAT accounting records the date you became a VAT registered business and the amount of your last VAT return.
  3. HMRC will confirm your details and within 72 hours will confirm your registration.
  4. You will then need to activate MTD for VAT on your accounting software using details provided by HMRC


How to submit a VAT return

When it comes around to time to submit your VAT return, you will need to file your VAT return via your accounting software programs. This will usually be under an option like “create VAT report” or something similar.

Once the report is created, check over the file for any errors, and then tell your accounting software to submit the VAT return to HMRC.


Which software programs can be used to file VAT returns?

There are plenty of accounting software options available that are recognised by HM Revenues & Customs. Some of the most highly recommended software programs for VAT submission are:

  • QuickBooks

£20 a month, QuickBooks is a great all-rounder for all of your accounting needs.

  • Xero

£10 to £30 a month, provides the ability to take photographs of bills and receipts to extract data.

  • FreshBooks

£19 a month, helps to produce estimates and proposals.

  • Sage

£12 to £36 a month for an above average, well-liked and recommended software.

  • FreeAgent

£19 to £29 a month or free to NatWest, RBS or Ulster Bank business customers.