MTD and VAT - Making Tax Digital in 2022

Making Tax Digital (MTD) is the UK government’s long-term plan to modernise the tax system of the country, making the system more effective and efficient – ultimately, it aims to make it easier for businesses and individuals to get their taxes right.

VAT is one of the least understood of all taxes, which may be surprising because it is also one of the most widely paid, accounting for around a third of all tax revenue in the UK.

Is MTD compulsory for VAT?

MTD has been compulsory for VAT registered businesses whose taxable turnover is greater than the VAT threshold (£90,000 from 1 April 2024) since legislation introduced the requirement for businesses to keep their VAT records digitally and submit VAT returns using functional compatible software.

MTD will be compulsory for VAT registered businesses and organisations from 1^st April 2022, whatever their turnover. This will impact hundreds of thousands of small businesses and sole traders who are registered for VAT voluntarily due to their taxable turnover being less than the VAT registration threshold.

Small businesses will no longer be able to submit VAT returns manually through the HMRC online service for VAT return periods commencing on or after 1st April 2022.

What VAT records will need to be kept digitally?

Under the rules of Making Tax Digital, businesses are responsible for keeping digital records of the following information:

Information about your business

• Your business name,
• The address of your primary place of business,
• Your VAT registration number
• A record of any VAT accounting schemes that your business uses

Information about sales

• Invoice dates
• Value of sales
• Rate of VAT applied to sales

Information about your purchases

• Invoice date
• Invoice value
• The amount of VAT claimed

Who is exempt from MTD for VAT?

There are some exemptions where VAT registered businesses do not need to follow the Making Tax Digital rules.

• If the business or organisation uses the VAT GIANT service – examples of these include government departments.
• If a business or organisation successfully applies for an exemption because they are considered ‘digitally exempt’. Each exemption request will be reviewed on a case-by-case basis by HMRC.
• If a business or individual is subject to insolvency procedures.

What is MTD Functional Compatible Software?

MTD functional compatible software is software that allows businesses to record and preserve the digital records as mentioned above in an electronic format, and to submit and receive information directly to and from HM Revenue & Customs (HMRC).

Examples of MTD compliant software

• Xero
• Quickbooks
• Sage (v24)

How do you submit a MTD VAT return?

An MTD VAT return can be submitted directly from a spreadsheet, using bridging software, through the MTD portal provided by HMRC, or by using a functional compatible accounting service, such as Xero.

When using a piece of commercial accounting software, the process of submitting an MTD VAT return will vary. We suggest consulting software support or speaking to Shorts if you have questions about submissions using a specific piece of software.

Do you need assistance with a VAT return?

We strongly recommend upgrading your accounting process for VAT to MTD as soon as possible if you haven’t already.

VAT is a complicated tax, and getting it right is crucial. The Shorts VAT team can help with all areas of VAT, including initial registration, the completion and submission of VAT returns, and advice on how to correct errors and mistakes.

Our Genus team are also Xero Platinum Partners and are one of the top 2% of Xero partners for certified advisors and clients.

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