MTD VAT – What is Making Tax Digital? Everything business owners need to know

Has your business recently started to turnover more than £85k a year? Or are you considering registering for VAT voluntarily?

If yes, then changes to the way the government collects VAT payments apply to you.

In this blog, you’ll learn everything you need to know about Making Tax Digital VAT (MTD VAT) and how we can help you to manage your VAT returns.

What is Making Tax Digital VAT?

Making Tax Digital VAT (MTD VAT) is the first step in the government’s plan to digitalise the way we pay our taxes.

Since its introduction, eligible businesses have had to record their finance and submit their VAT returns to HMRC every three months using government-approved software such as Sage, Xero and Quickbooks.

When did Making Tax Digital VAT start?

MTD VAT was first introduced in April 2019. From that date, all VAT-registered businesses with a turnover of more than £85k were required to use the system to submit their VAT returns.

The second phase of the scheme rolled out in April 2022 when it became law for every VAT-registered business – including those under the £85k threshold – to register for the system.

When to sign up for MTD VAT?

If you haven’t already registered – but have a turnover of more than £85k – you need to sign up for MTD VAT.

If you pay your VAT by Direct Debit (DD) you should avoid signing up too close to your VAT return due date or you could end up paying twice.

To avoid this, we recommend signing up either seven days before or five days after your VAT return is due.

If you don’t pay by DD, you can sign up at least three days before your return is due. 

Once you’ve signed up, you’ll also need to activate the MTD VAT feature in your accounting software.

What does Making Tax Digital VAT involve?

Once registered for MTD VAT, you must keep digital records of all your sales and purchases using government-approved software.

You also have to keep a separate record of the VAT you charge and pay, any VAT you owe HMRC and a record of VAT you can reclaim.

What software is required for Making Tax Digital VAT? 

The government has issued a list of hundreds of compatible software services. We recommend using Sage, Xero or Quickbooks.

Opting out and MTD VAT exemptions

​​Once you’ve registered for MTD VAT, you can only opt out if your turnover drops below the VAT threshold and you de-register for VAT. 

However, in some cases, exemptions from the system apply.

For example, you don’t have to use MTD VAT if you’re already exempt from filing VAT returns online or if you or your business is subject to an insolvency order.

You can also apply for an exemption if your age, a disability or where you live makes it difficult to use computers, software or the internet. Or if you object to using computers on religious grounds.

Exemption is not guaranteed though and HMRC will look at each case individually.

What you’ll need when you sign up for Making Tax Digital VAT

When you register for MTD VAT, you’ll need the following information: 

• A Government Gateway account, user ID and password
• Your business email address
• Your VAT registration number
• Your latest VAT Return
• Your National Insurance number if you’re a sole trader
• Your company registration number and Unique Taxpayer Reference (UTR) if you’re a limited company

You’ll also need government-approved software – such as Sage, Xero or Quickbooks – to track your digital records and submit your VAT Returns.

What are the benefits of Making Tax Digital VAT?

Although it may seem daunting to switch to MTD VAT, there are lots of benefits.

They include: 

• Easier accounting. Once you get set up on the right software, keeping track of your income and outgoings will be much easier
• Less stress. Submitting your returns digitally is quicker and way less stressful than doing it manually
• Less room for error. By switching to digital accounting you’re less likely to make mistakes that could result in penalties
• A clearer understanding of your finances. Using accounting software makes it easier to see your finances at a glance
• No more paperwork. When you switch to digital accounting you can say goodbye to piles of messy paperwork around your office
• Save time. Digital accounting can save you up to a day a week in admin, which means you’ll have more time to serve your customers and make more money

Are MTD VAT and Making Tax Digital Income Tax Self Assessment (MTD ITSA) the same?

No, MTD VAT and MTD ITSA are different.

MTD ITSA – which launches in April 2024 – will require self-employed people and landlords with an income of more than £10k a year to submit their tax returns digitally every quarter. 

If you already pay MTD VAT, you’ll also have to use MTD ITSA from April 2024.

Our blog, What Is Making Tax Digital? The Must-Read Guide For Business Owners will tell you everything you need to know.

How we can help you get ready for MTD VAT

At Angel Bookkeeping and Payroll Service, we’re specialists in MTD VAT. Using Sage, Xero and Quickbooks, we can help you at any stage of your journey. 

Whether you’re too busy to deal with it and want an expert to take it off your hands, are just starting out or simply hate dealing with the numbers, we’re here to support you.

Please call Aggie on 07867 129210 if you have any questions or if you’d like us to take care of your MTD VAT account.