Businesses urged to prepare for mandatory Making Tax Digital for VAT

Making Tax Digital

HM Revenue & Customs (HMRC) has reminded businesses to take steps to prepare for Making Tax Digital (MTD) for Value Added Tax (VAT) before it becomes mandatory for all VAT-registered businesses.

Launched in April 2019 for those with taxable turnover above the VAT threshold (£85,000 per annum), the system will be extended to VAT-registered businesses below the threshold from 1 April this year.

As of December 2021, nearly 1.6 million businesses have signed up for MTD. HMRC revealed that around a third of VAT-registered businesses with taxable turnover below £85,000 have voluntarily signed up to MTD for VAT ahead of April 2022, and thousands more are signing up each week.

The agency claimed that the MTD is designed to help businesses eliminate common errors and save time managing their tax affairs.

The system requires businesses to follow MTD rules, keeping digital records and filing VAT returns using MTD compatible software. HMRC asked businesses that have not yet signed up to MTD for VAT to do it immediately to ensure they are ready in time for the April 2022 deadline.

“MTD is fundamental to the delivery of a trusted and modern tax system, making it easier for businesses to get their tax right and supporting the UK to go digital,” Joanna Rowland, Director General for Transformation Group in HMRC, said.

“By signing up for MTD, we expect most businesses to experience long-term benefits, including reduced errors and time saved in managing their tax affairs. We encourage businesses to explore digital record-keeping for their VAT affairs and use this time to choose the right software to support their business needs.”

Businesses are being asked to ensure that they sign up to MTD at least 5 days after their last non-MTD VAT return deadline date, and no less than 7 days before their first MTD VAT Return deadline date or they may pay for the VAT twice.

Mike Cherry, national chair of the Federation of Small Businesses, has also urged businesses to sign up as early as possible.

“We have worked hard to ensure Making Tax Digital launch dates were adjusted to give small businesses more time to prepare and allow more competition to open up in the accounting software market,” he said. “It’s important that firms do all they can to get ahead of deadlines and access the affordable platforms that are now available.”

To sign up to MTD VAT, businesses, or an agent on a business’ behalf, need to:

  • Visit GOV.UK and choose MTD-compatible software
  • Keep digital records starting from 1 April 2022 or the beginning of their VAT period
  • Sign up and submit their VAT Return through MTD

Those who do not join may be charged a penalty for failure to do so. A list of software compatible with MTD for VAT, including low-cost options, can be found here. Businesses must have MTD-compatible software before signing up.

Some VAT-registered businesses may be eligible for an exemption from MTD. If a business has previously been granted an exemption for VAT online filing, this will carry over to MTD VAT requirements.

Last year, the government announced that MTD for Income Tax Self-Assessment (ITSA) will be introduced a year later and will now come into effect in the tax year beginning in April 2024, giving businesses more time to prepare.