How to set up your practice and clients for Making Tax Digital for VAT
Making Tax Digital (MTD) for VAT came into effect for most businesses with VATable sales above the VAT threshold in April 2019. This means you now need to submit MTD VAT returns on behalf of these clients using compatible cloud accounting software. From April 2022, you will also need to do this for clients with VATable sales below the VAT threshold.
This guide explains exactly what you need to do to get set up for MTD for VAT with HMRC, and then submit MTD VAT returns for your clients through FreeAgent.
The next phase of MTD for VAT
HMRC no longer accepts VAT submissions made using the XML facility. This means that accountants who use accounting software to submit their clients’ VAT returns must do so via the software's MTD connection. In FreeAgent, you can do this by following the steps outlined below.
The scope of Making Tax Digital for VAT will expand in 2022. VAT-registered businesses with a taxable turnover below £85,000 will need to follow Making Tax Digital rules for their first VAT return starting on or after 1st April 2022.
Setting your practice up for MTD
1. Create an agent services account
Creating an agent services account for your practice will generate a new Government Gateway ID which will give your practice access to HMRC’s MTD services. A practice will only ever have one set of credentials for MTD and you will need to keep hold of any existing Government Gateway IDs you use to access HMRC’s other online services.
If you’ve signed up for the Trust Registration Service (TRS) you may already have an agent services account in place. If this is the case, you don’t need to create a new account; simply log in and follow the steps outlined below.
2. Copy existing client relationships to your agent services account and request authority for new clients
The next step is to log in to your agent services account and add all of your practice’s existing Government Gateway credentials for VAT filing on behalf of clients. This will copy the authority your practice currently has for VAT filing to its agent services account.
If you have multiple sets of credentials you will need to add them all to your agent services account in order to link the authority for all your existing clients.
You should request authority to file MTD VAT returns on behalf of any new clients directly from your agent services account. Note that these clients must have a Business Tax Account (BTA) in place in order to authorise a new agent relationship.
3. Authorise your MTD-compatible software
Once you’ve successfully created your agent services account you can use the new credentials you have received to connect your software with HMRC. If you’re using FreeAgent you should:
- Log in to your Practice Dashboard and navigate to ‘Settings’
- Select ‘HMRC Connections’
- Follow the on-screen instructions
Seeing a ‘403 error (Client or Agent not authorised)’ message?
If you encounter a ‘403 error (Client or Agent not authorised)’ message during any part of the setup process, HMRC recommends that you check:
- that you have agent services account (ASA) credentials in place
- that you have used the correct agent services account (ASA) credentials to link your MTD software (if this is not the case, you will need to disconnect from the software and then reconnect with the correct credentials)
- that you have copied your authorisation to file VAT on behalf of the client to your agent services account (as outlined in step 2 above)
- that the client is signed up to MTD (see guidance below)
Need some help getting ready for MTD?
Once your practice is set up for MTD VAT filing, you need to sign your clients up to MTD with HMRC and then complete the setup of your software.
Signing clients up to MTD with HMRC
Before you get started, please note that once a client is signed up to MTD with HMRC, their next VAT return must be made using MTD-compatible software!
When you’re ready to sign clients up to MTD, visit the gov.uk signup page and then enter:
- your practice's Government Gateway ID and password for MTD services - these are the credentials you generated when you created your agent services account
- each agent Government Gateway user ID used by your practice for your VAT clients
- each client’s VAT registration number
- additional information about the client's business
- the client's email address
You should then receive an email from HMRC confirming that your client has been signed up for MTD. HMRC will email again to let you know when you can start using MTD software to submit the client’s VAT return. This second email should arrive within 24-72 hours of the first.
If you attempt to make a submission during this 24-72 hour period you may encounter a ‘500 (Internal Server Error)’ message. If you still see this error message after the 72 hour period has expired, you should report it to HMRC.
Clients can also sign themselves up to MTD.
Switching to MTD filing in FreeAgent
The final stage of the process is to complete the setup of your MTD-compatible software. To do this you will need to have added all your clients to the software you plan to use for MTD filing.
If you’re not using FreeAgent already, a wide range of tools and support is available to help you add your clients to the software smoothly. Our in-house experts will be happy to talk you through the options during a consultation.
Once you’ve added all your clients to FreeAgent, you should then:
- Navigate to ‘My Clients’ from your Practice Dashboard and select a client’s name from the list.
- Select ‘Switch to MTD filing’. This will allow you to submit MTD VAT returns from FreeAgent on that client’s behalf. Please note that once filing for a client has been switched to MTD, it cannot be reverted so make sure the client has been signed up to MTD before completing this step.
- Once the client has been successfully switched to MTD filing you’ll see a message confirming this.
- Repeat this process for all your VAT-registered clients in FreeAgent.
Clients with full (level 8) access to FreeAgent can complete this process themselves by following the steps outlined in our Knowledge Base. However, you may prefer to do this on their behalf instead. Clients with lower levels of access will not have the option to do this themselves.