What is Making Tax Digital for VAT?

Definition of Making Tax Digital

Making Tax Digital for VAT (MTD) is the first major phase in the Making Tax Digital initiative, the government’s plan to introduce a fully digital tax system. From 1st April 2019, affected businesses will be required to store digital records and submit VAT returns via MTD-compatible accounting software.

Who does Making Tax Digital for VAT apply to?

All businesses with a taxable turnover above the VAT threshold will need to comply with the MTD for VAT rules set out by HMRC. In short, this means that these businesses must store all records and submit VAT returns from MTD-compatible accounting software from 1st April 2019. If a business’s turnover subsequently falls below this threshold, the business must continue to follow the MTD for VAT rules until it deregisters from VAT.

How will MTD for VAT work?

In MTD-compatible accounting software like FreeAgent, filing VAT returns should remain familiar from the customer’s point of view. However, there are many outdated accounting systems - such as basic spreadsheets - which businesses will no longer be able to use.

The system you use to store accounting records and submit VAT returns will need to be API enabled. In other words, it will need to have the technology to communicate with HMRC’s systems.

Making Tax Digital for VAT exemptions

Only businesses with a taxable turnover that has never exceeded the VAT threshold will be exempt, unless they meet the other exemption criteria for Making Tax Digital. These businesses, however, can still join voluntarily to make use of the new streamlined Making Tax Digital for VAT submission process.

Businesses with an accounting year that doesn’t match the financial year

If a business has a VAT period that spans the 1st April 2019 start date, the VAT return for this period won’t fall under MTD. In this case, the return for the next VAT accounting period will be the first to be completed using MTD-compatible software.

For example, if a business’s VAT quarter runs from 1st March to 31st May 2019, the VAT return for this period won’t need to be an MTD submission. The business’s first compulsory MTD VAT submission would instead be for the following quarter, ending 31st August.

Soft landing period

There will be a “soft landing” period between 1st April 2019 and 1st April 2020. During this time, HMRC have advised they will be lenient with penalties if businesses have made sufficient efforts to comply.

Looking for advice?

If you have an accountant, they’ll be the best person to advise you on how to proceed. If you need an accountant, you can find one in our FreeAgent Accountants Directory.

Got questions? Ask Emily!

FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.

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