Making Tax Digital (MTD) for VAT

MTD for VAT was mandated for most VAT-registered businesses with a taxable turnover above the threshold (£85,000) from 1 April 2019. The mandation of a small number of businesses with complex requirements was subsequently deferred until 1 October 2019. From 1 April 2022 all VAT-registered businesses must sign up for MTD, whatever they earn.

Although the full transition to MTD for VAT will not be complete until April 2022, new rules on maintaining digital links from original transaction to tax return will be enforced from 1 April 2021 onwards. This means that businesses have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.

In summary, MTD requires businesses to maintain relevant information about sales and purchases in an electronic format, using "functional compatible software". This means a software programme which allows information to be recorded in an electronic form which sends and receives information to/from HMRC using the API platform (including API-enabled spreadsheets). It is possible to use more than one software programme but there must be a digital link between them.

Broadly, the functions of the compatible software must include:

• Keeping records in a digital form as required by regulations.
• Preserving digital records in a digital form as required by regulations.
• Creating a VAT return from the digital records held in functional compatible software and providing HMRC with this information digitally.
• Providing HMRC with VAT data on a voluntary basis.
• Receiving information from HMRC via the API platform in relation to a relevant entity’s compliance with obligations under the regulations.

Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records, or summary records from the spreadsheet, can exchange data digitally with HMRC.

The regular VAT penalty regime for missing any MTD obligations apply. Details on how to sign up to MTD for VAT can be found on the gov.uk website.