Making Tax Digital: How to file a VAT return

A blurred screen with the writing Making Tax Digital in front of it

The rules on how to keep VAT records and submit VAT returns changed on 1 April 2019

It's all about Making Tax Digital - the government's plan to transform the way taxpayers communicate with HMRC.

Here's what you need to know to make sure you are compliant.

What is Making Tax Digital?

With Making Tax Digital, the government's long-term goal is for all taxpayers, including businesses, sole traders and landlords, to file their tax information using digital apps on a quarterly basis.

It's a big change. But Making Tax Digital is being introduced gradually - and it started in April 2019 with VAT returns.

What is Making Tax Digital for VAT?

Since 1 April 2019, all VAT-registered businesses with a taxable turnover above the VAT registration threshold (currently £85,000), have been required to submit their VAT returns using an approved app. This system is called Making Tax Digital for VAT.

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MTD for VAT affected more than one million businesses in the UK. Many of these businesses had to change the way they keep their VAT records and submit their VAT returns.

If your business is required to register for VAT, you will be required to keep digital VAT business records and send returns using MTD-compatible software. This software is likely to be a cloud-based app that you can use from your smartphone.

It means you will have input all your information to the app, but you will be able to communicate with HMRC at the touch of a button.

VAT-registered businesses had to report VAT quarterly before MTD was rolled out, so the frequency of the reporting has not changed. Nor has the information you must input. The big change was the fact that it became compulsory (with very limited exceptions) to use approved software.

Even if your taxable turnover drops below the VAT registration threshold, you will still have to keep digital records and submit your VAT returns using MTD-compatible software. However, this does not apply if you de-register from VAT or if you are exempt from MTD for VAT.

HMRC published a VAT Notice (VAT Notice 700/22) which explains the rules for Making Tax Digital for VAT.

When did the new HMRC rules for VAT start?

VAT-registered businesses have had to use HMRC-approved software to keep VAT records and submit VAT returns since 1 April 2019.

Does Making Tax Digital for VAT apply to me?

Making Tax Digital for VAT applies to all VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000).

If this is you, you must use an approved app to keep VAT records digitally and to submit your VAT return.

A small number of VAT-registered businesses with "complex requirements" had until 1 October 2019. But all VAT-registered businesses are now covered.

How do I choose the right accounting software for Making Tax Digital?

There is a wide range of accounting software solutions that are compatible with Making Tax Digital. These are all commercial products; most of them work on a subscription basis.

The first step is to make sure that your preferred software is what HMRC calls "functional compatible software". In other words, can it connect to HMRC via an Application Programming Interface (API)?

If you already use software to keep your business records, check with your software provider to find out if it is MTD-compatible.

There is a list of all MTD-compatible software on the government website.

What should I look for in an accounting app?

There are some key functions and services that you may need to look for when choosing software. These are some of the questions you should ask about accounting software:

  • Does it have VAT capabilities?
  • Does it automatically calculate the tax I owe?
  • Can it pull transaction data straight from my bank?
  • Can it also get information from my POS system?
  • Does it update my transactions every day?
  • Does it support payroll?
  • Can it handle different currencies?
  • Is training and support offered?

Can I carry on using spreadsheets for my VAT accounts?

The government has said that spreadsheets can be a part of digital record-keeping under Making Tax Digital. However, they must be digitally integrated spreadsheets.

How do I prepare my VAT accounts now?

Once you have selected your chosen MTD software, you need to start inputting all your usual VAT records into the app. Key VAT information includes:

  • The value of all the sales you have made, excluding VAT;
  • Details of all your purchases (excluding VAT);
  • The specific rate of VAT charged on individual sales and purchases;
  • The date of all transactions;
  • Any trade with EU countries;
  • The name of your business and its principle address;
  • Your VAT registration number;
  • Details of any VAT accounting schemes you use.

How much does MTD-compatible software cost?

Most MTD-compatible software solutions operate on a subscription basis. Costs vary but most packages cost between £10 and £30 a month, depending on functionality. For more basic spreadsheet bridging software there are a few cheap options from £15 for a year, or even possibly free software.

There maybe some additional set-up costs for your business. You may want to invest in a new laptop or a better smartphone for example. You will also need to consider the time it takes you to input information into the new system.

Does Making Tax Digital affect how I use my accountant?

If your accountant normally files your VAT return for you, your accountant is an "agent" who is acting on your behalf. Accountants can continue to make VAT submissions on behalf of their clients; they will be able to file other types of MTD return in the future as well. You just need to authorise them to act on your behalf.

It is also possible to input all your VAT information into an approved app yourself but then ask your accountant to check it before they submit it to HMRC.

If, like a lot of small businesses, you file your own VAT returns, then an accountant will be able to guide you when choosing the right software.

How will Making Tax Digital affect my business in the long term?

If you're not VAT-registered, you're probably breathing a sigh of relief right now. But in time, Making Tax Digital will apply to other taxes including corporation tax and income tax eventually. So you'll need to start using an accounting app eventually anyway.

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