What Do I Need to Do for Making Tax Digital?
Prepare your business for Making Tax Digital. This comprehensive guide simplifies the transition to digital tax reporting, ensuring smooth compliance.
Making Tax Digital (MTD) is a government initiative in the United Kingdom designed to modernize the tax system. It aims to streamline tax administration for greater efficiency and simplicity for taxpayers. MTD reduces errors from manual record-keeping and submissions by shifting towards digital processes. The goal is to create a more integrated and accurate tax system.
Understanding MTD Compliance
Making Tax Digital for Value Added Tax (VAT) mandates compliance for businesses. MTD for VAT became compulsory from April 1, 2019, for VAT-registered businesses with taxable turnover exceeding the £85,000 threshold. These businesses had to maintain digital records and submit VAT returns using MTD-compatible software.
From April 2022, MTD for VAT became mandatory for all VAT-registered businesses, regardless of their turnover. This includes businesses below the £85,000 threshold. They must keep digital records of VAT transactions and submit returns directly to His Majesty’s Revenue and Customs (HMRC) via MTD-compliant software. Exemptions exist for those digitally excluded due to age, disability, location, or for certain religious societies.
Selecting MTD-Compatible Software
Choosing MTD-compatible software is a practical step for compliance. Businesses can select from two main types: full accounting software packages or bridging software. Full accounting software offers comprehensive features, managing income, expenses, invoicing, bank feeds, and VAT returns within a single system. This option suits businesses seeking an all-in-one financial management solution.
Bridging software links existing spreadsheets or non-compatible accounting tools to HMRC’s systems. This allows businesses to continue using their preferred spreadsheets for record-keeping while still meeting MTD submission requirements. It is often a cost-effective choice for smaller businesses or sole traders. Ensure selected software is listed on HMRC’s official list of recognized providers.
Key considerations when evaluating software include its ease of use, cost, and customer support. Integration capabilities with other business tools, such as banking or payroll systems, can enhance efficiency. Many MTD-compatible software options offer automated VAT calculations and real-time financial reporting, which can simplify compliance and provide better financial oversight. Selecting software that aligns with a business’s operational style and future growth plans is important for long-term effectiveness.
Preparing Your Digital Records and Software
Once MTD-compatible software is chosen, preparing digital records and setting up the software are the next steps. Digital records must encompass all VAT-related transactions, including sales, purchases, and any VAT charged or reclaimed. Important designatory data, such as business name, address, VAT registration number, and details of any VAT accounting schemes used, must also be digitally maintained.
Maintaining these records digitally requires accuracy and completeness, ensuring a clear audit trail from individual transactions to the final VAT return figures. HMRC requires “digital links” between different parts of the record-keeping process, meaning data transfer between systems must occur electronically without manual intervention. Businesses should establish routines to regularly update their digital records, ideally as transactions occur, to ensure they are always current.
Setting up the chosen MTD software involves linking it to HMRC. This begins with signing up for MTD with HMRC and receiving confirmation of enrollment. Businesses then authorize their chosen software to interact with HMRC’s systems by logging in with their Government Gateway user ID and password. This authorization establishes a secure connection, which may require re-authentication periodically, typically every 18 months. Existing financial data can then be imported into the new software, completing the preparatory phase for MTD compliance.
Submitting VAT Returns through MTD
After selecting and setting up MTD-compatible software and ensuring digital records are maintained, the final stage is submitting VAT returns. The process of generating and submitting a VAT return through MTD software is streamlined. Within the software, businesses can review the compiled VAT data, which is automatically calculated from the digital records.
Before submission, meticulously cross-check all entries and figures for accuracy. Once the data is verified, the software facilitates the direct submission of the VAT return to HMRC. This direct digital submission replaces the previous method of manual entry via the HMRC online portal, which is no longer permitted for MTD-mandated businesses.
Upon successful submission, the MTD software typically provides instant confirmation. HMRC also sends a confirmation, often including a unique receipt ID, which serves as proof that the return has been received. VAT returns are generally submitted quarterly, adhering to specific deadlines. The entire process, from data compilation to confirmation, is handled within the MTD-compatible software environment, ensuring compliance with digital submission requirements.