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Making Tax Digital for VAT: Your guide to MTD for VAT

November 7, 2022
Making Tax Digital is officially underway, with April 2022 marking the full rollout of its first phase: Making Tax Digital for VAT.

If you’re a newly VAT-registered business owner, you might be wondering what this means for you. Read on to find out.

Making Tax Digital for VAT: Key points

Pressed for time? Not to worry — here are the main things you need to know about Making Tax Digital for VAT:
    Making Tax Digital for VAT, or MTD VAT, is a government initiative introduced by HM Revenue and Customs (HMRC) designed to make storing VAT records and filing VAT returns easier for self-employed business owners while reducing the number of errors made in returns.Initially launched in April 2019 at VAT-registered business owners earning above the VAT registration threshold, as of April 2022 all VAT-registered business owners must comply with MTD for VAT rules, unless exempt.To be compliant, business owners under this scheme must file VAT returns using MTD-compliant software, such as accounting software or bridging software and store tax records using digital software.

What is Making Tax Digital for VAT?

Making Tax Digital is a government initiative designed to make simplify tax returns by using digital links to send tax data from digital software to HMRC’s systems.
Making Tax Digital for VAT is the first phase of this rollout, with all VAT-registered business owners now required to store digital records and file their VAT returns using MTD-compatible software (such as Ember).

Who does MTD for VAT apply to?

As of April 2022, all VAT-registered business owners are required to comply with MTD for VAT.
When the scheme first launched, only VAT-registered business owners earning above the £85,000 VAT registration threshold were required to comply.

However, from April 2022 onwards all VAT-registered business owners are required to comply, irrespective of their taxable turnover. This includes those earning below the threshold who chose to register for VAT on a voluntary basis.

Can I be exempt from MTD for VAT?

If you’re not already exempt, you can apply for exempt if you meet the exemption criteria set by HMRC. This is applicable across all areas of MTD, so if you’re exempt from MTD for ITSA you’ll be exempt from MTD for VAT, and visa versa.You can apply for an exemption if it’s not reasonable or practical for you to use MTD-compatible software, computers or the internet for any of the following reasons:
    Age, disability or where you liveYou object to using computers on religious groundsAny other valid reason
If you’re eligible for exemption, you can apply by calling or writing to HMRC. When making your application for exemption, you’ll need:
    Your VAT registration number Your business name and address Details of how you currently file your VAT return Why you think you’re eligible for exemption
HMRC considers each application on a case by case basis, and will send a letter with their decision once they’ve reached a verdict. Even if you’re positive your application will be successful, keep filing your VAT returns the way you usually do, otherwise you may be fined.

What happens if I don’t comply with MTD?

Failure to comply with MTD for VAT could see you facing a fine.As of January 2023, HMRC is introducing a points-based system that means only those who regularly make mistakes and miss deadlines are fined.Every time you miss a submission deadline, HMRC will inform you that you’ve received a point. After a certain number of points, you’ll be charged a £200 penalty. After that, every late submission will land you a penalty, although your points won’t increase in number.Your penalty threshold will be determined by how often you file your returns, and is as follows:
Submission frequencyPenalty threshold
Annual2 points
Quarterly4 points
Monthly5 points
You can get more information on the points system over at GOV.UK.

How to prepare your business for MTD for VAT

If you’re on the verge of surpassing the VAT threshold or are plan on registering your small business voluntarily, you’ll need to start preparing your business for MTD for VAT.To make sure you’re ready for MTD for VAT, you’ll need to complete these 3 easy steps:
    Check when you need to registerFind the right MTD-compatible softwareRegister your business with HMRC

Check when you need to register for MTD

If you plan on registering your business for VAT, you’ll need to start following MTD requirements immediately. This is due to the latest update in MTD for VAT legislation, stating all VAT-registered business owners must register for VAT, regardless of turnover.You’ll need to register for VAT if:
    Your total VAT taxable turnover for the last 12 months was above £85,000You expect your turnover to go over £85,000 in the next 30 days
If the following apply, you’ll also need to register your business for VAT, irrespective of your taxable turnover:
    You’re based outside the UKYour business is based outside the UKYou supply any goods or services to the UK (or expect to in the next 30 days)
If you register your business late, you’ll need to pay VAT on any sales you’ve made since the date you were supposed to register, and may need to pay a penalty.
To register for VAT, you’ll need to sign up for a VAT online account. In doing so, you’ll be registering for VAT and creating a own Government Gateway account, which you’ll use to submit your VAT returns to HMRC.

After you’ve successfully registered your business for VAT, you’ll receive the following:
    A 9-digit VAT number which you’ll need to include in future invoices issuedInformation on when to file your first VAT return and when to pay your VAT billConfirmation of your registration date, otherwise known as your ‘effective date of registration’

Find the right MTD-compatible software

Before you can register for MTD for VAT, you’ll need to make sure you have the right MTD-compatible software for your business close to hand.

There are 2 software solutions that business owners can adopt to ensure they’re meeting the requirements set under MTD for VAT: a spreadsheet-and-bridging software combination, or an all-in-one accounting software.

Bridging software is a popular choice for those who need to comply with MTD for VAT, but aren’t too keen to go entirely digital from the get-go. With this solution, business owners can store their VAT records in spreadsheets and send them directly to HMRC using MTD-compatible bridging software.
Alternatively, business owners can opt to use MTD-compatible accounting software — such as Ember. Not only can you store your VAT records securely, but you can also automatically generate, review and submit your VAT returns directly to HMRC directly from the app.

Register for Making Tax Digital with HMRC

If you’re VAT registered and have MTD-compatible software at the ready, you’re now ready to register for MTD for VAT.

To register, you’ll need your:
    Business email addressGovernment Gateway user ID and passwordVAT registration number and latest VAT return
Depending on your business structure, you’ll also need your:

After you’ve signed up, you’ll get a notification from [email protected] within 3 days (don’t forget to check your spam folder!). If you haven’t received an email within this timeframe, you can contact HMRC.

What records do I need to keep under MTD for VAT?

To make sure you’re paying the right amount of tax, HMRC requires you to keep records of the following
    Everything you buy and sell, including zero-rated, reduced and VAT exempt itemsCopies of all invoices issuedEvery invoice you receive, whether that’s paper or digitalSelf-billing agreements (where the customer prepares the invoice) and the name, address and VAT number of any self-billing suppliersDebit or credit notesAny goods you give away or take from stock for private useGeneral business records, such as bank statements, cash books, cheque stubs, paying-in slips and till rolls
To stay compliant with MTD for VAT, you’ll need to store the following records digitally:
    VAT on the goods and services you supply (supplies made)VAT on the goods and services you receive (supplies received)The ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sellAny adjustments you make to a returnReverse charge transactions — where you record the VAT on both the sale price and the purchase price of goods and services you buyAny VAT accounting schemes you useYour total daily gross takings if you use the retail schemeItems you can reclaim VAT on if you’re on the Flat Rate SchemeYour total sales, and the VAT on those sales, if you use the Gold Accounting Scheme
You’ll also need to keep digital copes of transactions made on behalf of your business by charity fundraising volunteers, third party businesses and employees for petty cash expenses.

Is Ember compatible with Making Tax Digital for VAT?

Yep! Not only are we HMRC approved, but our slick software means you can generate, review and send VAT returns to HMRC in a handful of clicks.If you’re pressed for time, or are worried about making a mistake on your return, you’re in luck — at Ember, we have a team of qualified accountants who can draft and file your VAT return for you.

Join us in creating the new age of accounting.

Simple language, simple software, so that you can spend less time dealing with admin and more time focusing on what really matters.