Making Tax Digital

The first stage of HMRC's Making Tax Digital (MTD) programme focuses on VAT and imposes new requirements on some VAT registered businesses and organisations from April 2019.

From April 2019 VAT registered businesses and organisations with taxable turnover above the VAT threshold of £85,000 will be required to:

  • Maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records will cease to meet the legal requirements in tax legislation.
  • Submit their VAT returns to HMRC using a functional compatible software product that can access HMRC’s API (Application Program Interfaces) platform.

The requirements do not apply to VAT registered businesses with taxable turnover below the VAT threshold (e.g. those that have registered voluntarily).

HMRC has announced a deferral to the start date of 6 months for some more complex businesses – details below.

Businesses within scope of MTD for VAT will need to acquire a suitable commercial software product or appoint an agent to submit returns to HMRC on their behalf.

HMRC’s online VAT return will remain available only to businesses that are not within the scope of MTD for VAT (e.g. businesses that complete a VAT return but have taxable turnover below the VAT threshold).

No changes are being made to:

  • VAT rules other than those that relate to record keeping and filing.
  • The amount of information submitted to HMRC; the VAT return will contain the same nine boxes that it does currently though the regulations do allow for additional information to be submitted on a voluntary basis.
  • The current filing and payment deadlines for VAT

Who's in?

The MTD for VAT requirements will apply to VAT registered businesses and organisations with turnover above the VAT threshold of £85,000. This includes unincorporated businesses, partnerships, companies, LLPs, trusts, non-UK businesses registered for UK VAT and charities.

VAT registered businesses with turnover below the VAT threshold can opt in to MTD and file their VAT returns using MTD compatible software but there is no obligation to do so.

A six-month deferral will apply to around 40,000 of businesses who fall into one of the following categories:

  • trusts
  • ‘not for profit’ organisations that are not companies (this includes some charities)
  • VAT divisions
  • VAT groups (the deferral applies to the group registration only and not to any group companies that are not covered by the group registration)
  • public sector entities that are required to provide additional information alongside their VAT return (such as Government departments and NHS Trusts)
  • local authorities and public corporations
  • traders based overseas
  • those required to make payments on account
  • annual accounting scheme users

These businesses will be mandated to use MTD from October 2019. HMRC has sent an individual letter to each deferred business to advise them that their start date is the beginning of the first VAT accounting period starting on or after 1 October 2019 rather than 1 April 2019. These letters include formal legal notification of the deferral of the start date and any business that wishes the deferral to apply must ensure that they receive the letter and should retain it carefully. A deferred business that does not receive a letter should contact the VAT helpline.

To calculate taxable turnover you should:

  • include standard rated, reduced rated and zero-rated supplies
  • exclude outside the scope and exempt supplies

The period to be considered when determining whether taxable income exceeds the £85,000 for MTD for VAT purposes is the year to the end of any month (i.e. a rolling 12 months). When the threshold is exceeded for the first time the business must comply with MTD for VAT from the beginning of its next VAT accounting period. When MTD for VAT begins the relevant periods to consider for businesses that file quarterly are:

VAT stagger group

First MTD VAT return

Check taxable turnover for

Mar/Jun/Sep/Dec

Quarter ended 30 June 2019

12 months ended 31 March 2019 

Apr/Jul/Oct/Jan

Quarter ended 31 July 2019

12 months ended 31 March 2019 and

12 months ended 30 April 2019

May/Aug/Nov/Feb 

Quarter ended 31 August 2019

12 months ended 31 March 2019 and

12 months ended 30 April 2019 and

12 months ended 31 May 2019

Voluntarily registered businesses that have not opted into MTD for VAT will need to continue to monitor their turnover to establish when they need to start complying with the MTD for VAT requirements.

Businesses that newly register for VAT (compulsorily) will need to consider how they will comply with the MTD for VAT requirements and will have very limited time in which to comply.

Once a business is required to comply with the MTD for VAT requirements, the obligations continue, even if the taxable turnover of the business subsequently drops below the VAT threshold.

Eventually, MTD for VAT may be extended to all VAT registered businesses, but this will not happen before April 2020 at the earliest.