The UK government has enforced VAT payment through the Making Tax Digital (MTD) service. Initially, it was mandatory for business owners who voluntarily registered for MTD. HM Revenue & Customs (HMRC) has recently stated that all businesses, including VAT-registered businesses, must follow the MTD rules from 2023.

If you're new to this, you might wonder, "What is Making Tax Digital?" In this article, we explain the term along with how to sign up, keep tax data online, and the aftermath of not following the rules. Keep reading to learn more about MTD.

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What is Making Tax Digital?

MTD is a government initiative to help self-employed individuals and small business owners complete digital tax returns and records procedures. The goal is to reduce errors by keeping digital records on compatible software.

In 2015, HMRC launched a digital tax account called Personal Tax Account. The intention was to maintain and check your personal tax records in one place and manage the tax system easily.

A similar scheme called Making Tax Digital for VAT was launched in 2019. Besides keeping business records digitally, landlords or small e-commerce owners can forward tax updates to HMRC rather than submitting self-assessment tax returns through this scheme.

In the future, tax legislation will demand digital records over paper documents.

What is Making Tax Digital for VAT?

What is MTD VAT? It started on 1 April 2019 and affected VAT-registered businesses with a VAT threshold of over £85,000.

From 1 November 2022, all VAT-registered businesses are encouraged to follow the Making Tax Digital rules. The rule is maintaining digital records with an MTD account and utilising the best MTD software for filing VAT returns.

MDT now replaces the previous systems, and you can no longer utilise the current VAT online account or file paper returns.

The Future Timeline of Making Tax Digital

From April 2023, the MTD rules will apply to all businesses, including UK landlords and non-VAT registered sole traders with property income or annual revenue of over £10,000.

On 6 April 2024, HMRC will introduce Making Tax Digital for income tax self-assessment to businesses.

And further ahead, the government has released a consultation about the design of Making Tax Digital for corporation tax. The planned implementation will be in 2026.

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What Happens If You Don't Follow the MTD Rules?

Not following the rules and meeting Making Tax Digital deadlines may warrant a fine. The HMRC aims to start a point-based system in January 2023, allotting points based on how regularly you submit VAT returns.

This way, MTD penalties will apply only to those who miss the VAT deadline.

What Records Do Businesses Need to Keep Digitally?

The requirements for the VAT return records have remained the same, but the location and process of storing documents have been improved. Here's what you need for the MTD VAT return record:

Tax paying date and time
Amount of tax
Tax rate

What Accounting Software can Keep MTD Records?

Your accounting software needs to be MTD-compatible. You can use bridging software with spreadsheets, but many accountants and small businesses prefer to use full-fledged tools, such as Link My Books (LMB).

Making Tax Digital software helps you store accurate tax data, identifies errors, notifies you about essential VAT rules and offers efficient support with additional features.

The process of sending records directly to the HMRC through your smartphone or computer is simple. You can also earn tax points and avoid penalties by submitting records regularly.

Benefits of MTD for VAT

Now that you know what MTD and MTD for VAT are, you may want to grasp the benefits. According to HMRC, all VAT-registered business owners with an existing VAT account will find it easy to submit MTD VAT returns.

The benefits of MTD for VAT are:

Quick VAT submission
Saves time by eliminating unnecessary paperwork
Fewer reporting errors
Improved accuracy of tax records

How to Sign up for Making Tax Digital (MTD)?

If you create an account for the first time, you’ll automatically register for MTD. First, you have to create an account on the main website. You’ll need the following to sign up for MTD for VAT:

Business email address and contact details
Govt. gateway login
Recent VAT return proof, including VAT number

A sole trader will also need their national insurance number. A limited company must have a company registration number and unique taxpayer reference.

A General and Limited Partnership entity should have a company registration number (for limited partnerships only), unique taxpayer reference, and registration postcode for self-assessment.

NOTE: If you pay tax through direct debit, consider signing up 7 days prior or 5 days after the return is due. Otherwise, you'll need to complete the tax return twice.

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Impact of Making Tax Digital on Businesses

The MTD for VAT accounting schemes impacts businesses considerably. Now owners and accountants need to use MTD-compatible software to manage MTD VAT records and accounts.

With less paperwork, paying the first MTD VAT return for small businesses has become simple and error-free. Future developments will see HMRC making paying corporation and income tax easier.

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Final Words

Making Tax Digital for VAT has been implemented to simplify tax affairs for self-employed and other businesses. Using MDT for VAT, you can pay taxes at the right time and send your records using electronic communications even when you're not in the office.

MDT allows you to quickly summarise VAT transactions, saving time from manually adding tax data on spreadsheets and dealing with papers. So, register now for Making Tax Digital for VAT and start keeping your records with Link My Books.

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