Step by step guide to Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT is legislation from HMRC that affects how all VAT-registered businesses must do their VAT accounting.

This is a guide on MTD for VAT for both businesses and agents. We look at what considerations you should make before registering.

Sage’s Making Tax Digital Hub is regularly updated with information, including a timeline of events, but here’s what we cover in this article:

• An overview of Making Tax Digital for VAT
• What was the April 2022 mandation of MTD for VAT all about?
• When should businesses start following Making Tax Digital for VAT?
• When should businesses file their MTD for VAT returns?
• Helping businesses comply with MTD for VAT as an agent
• What businesses need to do following automatic MTD for VAT sign up
• Final thoughts on Making Tax Digital for VAT

An overview of Making Tax Digital for VAT

With Making Tax Digital for VAT, if you have a business that falls within its scope, you must submit VAT Returns via software.

And you need to keep your VAT records digitally.

Essentially, MTD for VAT means you must use accounting software that can connect to HMRC’s systems to file a VAT Return (or use a computerised accounting process that can do so).

And with VAT Return filing deadlines on the horizon, it’s vital that you’re following the rules.

In fact, HMRC may have sent you an email or letter to highlight what you have to do now with regards to Making Tax Digital.

Since 1 November 2022, you can no longer use your existing VAT online account to file quarterly or monthly VAT Returns (although for certain businesses, HMRC have provided an extension. More details below).

According to TechRadar: “The best route to take for making the whole tax filing process even easier is to select a comprehensive accounting solution,”—and it’s chosen Sage Accounting as the ideal choice to fit that criteria.

What was the April 2022 mandation of MTD for VAT all about?

Making Tax Digital for VAT applies to all VAT registered businesses (apart from those that are digitally excluded).

Any businesses that were registered for VAT but below the VAT threshold (currently £85,000) didn’t have to follow MTD for VAT when the new legislation was first rolled out in April 2019.

But that changed in April 2022, when the mandation of MTD for VAT for those businesses began.

Running a VAT registered business and new to MTD for VAT?

Unless you’re exempt, you need to use follow the MTD rules from your first full VAT accounting period post-1 April 2022.

Note that using MTD for VAT-compatible accounting software doesn’t automatically mean you’re compliant.

Though you don’t need to register for the scheme (as HMRC does this automatically), you’ll need to make sure the feature is activated within your software, and that you’re keeping digital accounting records.

When should businesses start following Making Tax Digital for VAT?

The rule is simple for businesses new to MTD for VAT.

By law, assuming you are below the VAT threshold and are a ‘voluntary filer’, you need to start adhering to Making Tax Digital from the first day of your first VAT period that began on or after 1 April 2022.

Therefore, for example:

• If your VAT period had a 31 March 2022 end date, your first VAT quarter under MTD for VAT starts on 1 April 2022.
• If your VAT period has a 30 April 2022 end date, your first VAT quarter under MTD for VAT starts on 1 May 2022.
• If your VAT period has a 31 May 2022 end date, your first VAT quarter under MTD for VAT starts 1 June 2022.

And since 1 November 2022, you’ve no longer been able to file quarterly or monthly VAT Returns using your existing VAT online account, as this route has been decommissioned.

Now, you need to use MTD-compatible software to file your VAT returns. Make sure you’re doing that or you could face a penalty from HMRC.

(Do you file your VAT Returns annually? You should still be making every effort to submit in line with MTD, though HMRC has given a short extension for remaining business to get compliant by 15 May 2023.)

When should businesses file their MTD for VAT returns?

Don’t forget that a VAT return and payment must usually be filed within a calendar month plus seven days after the VAT accounting period ends.

However, you should always check the filing deadline for your business in your online VAT account at HMRC’s website.

What happens if I miss my submission date?

In the first year of Making Tax Digital mandation, HMRC took a ‘light touch’ to penalties.

Now it’s not doing this. You need to get things right from day one or you may face penalties.

Beginning in January 2023, a points-based late submission system will apply to MTD for VAT.

There’ll also be penalty charges if you pay more than 16 days late (or fail to agree to a Time to Pay arrangement with HMRC).

Helping businesses comply with MTD for VAT as an agent

If you’re an agent/accountant, there are several things you’ll need to do to help your clients comply with MTD for VAT.

Alternatively, if you’re using an agent/accountant for MTD for VAT, you should ensure their doing the following to support you.

Step 1: Get the right software

Make sure the software the business is using is compatible for MTD for VAT, allowing digital record keeping and direct VAT returns to HMRC.

If the current software isn’t compatible, support your client in choosing one that is.

HMRC offers a tool that lets you search for MTD-ready software, and both businesses and agents can use this. Notably, all key Sage products are compatible, including Sage Accounting.

Step 2: Create an agent services account

If you haven’t already, you need to create an agent services account.

This lets you administer Making Tax Digital on behalf of your clients (including both MTD for VAT and, when it arrives in 2024, MTD for Income Tax).

Before registering for an agent services account, you need to register with HMRC as an agent. This is a postal application rather than an online one.

Before you can apply to be an agent, you must have registered with a supervisory authority (or HMRC) regarding anti-money laundering. You may already have this in place via your chartered body (ACCA, AAT, CIMA, etc).

Step 3: Link existing VAT clients to your agent services account

If your client has already authorised you to file VAT Returns on their behalf before MTD for VAT, you need to copy them to your agent services account.

This can be done within the agent services account itself by selecting the appropriate option.

Step 4: Ask new clients to authorise you to link them

If a client has already been automatically signed up for MTD for VAT, perhaps before your involvement with them, you can use the agent services account to ask them to authorise you.

This creates an authorisation request (a web link) that you then email to your client. But you should take care because the link is time-limited and will expire if they don’t respond soon.

What businesses need to do following automatic MTD for VAT sign up

Here’s everything you need to know about how to register for MTD for VAT if you’re a sole trader, individual, incorporated business, or any other type of entity.

Step 1: Check your software

Make sure you’re using MTD compatible software that’s right for your business and will integrate with HMRC.

If your current software does not let you submit your VAT returns in this way, you’ll need to switch to a solution that does as soon as possible.

Step 2: Activate the MTD for VAT feature in your software

Once you have compatible software, check its VAT configuration and make sure the MTD for VAT feature is activated.

This is likely to be an ‘Enable MTD’, ‘Authenticate’ or similar option that’s located somewhere in the settings, options or feature menu area.

Speak to your software vendor if you’re unsure how to do this.

Step 3: Keep digital records

If you’re not already doing so, start keeping all accounting records digitally for current and future VAT returns using your software.

This is an essential requirement for MTD for VAT.

Step 4: Use your software all year round

Continue using your software throughout the year, including to file all future annual,  quarterly, or monthly VAT returns directly to HMRC. 

How to create and submit an MTD for VAT Return

When your VAT return date comes around, you need to file it via your business’s accounting software or bridging software.

You can file VAT returns in various accounting software packages—generally, you should look for an option to create a VAT report or return, or something similar, within it.

Suppose you’ve used the accounting software to record your VAT accounting over the previous period.

The report should be generated automatically—although don’t forget to enter any adjustments. Then you’ll probably need to tell the software to start submitting using the MTD process.

Creating and submitting an MTD for VAT Return using Sage Accounting

Here are the steps required to submit a Making Tax Digital for VAT Return using Sage Accounting:

1. While viewing your accounting summary, click the Reporting heading, and then click VAT returns.
2. Click the blue Create VAT return button.
3. Your dates are set automatically based on HMRC’s reporting requirements for your business. All you need to do is click the Calculate button.
4. Once the calculations are complete and the figures are displayed, you might need to make adjustments. To do so, click the Adjust link alongside whichever amount needs to be adjusted.
5. It’s also possible to click the Detailed Report button to see more info about the return, and you can create a hard copy of the return by clicking the Print button. However, neither of these are necessary to file the return.
6. Assuming you’re happy with the values shown in the VAT Return, click the Submit Online to HMRC option, and then click Save.
7. A dialogue box will appear asking you if you’re sure you’re happy with the return. Click the Finalise and Submit button to complete the submission.
8. You’ll be shown the VAT Return List, which shows the return and a brief status message about how it’s progressing. You can view this list in future by repeating Step 2 above.

Final thoughts on Making Tax Digital for VAT

Those who are signing up for Making Tax Digital for VAT from April 2022 onwards will have both a potentially easier and more difficult time than those who signed up back in April 2019.

It’s easier because the likes of accountants and tax advisers who may be supporting them have had two years of experience to guide the process.

Any problems that HMRC might have experienced in those early days had long since been ironed out.

However, they haven’t got the soft-landing period that eased the rules on digital linking.

But again, with support from the aforementioned experts, plus HMRC and accounting software providers, help is available to tackle any challenges.

And for accountants, when it comes to dealing with Making Tax Digital, you can use automation—learn how it can save you time and money with our ROI calculator.

Editor’s note: This article was first published in April 2019 and has been updated for relevance.