UK: Updates to Making Tax Digital for VAT

Andrew Decker
November 15, 2022

Update: 3 November 2022 by Russell Hughes

Making Tax Digital – Filing VAT Returns through Online VAT Account to become redundant

From Tuesday 1 November 2022, businesses filing VAT returns in the UK will no longer be able to submit via an existing online VAT account unless HMRC has agreed to an exemption from Making Tax Digital (MTD). Businesses that file annual VAT returns will still be able to use their VAT online account until 15 May 2023.

By law, all VAT-registered businesses must now sign up to Making Tax Digital and use compatible software for keeping VAT records and filing returns. HMRC has advised that from January 2023, any VAT registered businesses that fail to sign up for MTD and file returns through MTD-compatible software will incur .

Making Tax Digital’s aim is to help businesses get tax right first time by reducing errors, making it easier for them to manage their tax affairs by going digital, and consequently helping them to grow. More than 1.8 million businesses are already benefitting from the service, and more than 19 million returns have been successfully submitted through Making Tax Digital compatible software so far.

How to sign up to Making Tax Digital

If a business hasn’t already signed up to Making Tax Digital or started using compatible software, they must follow these steps now:

  • Choose MTD-compatible software – a list of free and low-cost software can be found here.
  • Check the permissions in the software – filing VAT returns is easy once a business has allowed it to work with Making Tax Digital.
  • Keep digital records for current and future VAT returns – a business can find out what records need keeping here.
  • Sign up for Making Tax Digital and file future VAT returns using MTD-compatible software.

Small businesses

If your turnover is under the VAT threshold of £85,000 and you haven’t signed up to Making Tax Digital in time to file your next return by 7 November 2022, you can still use your existing VAT online account for that return only.

New businesses

New businesses not yet registered for VAT will be automatically signed up for Making Tax Digital while registering for VAT through HMRC’s new VAT Registration Service (VRS).  Registering on the VRS provides a quicker VAT registration and improved security. It also helps new businesses fully comply with MTD requirements from day one, subject to using the correct software.

Still have questions about Making Tax Digital compliance? Speak to our tax experts.

Update: 17 March 2022 by Andrew Decker

Making Tax Digital for VAT – Expansion

Beginning in April 2022, the requirements for Making Tax Digital (MTD) for VAT will be expanded to all VAT registered businesses. MTD for VAT has been mandatory for all companies with annual turnover above the VAT registration threshold of £85,000 since April 2019. As a result, this year’s expansion is expected to impact smaller businesses whose turnover is below the threshold but who are nonetheless registered for UK VAT.

 

Update: 3 March 2021 by Andrew Decker

UK’s Making Tax Digital – 1 April Brings End to Soft Landing Period

Since April 2019, the UK has required the submission of VAT returns and the storage of VAT records to be completed in accordance with the requirements of its Making Tax Digital (MTD) regulations.

One of these requirements is that data transfer between software programs be achieved through ‘digital links.’ This requirement was initially waived during a ’soft landing’ period which is set to expire on 1 April 2021. As a result, to remain complaint with MTD requirements, businesses must ensure they can meet the digital link requirement.

What are the basic requirements of MTD?

Under MTD, businesses must digitally file VAT returns using ‘functional compatible software’ which can connect to HMRC’s API. Additionally, businesses must use software to keep digital records of specified VAT related documents.

What is a digital link and when is it required?

A digital link is required whenever a business is using multiple pieces of software to store and transmit its VAT records and returns pursuant to MTD requirements. For example, if a business stores its VAT records in its accounting program but then submits its VAT return using an approved piece of bridging software, the data must be transferred between the accounting and bridging software via a digital link.

A digital link occurs when a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications without the need for or involvement of any manual intervention.

The key to this requirement is that once data has been entered into a business’s software there shouldn’t be any manual intervention in transferring it to another program. This means that data cannot be manually transcribed from one program into another. Additionally, using a ‘cut and paste’ feature to transfer data doesn’t constitute a digital link.

For example, manually typing or copying information from one spreadsheet into another doesn’t count as a digital link but connecting the two spreadsheets using a linking formula does.

Additional examples of digital links include:

  • XML, CSV import and export, and download and upload of files
  • Automated data transfer
  • API transfer
  • Transfer of data and subsequent import of data into software by means of email or tangible digital media (i.e. flash drive).

The digital links requirement will apply to all businesses subject to MTD rules, however businesses that fulfill certain requirements can request an extension to delay the requirement.

For more information on MTD, including details on extension requests and criteria see VAT Notice 700/22: Making Tax Digital for VAT on HMRC’s website.

Important dates to remember regarding MTD for VAT

1 April 2019 –Business with annual turnover of £85,000 and over became liable to follow Making Tax Digital rule for VAT

1 April 2021 –Digital links requirement will be enforced

1 April 2022 – Taxpayers with turnover under £85,000 will be required to comply with making tax digital (MTD)

Need help with Making Tax Digital (MTD)?

Sovos’ Advanced Periodic Reporting technology is fully compliant with Making Tax Digital, including digital link.

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Author

Andrew Decker

Andrew Decker is a Senior Regulatroy Counsel at Sovos Compliance. Within Sovo’s Regulatory Analysis function, Andrew focuses on international VAT and GST issues and domestic sales tax issues. Andrew received a B.A. in Economics from Bates College and J.D. at Northeastern University School of Law. Andrew is a member of the Massachusetts Bar.
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