Making Tax Digital: All You Need to Know

What is Making Tax Digital?

The UK government introduced Making Tax Digital (MTD) with the aim of making filing VAT returns easier and more efficient for businesses. The regulation requires businesses to keep digital records and submit VAT returns via compatible software.

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.

Understanding MTD

Making Tax Digital is part of the UK government’s plans to reduce errors and make managing tax affairs easier with the use of digital tools.

Businesses must digitally file VAT returns using one of the HMRC approved compatible software solutions that connect to HMRC’s API. Using software to keep digital records of specified VAT related content is compulsory.

Get the information you need

Table of Contents

  1. Quick facts
  2. Roll out dates
  3. Penalties for not complying with MTD
  4. Making Tax Digital for VAT
  5. FAQ
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Making Tax Digital (MTD): Quick facts

  • MTD requires every VAT registered business to record and submit VAT returns electronically using ‘functional compatible software’.
  • Companies must use software to keep digital records of specified VAT-related documents.
  • Stored records must include designatory data and summary VAT data for the period.
  • Use of multiple pieces of software is allowed.
  • The format of the VAT return is a 9-box summary, filed via the HMRC’s JSON API platform, which must be digitally linked between the customer’s source data and the submitted digital return. Businesses receive and send information to HMRC via API.
  • Each business must set up a new digital tax account and should follow a new authentication process.
  • Submission of digital records can be in a range of digital formats, including XML, CSV, and Excel, provided they are API enabled.

Making Tax Digital (MTD): Roll out dates

1 April 2019: MTD for VAT introduced to UK VAT registered businesses exceeding annual gross sales of £85,000.

1 October 2019: MTD applies for businesses eligible for deferral.

1 April 2021: The ‘soft landing’ for digital links ended. Starting with that tax period, all MTD users must meet digital link requirements. HMRC may consider deferrals for taxpayers with complex legacy systems.

1 April 2022: Mandate expanded to include all businesses registered for UK VAT, regardless of size.

1 November 2022: Businesses filing VAT returns can no longer submit via an existing online VAT account unless HMRC has agreed to an exemption from MTD. Businesses that file annual VAT returns will still be able to use their VAT online account until 15 May 2023.

January 2023: Any VAT registered businesses that fail to sign up for MTD and file returns through MTD-compatible software will incur a default surcharge or late submission penalty and interest.

Penalties for not complying with Making Tax Digital (MTD)

  • A default surcharge of up to 15% for any late payments of VAT due.
  • Up to 100% of any VAT understated or over-claimed if a VAT return contains a careless or deliberate inaccuracy.
  • Up to 30% of an understated assessmentof VAT due if HMRC isn’t informed within 30 days that it’s incorrect.
  • £400 for submitting a paper VAT return without an exemption.

Making Tax Digital for VAT

Making Tax Digital applies to all VAT registered businesses in the UK. Electronic submission of VAT returns, digital record keeping and digital links are all requirements of the regulation.

Digital link requirement

One of the MTD requirements is ‘digital links’ – the electronic exchange of data between software programs, products or applications without manual intervention.

A digital link is required whenever a business is using multiple pieces of software to store and transmit its VAT records and returns in-line with MTD requirements. 

A digital link can be:

  • 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).

Making Tax Digital for Corporation Tax

MTD doesn’t currently apply for corporation tax but HMRC published results of its consultation and there are plans for a pilot scheme. A potential mandate is likely in 2026. Bookmark this live blog about updates for MTD or follow us on LinkedIn to stay up to date.

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How to set up Making Tax Digital with Sovos

Sovos can help you with MTD in two ways:

  1. You can use Sovos Advanced Periodic Reporting software to streamline your compliance workload with one solution, or
  2. You can use Sovos’ Compliance Services Portal to access expert VAT compliance services and get full visibility of how each obligation is being handled, every step of the way.

FAQ

Can I use Excel for Making Tax Digital?

Excel is an approved digital format to submit digital records as part of Making Tax Digital, as long as the file is API enabled or the spreadsheet is digital. Using Excel can prove inefficient and error prone in comparison to other digital record software options.

How do I setup MTD?

There are a few steps involved in setting up Making Tax Digital for your business:

Who needs to register for Making Tax Digital?

All UK VAT-registered businesses need to register for Making Tax Digital. New businesses will be automatically signed up for MTD when registering for VAT through HMRC’s new VAT Registration Service (VRS).

What is the threshold for Making Tax Digital?

Since April 2022 Making Tax Digital is mandatory for all VAT registered businesses, regardless of annual turnover.

Do sole traders have to make tax digital?

If a sole trader is a VAT registered business they will have to comply with the Making Tax Digital requirements. In the UK, businesses with an annual turnover of less than £85,000 can opt to register their business for VAT but it is not compulsory.

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