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Introduction

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Making Tax Digital is a UK Government initiative to become the most Digitalised Tax Administrator in the world by introducing legislation which requires all VAT registered businesses to sign up to 

HMRC's Making Tax Digital and record and maintain records digitally. (Note as of 1 April 2022 all VAT registered businesses must use MTD compatible software or spreadsheets to record VAT related transactions

and submit VAT returns to HMRC via Application Program Interface (API).  Prior to 1st April 2022,  the rules only applied to VAT registered business that were above the £85,000 VAT registration threshold.  

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The aim here is to make the administration of tax (VAT) more efficient and accurate and eliminate manual intervention as far as possible.

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To achieve this, businesses will either have to obtain accounting software from a software vendor or use a spreadsheet (such as Excel) to record transactions.  Note: If you choose to use spreadsheets to maintain records digitally then you will need to obtain compatible bridging software to be able to link and file the VAT figures you wish to report in your spreadsheet records to HMRC.

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Search for record keeping software and bridging software.

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Once you have compatible software or bridging software, you can then register with HMRC for Making Tax Digital or ask your agent to do you on you're behalf. 

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Exempt from Making Tax Digital 

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HMRC will allow individuals to be exempt from submitting returns under MTD and using compatible software or bridging software for the following reasons:​

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• Disability - prevents an individual from using compatible MTD software

• Location - You business is located in an area that does not have great internet access

• Age 

• Business is subject to Insolvency proceedings

• Religion

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Note: HMRC will consider each request for exemption on an individual basis and will make an decision based on individual circumstances.

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To make a claim for exemption, contact VAT: General Enquiries.​​

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Maintaining Records Digitally

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HMRC requires that all VAT Registered businesses keep the following records in digital format either within their MTD compatible software or in spreadsheets they are using to record their transactions.

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      General Data

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• Your business name

• The address of your principal place of business

• Your VAT registration number

• Any VAT accounting schemes that you use

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     Supplies Made to Customers

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     For each supply you must record:

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• Time of supply – the tax point ( Invoice Date or date cash received if earlier)

• Value of the supply – the net value excluding VAT

• Rate of VAT charged (seperate records for Std Rated, Reduced Rate, Exempt and Zero Rated supplies)

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​    Supplies Received from Vendors

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      For each supply received record:

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• Time of supply (tax point)

• Value of the supply

• Amount of input tax that you’ll claim

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Note: HMRC will allow you to record a number of transactions as a single VAT record in a number of different circumstances such:​

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• Petty Cash Transactions

• Supplier Statement where multiple transactions are consolidated into single VAT categories - Std Rated, Reduced Rate, Exempt, Zero

• Supplies made by Agents

• Charity Fund Raising Events

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For More information on these items please refer to HMRC VAT Notice 700 / 22 Making Tax Digital

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      VAT Return Summary Data

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​For Each VAT Return your MTD compatible Software or Spreadsheets should contain:

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• The total output tax you owe on sales

• The total tax you owe on acquisitions from EU member states

• The total tax you’re required to pay on behalf of your supplier under a reverse charge procedure

• The total input tax you’re entitled to claim on business purchases

• The total input tax allowable on acquisitions from EU member states

• The total tax that needs to be paid or you’re entitled to reclaim following a correction or error adjustment

• Any other adjustment allowed or required by VAT rules

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Adjustments

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      Where adjustments are required to amend or correct data, these must be:

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• Made within the Software or system itself or spreadsheets

• The totals of each adjustment should be included

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Digital Links - Mandatory under Making Tax Digital

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      Digital links are the transfer of data electronically within or between different applications or software ​

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• Formulas linking different cells or workbooks in a a spreadsheet

• Electronic links between different pieces of software used by businesses.

• Transferring data onto a memory stick, external hard drive etc for upload onto a different system. 

• XML, CSV import and export, and download and upload of files

• Transfer by Application Program Interface (API)

• Other automated electronic transfers

• Emails Containing Data Files which are the uploaded onto other electronic systems

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       The aim here is to ensure that a digital journey (audit trail) is maintained for the VAT returns submitted to HMRC.

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       What are not Digital Links:

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• Copy and pasting between spreadsheets and workbooks

• Written notes being copied from one system and entered in another

• Emails Containing Data Files which are the uploaded onto other electronic systems

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Sign up for Making Tax Digital for VAT

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Sole Trader, Partnership or Company

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• HMRC:   Sign up now

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      Data and information you require to sign up:

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• Your business email address

• Your Government Gateway user ID and password - if you do not have a user ID, you can create one when you use the service

• Your VAT registration number and latest VAT return

• Your National Insurance number if you’re a sole trader

• Your company registration number and Unique Taxpayer Reference if you’re a limited company or registered society

• Your Unique Taxpayer Reference and the postcode where you’re registered for Self Assessment if you’re a general partnership

• Your Unique Taxpayer Reference, the postcode where you’re registered for Self Assessment and your company’s registration number if you’re a limited partnership

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       Agents signing up on behalf of their clients:

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     What you need to do as an Agent to File VAT returns for your Clients

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• Obtain / Create MTD Compatible Software or Spreadsheets. 

• Create an Agent Services Account (note this is a separate account from your existing online agent account) 

• For your existing clients that are already on your online agent account you will need to copy them across to your new Agent Service Account.

• Your clients VAT certificate

• Contact details and Business email

• For Sole Traders their NI Number

• For Companies their UTR for Corporation Tax

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      HMRC :   Sign up now

       

            

Making Tax Digital For Small and Medium Sized Businesses

      Typically, these businesses will either maintain digital records using:

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• Off the shelf MTD compatible Software ( including API based link to submit returns to HMRC themselves)

• Excel workbooks and spreadsheets  and separate Bridging software used to submit Returns to HMRC)

• Use own accounting software or Spreadsheets to produce summary data and email or download onto a memory stick and pass to their agent who will then upload onto their own software for processing and filing to HMRC.

• Use an agent to record their Digital records using the agents own MTD compatible software or spreadsheets. 

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      The key challenge here is making sure all the relevant records for the VAT return are manually entered or uploaded into the software or spreadsheet workbooks and that

      there is the required digital linking within the software and more importantly within the spreadsheets being used.  Whichever method is used, all VAT return data must be submitted using API's to HMRC.

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Making Tax Digital For Large Businesses

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      For Large Businesses such as Banks or Manufacturing Companies,  MTD can be much more complex and complicated in that:

• These organisations will have multiple systems that contain data required for VAT reporting

• Multiple VAT returns that feed into a main Group VAT Return

• Some of those systems will be supplied by external Vendors and digitalisation will require extensive liaison and possible development costs 

• A lot of the data and processes used to support VAT reporting will be contained in excel workbooks which may or may not have adequate digital links

• There is usually a lot of manual processing which will have to be documented and eliminated

• It may require specific IT and Project management staff to implement an robust MTD solution

• It may need to build Tax Engines, Data Warehouses and internal API's to inter connect systems and for filing VAT returns with HMRC

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       Key Things to Consider When Implementing MTD Successfully in a Large Organisation 

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• Will need to Identify and document all sources of Income and Expenses and the associated systems used to record and account for VAT. 

• Will require the Identification and documentation of all manually processes and figures used to prepare the VAT returns

• Work should focus on eliminating manual processes and adjustments early on in the project

• Ensure you have staff with the right knowledge and skill set in place to build a robust MTD VAT reporting process

• Ensure there is a common set of mandatory fields to extract data from each system to ensure there is efficiency and completeness 

• Decide on the structure and architecture of the MTD process.  Will it be a purely internally developed or will it require the assistance of an external partner or software provider

• Its imperative to ensure that all requirements are documented and presented to the internal IT Teams or external IT teams to ensure there are no bottlenecks in the later stages of development.  

• Build a data and Transformation warehouse specifically to store and process VAT information, static data tables and to transform the data into your VAT return.

• Ensure there is a project plan complete with overview of MTD, stages, timelines, budgets and costing, key personnel, any external vendor requirements and timelines, systems in scope, out of scope, manual adjustments that will require automation etc.  

• Ensure controls are in place to maintain customer data integrity and confidentiality  

• Use API's as much as possible to maintain and fully automate digital links

• If you have clients in multiple jurisdictions, you will need to link your static client data to your Tax Engine to ensure VAT is applied and calculated accurately based on client country of operation or location.

• If you are a complex partially exempt business and have a Partial Exemption Special Method, then consideration needs to be made as to how input VAT allocation and VAT recovery will work with the new MTD system. 

• In larger more complex businesses such as Banks, there are likely to be multiple service companies and trading companies where service company incurred VAT is allocated to the different trading entities, product and service areas within these trading entities. (Basically allocating VAT incurred on general Back Office Costs to Front Office Areas).  This can be a complex process and there will usually be an automated system or manual allocation process that manages this process. 

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