Understanding Making Tax Digital for Businesses Under the VAT Threshold

Starting 1 April 2022, all VAT (value-added tax) registered businesses must comply with Making Tax Digital (MTD), regardless of what their turnover is. Up until that point, businesses under the VAT threshold (turnover less than £85,000 per year) didn’t have to comply with Making Tax Digital.

Included in MTD are sole traders, partnerships, limited companies, landlords who have at least one property in the UK, registered charities and trusts.
Keep in mind that once you’ve signed up for MTD, you can only submit MTD VAT returns.

Making Tax Digital

Making Tax Digital is a government initiative requiring businesses to digitise their tax management. VAT-registered businesses must keep digital records and submit their VAT returns using software that is compatible with and recognised by HMRC.

The rest of your VAT requirements haven’t changed. Businesses are still required to complete their returns monthly, quarterly, or annually; VAT payments are still due on the current deadlines; and you aren’t required to keep additional records for VAT purposes.

Benefits of MTD

There are benefits to MTD, including:

  • Decreased errors in VAT reporting
  • Less time doing paperwork
  • Faster returns filing
  • More reliable record-keeping.

Records that must be kept

You don’t have to keep additional records for VAT, but the records you keep must be digital and should include:

  • The time of supply
  • The value of supply (net, excluding VAT)
  • The rate of VAT charged
  • Your business name
  • Your principal business address
  • Your VAT registration number
  • Details of the VAT accounting schemes you use

Digital record keeping

Your records must all be kept digitally, which means you must use either a spreadsheet or a software solution. You can use a mix of both, but any information shared between them must be shared digitally. Likewise, any information shared between you and your accountant must be shared digitally. Copying and pasting from a spreadsheet doesn’t work. You also must have digital or physical copies of your invoices to confirm the numbers in your spreadsheet.

Xero offers an HMRC-compatible solution that enables you to remain compliant in storing your records digitally, including enabling you to use spreadsheets for VAT and upload the VAT amounts digitally.

Submitting your return

Under Making Tax Digital, VAT-registered business owners will no longer submit the VAT return through the HMRC website. Instead, you’ll have to access compatible software that includes an MTD for VAT feature, like Xero. That software will then be used to submit your return.

Signing up for Making Tax Digital

You can sign up for MTD for VAT using the gov.uk website.

To register, you’ll need your:

  • Business email address
  • Government Gateway login
  • VAT number and most recent VAT return

Talk to us if you have questions about registering for MTD for VAT. We can register for you but you will need to authorise us. Contact us to get this started.

Additionally,

  • Sole traders need their National Insurance number
  • Limited companies or registered societies need their company registration number and Unique Taxpayer Reference (UTR)
  • General partnerships need their Unique Taxpayer Reference (UTR) and the postcode registered for under Self Assessment
  • Limited partnerships need their company registration number, Unique Taxpayer Reference, and the postcode they registered for under Self Assessment

Using Xero software to remain compliant

Xero software is MTD-compliant and recognised by HMRC. It enables you to store your records digitally and submit your VAT return to HMRC directly. Additionally, Xero has other features to make managing your business easier, including:

  • Bank reconciliation
  • Invoicing
  • Receipt capture
  • Payroll

Get in touch with us to get started with Making Tax Digital.

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