Making Tax Digital (MTD) – What is Making Tax Digital?

Making Tax Digital (MTD) is an HMRC initiative that replaces manual tax administration with an online, digital system for reporting and paying tax.

Learn about the benefits of online invoicing software.

Making Tax Digital is part of the British Government’s plan to transform the way individuals and businesses manage their taxes. The goal of MTD is to make it easier, more efficient and more effective for taxpayers to report and pay the right amount of tax.

At the moment, Making Tax Digital only applies to VAT. Eventually, MTD will also apply to a number of other taxes, but this won’t come into effect until a later date.

Making Tax Digital for VAT

There are two parts to Making Tax Digital’s digitalisation of VAT: online records and online tax returns.

MTD and digital records

Making Tax Digital requires certain financial records to be kept, maintained, and preserved digitally. These records are known as your ‘electronic account’ and include:

Your business name
Your business’s main address
Your VAT registration number
Any VAT accounting schemes that you use

You’ll also need to keep a digital record of the following details for each supply (i.e. taxable sale) that you’ll report to HMRC:

The time of supply: for accrual accounting, this is the date that you issue a VAT invoice, and for cash accounting, this is the date that you receive payment
The net value of the supply, not including VAT
The rate of VAT charged (20%, 5%, or 0%).

All businesses need to keep additional records, such as invoices and credit notes, but MTD doesn’t require you to keep these records digitally.

MTD and digital VAT Returns

When companies are registered for VAT, they’re responsible for submitting VAT Returns. Through VAT Returns, businesses report the VAT they’ve spent on taxable purchases as well as the VAT they’ve charged on taxable sales. The difference is then paid to or claimed from HMRC.

Before Making Tax Digital, businesses had to record, report, and pay their VAT manually. From April 1st 2019, HMRC will accept digital VAT Returns that are submitted through authorised, MTD-compatible software.

Under MTD, you can still choose whether to submit your VAT Returns yourself or get an accountant to do it on your behalf.

Who needs to use Making Tax Digital?

The rules for Making Tax Digital currently apply to VAT-registered organisations that have a taxable turnover above the £85,000 VAT threshold.

If your company is registered for VAT but has a VAT taxable turnover of less than £85,000, you aren’t currently required to use Making Tax Digital. This means that you can choose whether you would rather use MTD-compliant software to submit VAT returns and keep digital financial records or keep physical records and submit your VAT returns manually.

If your business isn’t registered for VAT, you don’t currently need to keep VAT records or submit VAT Returns. However, it would be beneficial to start thinking about this as it will be implemented in the coming years.

Making Tax Digital timeline

From April 2019, MTD applied to all VAT registered businesses whose taxable turnover was above the £85,000 threshold. From April 2022, MTD will be extended to all VAT registered businesses (including voluntarily registered), regardless of their turnover.

Finally, MTD will be extended to all businesses in April 2023. This includes non-VAT registered sole traders and landlords who earn more than £10,000 (gross).

The coronavirus pandemic delayed the rollout of MTD, and it may also be delayed in the future. For the most up to date information, you can read the guidance on the HMRC website.

If your tax periods don't match up with the April 1st start date, you’ll need to start keeping digital records and submitting online VAT Returns from the first day of your next VAT period.