Making Tax Digital (MTD) for VAT and the New Penalty System

by | Mar 16, 2022 | Accounts Software, VAT

As of 1 April 2022, all VAT registered businesses are required to maintain and submit their company accounts using software which is compliant with the Making Tax Digital (MTD) Scheme.

Since the role out of MTD in 2019, it was only businesses that exceeded the VAT threshold of £85,000 that needed to submit their returns using the relevant software. However, from April of this year, the rules will apply to an additional 7000 VAT registered businesses as the threshold will be removed.


What is changing?

The new system requires that you use compatible software to keep your VAT accounting records, and that you use the software to create your VAT return and submit the return to HMRC.

It will no longer be possible to submit your VAT returns through the HMRC website. An accountant can still submit the return on your behalf, but you will need to keep digital records for your VAT accounting.


What Software is Required?

The MTD rules require that a business uses a compliant cloud accounting software package. Most of the well known cloud accounting providers will be compliant, but it is possible to double check for peace of mind on the Gov UK website.

This means that it will no longer be possible for a business to submit its return using the HMRC website.


Which records will you need to keep digitally?

The requirements of MTD for VAT are that you keep the following records digitally:

  • Business name
  • Address of your principal place of business
  • VAT Registration number
  • Details of VAT accounting scheme used
  • Invoice details – time/date of supply (tax date point), net value (exc VAT) and VAT rate used to calculate VAT


How to Register for MTD for VAT

If you are already VAT registered, you can register for MTD for VAT at any point.
If you are registering for VAT for the first time, then MTD enrolment is automatic.

If you are voluntarily registered for VAT, the latest you must register for MTD for VAT is before the end of your first full VAT period following April 2022.

The process requires that you log into the Government Gateway Account for your business (which you may have previously used when filing VAT returns online). If you do not already have a Government Gateway account, you will need to create one using your email address.

Once you have completed these steps, you will probably need to activate the correct MTD VAT feature in your accounting software and this will require your MTD login details.

How does my accountant file a MTD VAT return on my behalf?

If your accountant will be filing your return on your behalf, they will use their HMRC Agent Services account and will register on your behalf with HMRC. They will need to discuss and arrange this with you ahead of the deadline.


The value of Making Tax Digital

The initial responsibility of preparing for MTD should be quickly offset by the benefits to be found from using the system. Many businesses which have voluntarily signed up to MTD ahead of time are already seeing those benefits in the form of more efficient record keeping, and the ability to view tax owed by the business throughout the year.


Penalty System

Under the new rules, a penalty system will be introduced, which will apply to both MTD for VAT as well as MTD for Income Tax Self-Assessment (ITSA).

The new penalty system will apply to VAT customers for accounting periods beginning on or after 1 January 2023.For ITSA customers with business or property income over £10,000 per year (who are mandated for MTD for ITSA) the changes will apply from the tax year beginning 6 April 2024. All other ITSA customers will be subject to the new penalty system from the tax year beginning 6 April 2025.

The new MTD VAT penalty system operates by allocating points for late submission. For each missed deadline, one point is allocated and on reaching a certain threshold, a £200 fine will be issued. The thresholds are determined by submission frequency, with annual submissions attracting two points, quarterly submissions attracting four points and monthly submissions attracting five points.


Support with your MTD Vat Filing

If you need support with the MTD transition for your VAT-registered business, please get in touch with the team who will be pleased to support you with the process. We also provide comprehensive VAT advice for small businesses.

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