Step by step guide to Making Tax Digital for VAT
Making Tax Digital (MTD) is legislation from HMRC that affects how all VAT-registered businesses must do their VAT accounting.
This is a guide on MTD for VAT for both businesses and agents.
We look at what considerations you should make before registering.
With Making Tax Digital for VAT, if you have a business that falls within its scope, you must submit VAT Returns via software.
And you need to keep your VAT records digitally.
Essentially, MTD for VAT means you must use accounting software that can connect to HMRC’s systems to file a VAT Return (or use a computerised accounting process that can do so).
And with VAT Return filing deadlines on the horizon, it’s vital that you’re following the rules.
In fact, HMRC may have sent you an email or letter to highlight what you have to do now with regards to Making Tax Digital.
According to TechRadar: “The best route to take for making the whole tax filing process even easier is to select a comprehensive accounting solution,”—and it’s chosen Sage Accounting as the ideal choice to fit that criteria.
Sage’s Making Tax Digital Hub is regularly updated with information, including a timeline of events, but here’s what we cover in this article:
What was the April 2022 mandation of MTD for VAT all about?
Making Tax Digital for VAT applies to all VAT registered businesses (apart from those that are digitally excluded).
Any businesses that were registered for VAT but below the VAT threshold (currently £85,000) didn’t have to follow MTD for VAT when the new legislation was first rolled out in April 2019.
But that changed in April 2022, when the mandation of MTD for VAT for those businesses began.
Running a VAT registered business and new to MTD for VAT?
If you’re eligible, you need to use follow the MTD rules from your first full VAT accounting period post-1 April 2022.
Note that using MTD for VAT-compatible accounting software doesn’t automatically mean you’re compliant.
You need to register for MTD for VAT, activate the option within your accounting software, and authenticate with HMRC’s computers.
When should businesses start following Making Tax Digital for VAT?
The rule is simple for businesses new to MTD for VAT.
By law, you need to start adhering to Making Tax Digital from the first day of your first VAT period that begins on or after 1 April 2022.
You could, of course, have signed up earlier.
Therefore, for example:
- If your VAT period had a 31 March 2022 end date, your first VAT quarter under MTD for VAT starts on 1 April 2022.
- If your VAT period has a 30 April 2022 end date, your first VAT quarter under MTD for VAT starts on 1 May 2022.
- If your VAT period has a 31 May 2022 end date, your first VAT quarter under MTD for VAT starts 1 June 2022.
When should businesses should sign up for MTD for VAT and file their first return?
The rules around when businesses or agents acting for them, such as accountants, can and can’t sign up to Making Tax Digital for VAT are a bit complex.
It’s not possible to sign up for MTD for VAT until after the last non-MTD VAT Return has been filed.
Don’t forget that a VAT Return and payment must usually be filed within a calendar month plus seven days after the VAT accounting period ends.
However, you should always check the filing deadline for your business in your online VAT account at HMRC’s website.
HMRC offers the following guidelines as to when businesses/agents can sign up to MTD for VAT, and the earliest the first MTD VAT Return can be filed as follows:
- If you pay by direct debit, you must allow five working days after the filing deadline for your final non-MTD return before signing up for MTD for VAT, and must allow at least seven working days before the filing deadline to file your first return under MTD.
- If you pay by non-direct debit methods, you must allow 24 hours after your last non-MTD return before signing up, and 72 hours after signing up before filing your first return under MTD.
Suppose your business needs to file a VAT Return for the April to June 2022 period, and it pays by direct debit. In that case, the latest the business can theoretically sign up is 31 July 2022—seven days before the filing deadline.
However, it’s wise to do so earlier. That way, you can iron out any problems (if they arise) well ahead of time.
What happens if I miss my submission date?
In the first year of Making Tax Digital mandation, HMRC took a ‘light touch’ to penalties.
Now it’s not doing this. You need to get things right from day one or you may face penalties.
Beginning in January 2023, a points-based late submission system will apply to MTD for VAT.
There’ll also be penalty charges if you pay more than 16 days late (or fail to agree to a Time to Pay arrangement with HMRC).
Registering for MTD for VAT as an agent in 6 steps
If you’re an agent/accountant, there are several things you’ll need to get ready in time for each client when it comes to MTD for VAT.
Alternatively, if you’re using an agent/accountant for MTD for VAT, you should ensure they’ve completed the following on your behalf.
Step 1: Check if and when your client has to sign up for MTD for VAT
If you already act on behalf of the client, this information should be readily at hand.
But if they undertake their own returns, or if the client is new to your practice, there might be a need to contact them.
This will add a time overhead, especially if the client is new to VAT and requires education around the fundamental principles.
Step 2: Get the right software
You need software compatible with MTD for VAT, which allows you to sign in using the Agent Services account.
HMRC offers a tool that lets you search for MTD-ready software, and both businesses and agents can use this. Notably, all key Sage products are compatible, including Sage Accounting.
Step 3: Create an agent services account
If you haven’t already, you need to create an agent services account.
This lets you administer Making Tax Digital on behalf of your clients (including both MTD for VAT and, when it arrives in 2024, MTD for Income Tax).
Before registering for an agent services account, you need to register with HMRC as an agent. This is a postal application rather than an online one.
Before you can apply to be an agent, you must have registered with a supervisory authority (or HMRC) regarding anti-money laundering.
You may already have this in place via your chartered body (ACCA, AAT, CIMA, etc).
Step 4: Link existing VAT clients to your agent services account/sign up your existing VAT clients for MTD
If your client has already authorised you to file VAT Returns on their behalf before MTD for VAT, you need to copy them to your agent services account.
This can be done within the agent services account itself by selecting the option.
If the client is new to VAT, you’ll need to sign them up. You need their VAT certificate, contact details, Unique Taxpayer Reference (UTR), National Insurance number, company registration number, and other info.
Step 5: Ask new clients to sign up to Making Tax Digital
Your client can sign up to MTD for VAT by themselves.
Assuming you’ve been filing VAT Returns for them already, you should automatically get a confirmatory email when this happens.
This will include instructions on adding them to your agent services account.
Step 6: Ask new clients to authorise you in order to link new clients
If a client has already signed up for MTD for VAT, perhaps before your involvement with them, you can use the agent services account to ask them to authorise you.
This creates an authorisation request (a web link) that you then email to your client.
But you should take care because the link is time-limited and will expire if they don’t respond soon.
Registering for MTD for VAT as a business
Here’s everything you need to know about how to register for MTD for VAT if you’re a sole trader, individual, incorporated business, or any other type of entity.
How to register your business for MTD for VAT in 4 steps
The registration process involves logging in with the Government Gateway account for your business.
You might have used this previously when filing VAT Returns via the portal website.
If you don’t have an account, you can create create one (you need an email address to do so).
To register for MTD for VAT with HMRC, among other things, you need to input the following information when requested (some of this can be found on your VAT registration certificate, so have it to hand):
- Your Government Gateway ID and password
- Your company’s VAT number
- The date your business became VAT registered
- The Box 5 amount from your most recent VAT Return (the amount of your last VAT Return).
Once you’ve inputted the above details, HMRC will immediately verify them. If you’ve made any errors, you can input the details again.
The verification message from HMRC that says your business can start submitting VAT Returns via MTD for VAT might take up to 72 hours – you shouldn’t submit your VAT Return until you receive this confirmation.
Once you’re signed up to MTD for VAT, you need to activate the feature within your accounting software using the details provided by HMRC.
This is likely to be an ‘Enable MTD’, ‘Authenticate’ or similar option that’s located somewhere in the settings, options or feature menu area.
Speak to your software vendor about how to do this.
How to create and submit an MTD for VAT Return
Once you’ve registered, when your VAT Return date comes around, you need to file it via your business’s accounting software or bridging software.
You can file VAT Returns in various accounting software packages—generally, you should look for an option to create a VAT report or return, or something similar, within it.
Suppose you’ve used the accounting software to record your VAT accounting over the previous period.
The report should be generated automatically—although don’t forget to enter any adjustments. Then you’ll probably need to tell the software to start submitting using the MTD process.
Creating and submitting an MTD for VAT return using Sage Accounting
Here are the steps required to submit a MTD for VAT return using Sage Accounting:
- While viewing your accounting summary, click the Reporting heading, and then click VAT returns.
- Click the blue Create VAT return button.
- Your dates are set automatically based on HMRC’s reporting requirements for your business. All you need to do is click the Calculate button.
- Once the calculations are complete and the figures are displayed, you might need to make adjustments. To do so, click the Adjust link alongside whichever amount needs to be adjusted.
- It’s also possible to click the Detailed Report button to see more info about the return, and you can create a hard copy of the return by clicking the Print button. However, neither of these are necessary to file the return.
- Assuming you’re happy with the values shown in the VAT Return, click the Submit Online to HMRC option, and then click Save.
- A dialogue box will appear asking you if you’re sure you’re happy with the return. Click the Finalise and Submit button to complete the submission.
- You’ll be shown the VAT Return List, which shows the return and a brief status message about how it’s progressing. You can view this list in future by repeating Step 2 above.
Final thoughts on Making Tax Digital for VAT
Those who are signing up for Making Tax Digital for VAT from April 2022 onwards will have both a potentially easier and more difficult time than those who signed up back in April 2019.
It’s easier because the likes of accountants and tax advisers who may be supporting them have had two years of experience to guide the process.
Any problems that HMRC might have experienced in those early days had long since been ironed out.
However, they haven’t got the soft-landing period that eased the rules on digital linking.
But again, with support from the aforementioned experts, plus HMRC and accounting software providers, help is available to tackle any challenges.
And for accountants, when it comes to dealing with Making Tax Digital, you can use automation—learn how it can save you time and money with our ROI calculator.
Editor’s note: This article was first published in April 2019 and has been updated for relevance.