Home / Resources / Tax Helpsheets

Tax Helpsheets

An Introduction To Making Tax Digital

An Introduction To Making Tax Digital

What is MTD about?

HMRC's Making Tax digital (MTD) project is designed to assist businesses keep abreast of their tax obligations.

In particular, MTD:

• provides for electronic submission of accurate information to HMRC;

which, in turn

• enables immediate HMRC review of the information; and
• reduces the risk of potential errors arising;

which enables

• businesses to obtain a more accurate view of their current tax position.

Broadly speaking, Making Tax Digital (MTD) for VAT has applied for VAT return periods commencing on or after 1 April 2019. Now, most businesses making taxable supplies above the VAT registration threshold - currently £90,000 - are required to submit their return information to HMRC using MTD compatible software.

What are digital links?

MTD requires businesses to maintain relevant information about sales and purchases in an electronic format, using 'functional compatible software'. This means a software program which allows information to be recorded in an electronic form which sends and receives information to/from HMRC using the API platform (including API-enabled spreadsheets). It is possible to use more than one software program but there must be a digital link between them.

Broadly, the functions of the compatible software must include:

• keeping records in a digital form as required by regulations;
• preserving digital records in a digital form as required by regulations;
• creating a VAT return from the digital records held in functional compatible software and providing HMRC with this information digitally;
• providing HMRC with VAT data on a voluntary basis;
• receiving information from HMRC via the API platform in relation to a relevant entity's compliance with obligations under the regulations.

Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records, or summary records from the spreadsheet, can exchange data digitally with HMRC.

The regular VAT penalty regime for missing any MTD obligations came into play on 1 April 2020.

Are there exceptions to MTD?

Yes. The exception is a small minority of VAT-registered businesses with more complex requirements.

What are these exemptions?

You will not have to follow the Making Tax Digital rules where HMRC is satisfied that:

• Your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers)
• It is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason
• You are subject to an insolvency procedure

These may apply even if you are not currently exempt from online filing for VAT.

Does anything remain unchanged under MTD?

Yes. What won't have to change is the kind of information you send to HMRC or when you need to send it. You will, however, need the right kind of software to do it.

What kind of software is that?

A software product or set of products, that support the MTD obligations of keeping digital records and exchanging data digitally with HMRC through the MTD service.

What is bridging software?

Bridging software is how HMRC describes the digital tool that can take information from other applications, for example, a spreadsheet or an in-house record keeping system and then lets the user send the required information digitally to HMRC in the correct format.

What information needs to be recorded?

The time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged, business name and principle business address as well as your VAT Registration Number and details of any VAT accounting schemes you use.

What's this about digital records?

Digital records can be kept in a range of compatible digital formats in various places and different software. For example, a spreadsheet can be a component of digital record keeping, provided that the product which consolidates records or summary records from the spreadsheet is digital.

Can you continue to record daily totals?

Yes, but they have to be captured digitally. If you use spreadsheets to keep business records, you'll need MTD-compatible software so that you can send HMRC your quarterly VAT returns and receive information back from HMRC.

What is the next phase?

Making Tax Digital for Income Tax

The new Making Tax Digital for Income Tax rules will come into effect in April 2026. These will apply to self-employed businesses and landlords with annual business or property income.

As of August 2024, if you are self-employed or a landlord you may be able to volunteer to enroll early into MTD for Income Tax as part of a pilot to test and develop the service before it becomes mandatory in April 2026.

More information

For more details visit this dedicated HMRC page here or give us a call.