Keeping Records for Making Tax Digital VAT

Making Tax Digital (MTD) is with us now, and whilst change can be daunting, non-compliance is worse! But don’t worry; once you make the move to online tax it’ll free-up time in your business to do what you do best. So, let’s take a look at the state of play with MTD and what it means for your business.

The Making Tax Digital Timeline

Let’s take it back to basics for a second. HMRC is rolling out their Making Tax Digital (MTD) legislation as part of an initiative to bring tax into the 21st century. The ultimate goal is to bring tax payments closer to the point in time when the liability is triggered.

In the first stages though, it’s about making tax records more accessible to HMRC and streamlining the reporting process.

But make no mistake, MTD isn’t optional. Businesses that fall within its scope must comply, and failure to do so carries financial penalties.

Rolling out in stages, there is a timeline firmly in place for different types of tax to be brought within MTD. For VAT it became compulsory from April 2022. The timeline so far is as follows:

  • 1st April 2022: MTD became compulsory for all VAT registered businesses from the first VAT period after 1st April 2022.
  • 6th April 2023: Existing penalty system for late VAT submissions and payments gets replaced with new points-based penalty system.
  • 6th April 2024: Landlords and self-employed taxpayers will start using MTD for Income Tax Self Assessment (ITSA). You can voluntarily start using MTD before that date if you choose to.
  • Scheduled for 2026 – MTD is still in the consultation stage for businesses paying corporation tax, but its inclusion is anticipated at some point in 2026.

 

VAT Software

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What does my VAT registered business need to do?

As far as VAT periods and invoicing go, nothing has changed. If your business is VAT registered, you must add VAT to invoices where applicable. You’ll also continue to make VAT submissions at the same intervals as before. For most people this means making quarterly submissions, unless of course you’re on an annual VAT accounting scheme.

What has changed is that you must now keep digital records of your VAT invoices and VAT account in a format that complies with MTD. There are currently two ways you can do this:

  • Using an all-in-one software which is compatible with MTD to keep your records, and make submissions to HMRC.
  • Use software which isn’t compatible (such as spreadsheets), and then use additional bridging software to transfer data to HMRC.

 

Bridging software versus an all-in-one solution

Most of us are familiar (and probably fairly comfortable) with using spreadsheets, and lots of people use them to take care of their bookkeeping. If your business is VAT registered though, you’ll need bridging software in order to continue using them.

Just remember that bridging software should only really be a short-term fix, and that bridging software by itself doesn’t meet all the requirements of MTD.

 

Bridging software is designed for you to make MTD compliant submissions. It doesn’t meet the requirements for VAT record keeping, which will still need doing digitally. This also means you’ll need to spend time moving data around, and dealing with any formatting issues as a result.

Using fully MTD compatible software allows compliant storage of your VAT records, and you can make submissions directly to HMRC without needing to import, export, or lose your sense of humour moving data around.

As Making Tax Digital expands to include other taxes, such as Income Tax Self-Assessment (ITSA), it also makes everything simpler to keep all your records in the same place.

How do I move to using MTD software?

Making Tax Digital, with all its jargon and the threat of penalties, can sound a bit overwhelming. But, embrace it. Partly because we don’t really have a choice, but mostly because going digital will make bookkeeping for your business more streamlined, efficient, and less time-consuming.

  • Compliance: Firstly, take a look at HMRC’s approved list to make sure the system you put in place is compliant with MTD.
  • Automation: Look for software which ticks off as many of your bookkeeping needs as possible. For instance if you enter lots of transactions then software which automates this, with features like bank feeds and recurring invoices, makes life easier. That way, most of the VAT records that you must keep are created near-automatically, and the information will feed automatically into your VAT submission when it’s time.
  • Data validation: If the thought of VAT errors makes your skin crawl, also look out for software which helps you reduce the risk of mistakes. Even experts can make typos you know.
  • Onboarding: How easy is it to enter your existing records into the new software? Ideally there will be some sort of upload or onboarding tool so you don’t lose anything, but don’t need to spend hours typing or copying.
  • Testing, testing, 1,2,3: Going back to the subject of experts, just because tax is a complicated subject, it doesn’t mean the software should be. Most providers offer free trials (and some are free to use anyway) so test everything out to make sure you can make sense of it.
  • Support: And again, everyone needs a bit of extra help sometimes, so make sure your software provider can offer it! The gold standard is usually live chat support, but there should be a good mix of articles and guides to help you with both the financial aspect, and with using the software.

Learn more about Pandle’s time saving bookkeeping tools for MTD VAT, and set up your free account!


Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.


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