Making Tax Digital

Making Tax Digital (MTD) is the U.K. government initiative to digitalise the U.K. tax system. The U.K. government hopes that MTD will help reduce the tax gap — the difference between tax revenue owed and VAT revenue collected — by requiring taxpayers to keep digital records, use recognized software that is compliant with MTD, and submit VAT returns more regularly to bring the tax system closer to real-time.

VAT-registered businesses are now required to keep digital records of their VAT data and submit VAT returns using compatible software. The U.K. government maintains a list of software that businesses can check for compatibility.

Compatible software must be VAT-bridging software and be able to fulfil digital record keeping requirements (the ability to record and store digital records), provide HMRC with requested information and VAT returns data, and in turn receive information back from HMRC.

Businesses that do not sign up for Making Tax Digital for VAT will be done so automatically by His Majesty’s Revenue and Customs (HMRC).

Tax agents using MTD for VAT on behalf of their clients (to file client VAT returns, for example) can create an agent services account (ASA).

Businesses are required to store data digitally on a functional compatible software package. This includes the following:

• Business name

• Address of the principal place of business

• VAT registration numbers

• A record of any VAT accounting schemes that are used

• For each taxable supply:

  • The time of supply

  • The value of the supply

  • The rate of VAT charged

• For each VAT return submitted:

  • The output/input tax

  • The output/input tax on acquisitions from other EU member states

  • The tax required to be paid/reclaimed under the reverse charge for supplies

  • Any tax to be paid following a correction or error adjustment

VAT-registered businesses exceeding the taxable turnover threshold of £85,000 have been required to comply with Making Tax Digital rules since April 2019, by keeping digital VAT records and filing VAT returns using MTD-compatible software.

All VAT-registered businesses — regardless of turnover — have been required to file digitally through MTD since April 2022.

Avalara MTD Cloud and VAT Reporting software solutions are recognised by HMRC as MTD compliant.

There are various penalties for noncompliance with MTD requirements (in addition to the established and existing VAT rules). These include:

A penalty of up to £400 for every return filed without using compatible software.

A penalty of between £5 and £15 for every day the business does not meet the requirement to keep these records digitally.

A penalty of between £5 and £15 for every day the business does not meet the requirement to use digital links to transfer data between pieces of software.

In addition, if a business files a return that contains errors, it may have to pay back any VAT that is owed. The business may also be charged a penalty of up to 100% of the VAT the business owes. Businesses must use the checking functions within their compatible software to ensure their returns are correct before filing.