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The way businesses are required to keep records and report them to HMRC changed in April 2019. This is known as “Making Tax Digital” (MTD) and it requires businesses to maintain and send information to HMRC electronically. MTD will apply to VAT records from April 2019 and to income and corporation tax within the following two or three years.

For some businesses the new systems will mean a major overhaul of their bookkeeping and accounting practices, others will be better placed. Either way, almost every business will need to make changes to adapt to the new rules.


What is Making Tax Digital for VAT (MTDfV)?
Are there exemptions from MTD?
What is my accountant's role in MTD?
What is Making Tax Digital for Business?
What are the quarterly reporting requirements?
What are the penalties for failing to comply with MTD?


What is Making Tax Digital for VAT (MTDfV)?

The purpose of MTDfV is to remove, as far as possible, human involvement in the preparation of VAT returns. This starts with how you record information about purchases and sales and ends with the way in which you transmit the data to HMRC. MTD requires every transaction to be recorded using an approved bookkeeping app or spreadsheet combined with special software. MTDfV legislation requires transaction data to automatically follow a path using "digital links" to arrive at the figures for your VAT return, which must be sent to HMRC via the Internet. HMRC calls this the "digital journey". It is essential for businesses that they understand what does and what does not count as an acceptable digital link.

Handwritten and other manual records of transactions will not be acceptable under MTD. Primary data must be stored electronically and be digitally linked to your business records as a whole. Acceptable digital links include:

  • a formula in one sheet which obtains the value for that cell from another spreadsheet
  • an app that automatically draws data from another app, spreadsheet or digital record.

Where data needs to be transferred between two or more different people to work on it, the transfer must be digital, for example:

  • by e-mailing a spreadsheet or bookkeeping app data in a form that can be imported electronically by the recipient
  • using a portable device, e.g. a pen drive or memory stick.

Are there exemptions from MTD?

Some VAT-registered businesses are exempt from MTDfV. If you think yours might be you will need to contact HMRC to confirm. You can be exempt from MTD if, for example:

  • you aren't permitted to use computers for religious reasons
  • you are unable to because of your "age, disability or location".

For businesses which cannot escape by exemption HMRC is allowing a “soft landing”. This means it will not strictly enforce the requirement for digital links for up to a year, but MTDfV-approved software is still essential as it will not be possible to submit your VAT figures without it. After the soft-landing period financial penalties will apply for failing to follow the MTDfV rules.

What is my accountant's role in MTD?

MTDfV will still allow your accountant or bookkeeper to prepare your records and submit your VAT figures each quarter. However, where you provide the data to them it must be transferred digitally, so you will still need to understand what and how you should keep records and transfer them to your accountant in a way that complies with the MTDfV regulations.

What is Making Tax Digital for Business?

Although Making Tax Digital for Business (MTDfB) will not start before April 2020 and may be a year or more later than that, it is wider reaching than MTDfV. Every business, whether run through a company, partnership or as a sole trader, including buy-to-let and other property rental businesses which have an annual turnover over £10,000 or more, will be required to comply with the MTDfB rules.

Businesses which are already within MTDfV will be at an advantage as it is likely that software they use for keeping their records will be sufficient to meet the needs of MTDfB with only few or no modifications required. Having said that, there is currently no firm information about what additional record keeping rules may apply under MTDfB.

special report

What are the quarterly reporting requirements?

MTDfB will include a completely new procedure for reporting business profits and losses to HMRC. You will be required to send reports of your business’s income and expenses to HMRC every three months. These will be in addition and separate from the quarterly reports for MTDfV. The information you send will allow HMRC to project your business’s tax bills much sooner than under the current system, although currently HMRC says it has no plan to change the tax payment dates.

In addition to the quarterly reports you will be required to submit an annual report which must include any corrections and adjustments required to the figures you submitted in your three-monthly reports. The annual report is needed to convert your business’s profit or loss for accounting purposes to a profit or loss for tax purposes, for example, by removing the cost of equipment deprecation and replacing it with capital allowances. In some situations, the annual report may do away with the need to complete and submit a self-assessment tax return.

What are the penalties for failing to comply with MTD?

A new system of financial penalties will be introduced to deal with failures to follow the MTD rules, for VAT and other taxes. It will be based on a points system. Each failure to submit proper MTD reports will result in points being added to your tax record. When the points reach a threshold, you will be charged a penalty. As the points build the penalties will increase. To summarise:

  1. A penalty point will apply every time you send a report late.
  2. When the points add up to a threshold set by HMRC you’ll be fined.
  3. If you’re late again, you’ll be fined unless HMRC has wiped the previous penalty points which will only happen if you’ve complied with the rules for a relatively long period. You will be able to appeal against penalty points and fines if you have a reasonable excuse for not complying with the MTD rules.

For a comprehensive overview of the MTD rules, download a free copy of our Special Report extract: Making Tax Digital - The Basics.

Making Tax Digital - The Basics