Your questions answered - nine common questions about Making Tax Digital for VAT.
- What is Making Tax Digital (MTD)?
- When does Making Tax Digital start?
- Does Making Tax Digital affect me?
- How does MTD change the way I do my VAT returns?
- How do I sign up with HMRC for Making Tax Digital?
- What kind of accounting software do I need to use for Making Tax Digital?
- Can I keep on using a spreadsheet and still comply with Making Tax Digital for VAT?
- Does Making Tax Digital affect how I work with my accountant?
1. What is Making Tax Digital (MTD)?
Making Tax Digital is the government's plan to transform the way taxpayers communicate with HMRC and move towards a digital system where paper-based tax returns are a thing of the past.
In the long term, the government wants all taxpayers, including businesses, sole traders and landlords, to file all their tax information using MTD-compatible software on a quarterly basis.
All VAT-registered businesses are now required to use special software to keep their records and submit their VAT returns for VAT periods ending on or after 1 April 2022. Between 1 April 2019 and 1 April 2022 MTD only applied to VAT-registered businesses with a taxable turnover above the VAT threshold.
2. When does Making Tax Digital start?
Making Tax Digital is being rolled out gradually. It started with VAT. Between April 2019 and 1 April 2022, VAT-registered businesses with a taxable turnover above the VAT-registration threshold were required to submit their VAT returns every quarter using MTD-compatible software. This requirement was extended to all VAT registered businesses on 1 April 2022.
Making Tax Digital will be extended to income tax from April 2026. You will need to ensure you have compatible software so that you can file your information online. You will be required to report your income and expenses online every three months and finalise your figures at the end of the year. You can start preparing now by searching for MTD compatible software.
3. Does Making Tax Digital affect me?
Making Tax Digital for VAT will affect you if you are a VAT-registered business - even if your taxable turnover falls below the VAT registration threshold.
The rules do not apply if you de-register from VAT or if you are exempt from MTD for VAT. You may be exempt if:
- Your business is run by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations;
- It is not "reasonably practicable" for you to use digital tools for reasons of age, disability, remoteness of location or for any other reason;
- You are subject to an insolvency procedure.
If this applies to you, you'll need to ring the HMRC helpline to discuss alternative arrangements.
MTD is being rolled out to income tax from April 2026. You will need to sign up for Making Tax Digital for Income tax if:
- you are registered for Self Assessment
- you get income from self-employment or property, or both
- you are not exempt
- your total qualifying income exceeds the threshold (sign up by 6 April 2026 if your income is more than £50,000 or by 6 April 2027 if you income exceeds £30,000)
4. How does MTD change the way I do my VAT returns?
The big change is that you will have to use MTD-compatible accounting software to record your financial data and to submit VAT returns to HMRC. Once you have input all your information, the app must be able to communicate with HMRC at the touch of a button.
This affected more than one million VAT-registered businesses in the UK. However, the frequency of reporting did not change, not did the information you have to input.
5. How do I sign up with HMRC for Making Tax Digital?
You can't submit your VAT returns digitally until you have signed up to MTD on the HMRC website. You may be asked to confirm some of your details and you'll also need:
- Your Government Gateway user ID and password;
- Your VAT registration number.
6. What kind of accounting software do I need to use for Making Tax Digital?
MTD-compatible software must be what HMRC calls "functional compatible software" that can link to HMRC via an Application Programming Interface (API).
HMRC has not developed its own software for taxpayers; it expects them to shop around for suitable software themselves. There is a list of all MTD-compatible software on the government website. Most of the main accounting software solutions work on a subscription basis. Software packages typically cost between £10 and £30 a month, depending on functionality. If you already use software to keep your business records, check with your software provider to find out if it is MTD-compatible.
7. Can I keep using a spreadsheet and still comply with Making Tax Digital for VAT?
Yes, but only in conjunction with the right software. You will need spreadsheet bridging software to automatically copy the data from the spreadsheet into the new software.
8. Does Making Tax Digital affect how I work with my accountant?
If your accountant normally files your VAT return for you, as an agent, they can continue to do so under Making Tax Digital as long as you authorise them to act on your behalf. In time, they will also be able to file other types of MTD return, such as income tax and corporation tax.