Guide to Prepare Your Business for Making Tax Digital

The mandatory implementation of Making Tax Digital (MTD) for VAT is only less than a year away.  From 1 April 2022, all VAT-registered businesses, no matter how much they earn, must comply with this new way of doing taxes. 

If you still haven’t registered your business, this quick guide will show you the requirements you must prepare, the MTD-compatible software you can use, and the actual sign-up process.

Making Tax Digital requirements

Making Tax Digital for VAT has two major requirements for VAT-registered businesses:

1. Keep and preserve digital records.

For now, you only need to keep records required to complete your VAT return on your record-keeping software or bridging software (requirement #2 discusses what bridging software is). 

The records you must keep digitally include:

• Your business name, address, and VAT number
• Any VAT accounting schemes you have
• The VAT on goods and services you supply (where you made a profit)
• The VAT on goods and services you received (where you spent money)
• Adjustments you made on your return
• The time of supply (transaction date) and value of supply of everything you buy and sell
• The rate of VAT you’ve charged on your goods and services
• Your total daily gross takings (DGT). DGT is the record of all supplies you’ve made on a particular day. This is applicable if you use a retail scheme.
• List of items you can reclaim VAT on. This is applicable if you use the Flat Rate Scheme.
• Your reverse charge transactions or where you record the VAT on sales price and the purchase price of goods and services you buy.
• Your total sales, including VAT, if you buy and sell gold and use the Gold Accounting Scheme.

You must add all items listed here to your digital records. However, you do not have to scan paper records such as receipts and invoices. 

The HMRC requires you to keep your records for 6 years from the end of the accounting period.

2. Submit returns to HMRC using MTD-compatible software.

MTD-compatible software allows you to keep digital records and submit VAT returns. It should also be capable of:

• Keeping and maintaining your records based on regulations set by HMRC
• Preparing VAT returns using the information on your digital records
• Communicating with HMRC digitally (sending and receiving information to and from HMRC)

The top players — such as Xero, QuickBooks, and Sage — have already added an MTD feature in their software. This page publishes all providers that have been through HMRC’s recognition process.

If you’re using non-compatible software — such as spreadsheets — you must use bridging software to link your business records to HMRC’s systems. 

Bridging software is a tool or application that connects your business to HMRC so you can still report your taxes digitally, even without using accounting software. However, it can’t help you with your other MTD requirements like digital record keeping. While there’s still time before MTD becomes mandatory for VAT-registered businesses, see if you can invest in proper accounting software. 

How to sign-up for Making Tax Digital

Here are the steps you need to follow, as outlined by HMRC.

1. Get MTD-compatible software

You must have compatible software, or at least a bridging tool, before proceeding with the actual sign-up process.

2. Prepare all your relevant business information

 To sign up, you need your: 

• Government Gateway user ID and password to access your gov.uk account. You can also create your sign-in details if you still do not have one.
• Business email address
• VAT registration number and latest VAT return

Here’s the other information you must provide based on your business category:

• If you’re a sole trader, prepare your National Insurance number
• If you’re a limited company or registered society, prepare your company registration number and Unique Taxpayer Reference (UTR) number.
• If you’re a limited partnership, prepare your UTR number, your company’s registration number, and the postcode where you’re registered for Self Assessment.
• If you’re a general partnership, prepare your UTR number and the postcode where you’re registered for Self Assessment.

3. Start the sign-up process

Once you’re done preparing your compatible software and relevant documentation, you can now begin with the actual sign-up process. Here’s how it goes:

1. You can start the sign-up process on this page. This will redirect you to a page asking if you’re already using MTD-compatible software. Simply select ‘yes’ then click continue. 
2. Sign in to your HMRC portal account using your Government Gateway user ID and password. 
3. Follow the on-screen instructions and provide any requested information
4. Check your email within 72 hours. Once you receive a verification email, click the link to verify your email address.
5. Read the terms of participation then click ‘accept’.

Within 24 hours, HMRC will let you know through a confirmation email if you can start submitting your VAT returns under MTD. 

Reminder: Do not sign up too close to your due date if you already pay by Direct Debit to avoid paying twice. This means you must NOT sign up 7 days before your return is due or 5 days after your return is due.

Get by, by getting help

Are you still unsure how to deal with the changes brought by MTD? Or do you need help with making tax digital and digitizing your entire accounting process?

D&V Philippines advocates the use of digital technology in accounting. We regularly train our accountants and share with them critical updates about the tax and regulations in the UK so they’re always on top of what they do.