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Making Tax Digital for VAT - How does it work?

The recent introduction of the Making Tax Digital scheme represents a major shift in VAT accounting and submissions in the UK, resulting in significant changes to the way these taxes are paid and processed.

For businesses paying VAT in the UK, it is therefore essential to make yourself aware of these changes and their implications, and ensure you are ready and able to comply with the new laws now they have taken effect.

Read on for more information on how the Making Tax Digital scheme works from the experts at The VAT People. You can also contact us on 0333 3638 012 to find out more.

What is Making Tax Digital?


Making Tax Digital is an initiative by HM Revenue & Customs designed to completely digitise the VAT accounting process. Under this new framework, all businesses above a certain size now need to submit their VAT return information to HMRC through Making Tax Digital-compatible software.

These changes mean it is now essential for all VAT-registered businesses to keep accurate, up-to-date digital records enabling them to provide HMRC with the correct information at the correct time. This should include:

  • Names
  • Addresses
  • VAT registration numbers
  • Data on VAT accounts from which VAT return information will be directly taken
  • Information regarding supplies provided and received

This new system came into effect for VAT payments in April 2019, with the intention of gradually expanding the scheme to cover other forms of tax in future.

Is Making Tax Digital for VAT compulsory for all companies?


Currently, Making Tax Digital applies to all businesses that make taxable supplies above a VAT registration threshold of £85,000.

Although the government is planning to eventually roll out the scheme more broadly to include smaller businesses, the initial focus will be on supporting the first wave of participants to make a smooth transition to the new system. As such, Making Tax Digital will not be mandated for any new businesses or taxes until 2021 at the very earliest.

Businesses that are currently exempt from the Making Tax Digital rules can still choose to utilise the new system by signing up with HMRC to file future VAT returns digitally using compatible software.

What software can I use for Making Tax Digital?

HMRC does not recommend a specific software program for submitting digital VAT returns, but offers a tool that allows you to search for compatible solutions, available on the official government website.

Suitable software should perform the following functions:

  • Recording and preserving digital records
  • Providing information and returns from data held in those digital records to HMRC, by using the API platform
  • Receiving information from HMRC using the API platform

These functions do not all need to be carried out by the same program; instead, a combination of different software tools can be used to compile the digital records necessary to meet the Making Tax Digital requirements.

Each VAT return should contain:

  • the total output tax owed on sales
  • the total tax owed on acquisitions from other EU member states
  • the total tax payable on behalf of your supplier under a reverse charge procedure
  • the total input tax you are entitled to claim on business purchases
  • the total input tax allowable on acquisitions from other EU member states
  • the total tax that needs to be paid or you are entitled to reclaim following a correction or error adjustment
  • any other adjustment allowed or required by VAT rules

These rules are likely to evolve and change further during the Brexit process, which is why companies should stay up to date on the latest developments with the scheme.

How can I find out more about Making Tax Digital?

For more information about the Making Tax Digital scheme, visit the government’s official hub page for the scheme. You can also find out the full details about the new digital VAT rules as they currently apply from HMRC.

If you have specific questions about how your business should be getting ready for Making Tax Digital, get in touch with the experts at The VAT People. We have years of experience in VAT law and can help to find the best and most cost-effective solution for your organisation.

Call us now on 0333 3638 012, or fill out an online enquiry form and a member of the team will get back to you.

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