Making Tax Digital for VAT: a guide for limited companies

Making Tax Digital for VAT and your limited company

Making Tax Digital (MTD) for VAT is not a separate registration. It is the set of rules for how a VAT-registered business keeps its VAT records and sends its VAT Returns. VAT Notice 700/22 says it applies to all VAT-registered businesses, so a company that registers voluntarily, below the threshold, follows the same rules.

There are two parts. You keep certain records in digital form. You then send the return from those records to HMRC using software that connects to HMRC's systems.

If your company has only just registered, GOV.UK says to wait for HMRC to confirm the registration before you download compatible software. Keep paper versions of your records while you wait.

Source: Charge, reclaim and record VAT: keeping VAT records

Which VAT records must be digital

You still keep normal business records, such as invoices, bank statements and till rolls. On top of that, GOV.UK lists records you must keep digitally, unless you are exempt.

VAT Notice 700/22 also asks for some fixed details to be held digitally: the business name, the address of the principal place of business, the VAT registration number and any VAT accounting schemes used.

Begin keeping records when you register for VAT. You must keep VAT records for at least 6 years, or 10 years if you use the VAT One Stop Shop scheme or used the Mini One Stop Shop scheme.

Source: Charge, reclaim and record VAT: keeping VAT records

Digital links: no copy and paste

Many companies use more than one product. For example, sales may sit in one system and purchases in a spreadsheet. If so, the data must move between them by a digital link. VAT Notice 700/22 describes a digital link as an electronic transfer or exchange of data between software programs, with no manual intervention such as copying information over by hand.

Acceptable links include formulas linking cells in a spreadsheet, emailing a spreadsheet so it can be imported into other software, handing someone records on a pen drive for them to import, XML or CSV import and export, and downloading and uploading files. Cut and paste, or copy and paste, is not a digital link.

A spreadsheet can still work. You can keep records in a spreadsheet and send the return through bridging software, which connects the spreadsheet to HMRC.

Source: VAT Notice 700/22: Making Tax Digital for VAT

How to find compatible software

HMRC publishes a search service on GOV.UK where you can look for record keeping software and bridging software. Record keeping software lets you keep digital records and submit VAT Returns. Bridging software connects software that is not compatible, such as a spreadsheet, to HMRC's systems.

HMRC says it can only advise on the legal requirements of MTD. It does not tell you which product to choose, and nor do we. Check that a product covers what your company actually does, such as any VAT scheme you use, before you commit. If you have problems entering figures into a product, GOV.UK says to contact the software provider rather than HMRC.

Source: Find software that's compatible with Making Tax Digital for VAT

When VAT Returns and payments are due

You usually send a VAT Return every 3 months. Each 3-month block is your accounting period. The deadline for submitting online is usually one calendar month and 7 days after the end of the period. That is also the deadline for your payment to reach HMRC, so allow time for it to clear.

You must send a return even if you have no VAT to pay or reclaim. A nil return is still a return, and it counts for penalty points if it is late.

Source: Submit a VAT Return

Late submission penalty points

From 1 January 2023, each late VAT Return earns one penalty point. When you reach the threshold for your filing frequency, you get a £200 penalty, and a further £200 for each later late return while you stay at the threshold. This applies to nil and repayment returns too.

To reset points to zero, you need a period of compliance: every return on time for the set period, and all outstanding returns for the previous 24 months sent in.

Source: Penalty points and penalties if you submit your VAT Return late

Late payment penalties and interest

Paying late is treated separately from filing late. If you pay in full within 15 days of the due date, there is no late payment penalty. Between day 16 and day 30, the first penalty is 3% of the VAT owed at day 15. From day 31, it is 3% of what was owed at day 15 plus 3% of what is still owed at day 30, and a second penalty builds up daily at 10% a year on the balance.

Late payment interest is also charged from the first day the payment is overdue until it is paid in full.

Source: How late payment penalties work if you pay VAT late

Common mistakes for newly registered companies

Copying totals from one spreadsheet into another by hand. That breaks the digital link rule.

Assuming a quiet quarter means no return. A nil return must still be sent on time.

Treating the filing deadline as the payment date when money takes days to reach HMRC.

Choosing software before HMRC has confirmed the VAT registration, then setting it up with the wrong details.

Forgetting that points for late returns do not reset at the threshold until a full period of compliance is completed.

Source: Remove penalty points you've received after submitting your VAT Return late

Exemptions are narrow

VAT Notice 700/22 says HMRC can exempt a business where using digital tools is not practical, such as because of location with no internet access, disability, religious beliefs that are incompatible with electronic records, or an insolvency procedure. Age alone does not qualify, and nor does being unfamiliar with software. Most limited companies will not be exempt.

Source: VAT Notice 700/22: Making Tax Digital for VAT

Not registered yet?

If your company is not yet registered for VAT, Making Tax Digital for VAT does not apply to it yet. Check the £90,000 VAT registration threshold first, then see how to register a limited company for VAT. Once it is registered, the company must keep digital VAT records and send its VAT Returns through compatible software.

SimpleFilings can check your details with you and prepare your company's VAT registration for a £4.99 SimpleFilings service fee. HMRC does not charge to register. We do not keep your VAT records or file VAT Returns, so you will still need compatible software.

If the company later stops trading, the rules on how to deregister for VAT explain the 30-day deadline and the final return.