VAT-registered businesses must comply with Making Tax Digital (MTD) rules, regardless of how much they make in a year.

Kicking in from 1 April 2022, the changes mean all VAT-registered businesses must compile VAT returns and submit them using software that connects to HMRC's systems via a software link.

Although MTD for VAT is not completely new, this is a significant change for smaller businesses, many of whom do not currently use software to keep their business records and file VAT returns.

MTD is the thrust of HMRC's goal to transform the UK tax regime into the most digitally advanced one in the world, help make the system easier to understand and lose less tax revenue to filing mistakes.

VAT-registered businesses with a turnover above £85,000 have been required to meet these conditions since April 2019.

In January 2022, around one third of affected businesses had already signed up to MTD, according to HMRC, leaving two thirds of businesses with a matter of months before they need to file their first VAT return under MTD.

Who does MTD for VAT apply to?

The new regime applies to all businesses that are registered for VAT, unless HMRC has agreed they are exempt.

These businesses must follow MTD for VAT rules from either 1 April, 1 May or 1 June 2022 depending on their VAT return quarters, as shown below:

VAT return quarters  Last VAT return due under the old system   MTD for VAT start date for digital records First VAT return due under MTD 
 June, September, December and March  Quarter ended 31 March 2022  1 April 2022  Quarter ended 30 June 2022
 July, October, January and April  Quarter ended 30 April 2022  1 May 2022 Quarter ended 31 July 2022 
 August, November, February and May  Quarter 31 May 2022  1 June 2022  Quarter ended 31 August 2022
It is important that you do not sign up for MTD for VAT until you have submitted your final VAT return under the old system.

When you need to sign up depends on what your VAT is and whether or not you pay your VAT by direct debit.

There is a risk that any trader who should be filing VAT returns under MTD rules but has not registered will be charged a penalty.

MTD for VAT exemptions

Businesses that are already exempt from filing their VAT returns online continue to be exempt and do not need to reapply.

Otherwise, businesses can apply for exemption if:

  • it is not "reasonably practicable" for you to use digital tools because of age, disability, remoteness of location or any other reason
  • you or your business are subject to an insolvency
  • your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or records.

Applicants for exemptions need to fully explain the reasons why they believe they meet one of the exemption criteria before HMRC decides if the claim has been successful.

Future of MTD

MTD for VAT is the start of HMRC's digitisation process, with MTD for income tax up next in April 2024.

MTD for income tax had originally been due for April 2023, but the Government delayed it by a year to give businesses more time to recover from the worst of the COVID-19 pandemic.

A pilot scheme is currently underway for businesses that want to get started with MTD for income tax rules right away.

MTD for corporation tax, the final part of the digitisation process, is due to begin no earlier than April 2026.

Talk to us about MTD.