Making Tax Digital: What You Need to Know for Compliance

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024.

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax.

This blog post is going to be all about the keywords you may, or may not already know and what they actually mean!

Agent

Also known as an accountant or book-keeper, an ‘agent’ is someone who can prepare and file a business’ VAT returns on their behalf. Agents will be able to submit their clients’ MTD for VAT returns directly to HMRC using MTD compatible software.

Agent services account

An agent services account is what accountants use to access HMRC’s online services for Making Tax Digital for VAT.

API-enabled spreadsheets

An API (Application Programming Interface) is a type of technology which allows for the exchange of data between two software programmes. In terms of Making Tax Digital, an API-enabled spreadsheet is a spreadsheet such as Excel which can connect to an API and combine with accounting software.

Automated Data Transfer

An Automated Data Transfer is a type of digital link that is accepted by HMRC. For instance, when a VAT calculation spreadsheet is directly linked to accounting software where it can access figures directly.

Cloud-based accounting software

Cloud based accounting software or online accounting software, is software that is hosted in “the cloud.” This means that you can easily and securely access your financial data any time, anywhere.

Xero is an example of a cloud-based accounting software where you can easily keep digital records and submit your VAT returns directly to HMRC.

Designatory data

In terms of MTD, designatory data refers to specific business information that you must keep a digital record of. It includes; business name, the address of your principal place of business, your VAT registration number and any VAT accounting schemes that you use.

Digital links

A digital link is an exchange of data between two pieces of software, such as accounting software and HMRC’s systems.

Digital audit trail

A digital audit trail is a record of every step in a business transaction. This allows HMRC to clearly see the journey from transactional data recorded in your accounting system all the way through to the VAT return numbers you’ve submitted.

Digitalisation

Digitalisation refers to automating processes or business models through software and digital technology. In the context of Making Tax Digital, digitalisation refers to HMRC’s goal to shift the UK’s tax system online.

Digital records

A digital record refers to the digital version of information that you can view on a computer, tablet or phone screen. Under the MTD rules, businesses must store specific information in a digital format on a computer or in the cloud using HMRC-approved software.

MTD’s requirement for digital record keeping means businesses can no longer solely rely on keeping their records in paper form. Examples of digital records that businesses will need to store under MTD include;

• Company name
• Address
• VAT registration number

Digital tax account (DTA)

A digital tax account (DTA) refers to an online account with HMRC through which you will submit your taxes. This includes both Business Tax Accounts and Personal Tax Accounts.

Domestic reverse charge

The VAT domestic reverse charge procedure is an anti-fraud measure designed to combat complex fraud assaults on the UK VAT system.

Flat Rate VAT Scheme

Under the Flat Rate VAT scheme, businesses simply pay a percentage of their total turnover as VAT. The actual amount you pay depends on the type of business, as different industries have different flat VAT rates.

Form 64-8

Form 64-8 is used to tell HMRC that a business has given authorisation for an agent to act on their behalf.

Government Gateway Account

A Government Gateway Account is what business owners use to communicate with HMRC online. An account is created when you first sign up for a government online service.

HMRC

Her Majesty’s Revenue and Customs is a non-ministerial department of the UK government responsible for the collection of taxes in the UK. Making Tax Digital is managed by HMRC.

HMRC API

The HMRC API (Application Programming Interfaces) allows for the exchange of data between two software programmes. It’s the technology that is used to connect third-party accounting software such as Xero to HMRC systems.

HMRC-recognised MTD software

HMRC-recognised MTD software, or ‘functional compatible software’, is what businesses must use to comply with MTD. This can be an accounting software, product, or application that can preserve and hold digital records along with providing and receiving information from HMRC through an API.

From April 2022, all VAT-registered businesses must keep digital records and submit VAT returns using HMRC-recognised software such as Xero.

MTD

MTD is the abbreviation for Making Tax Digital, a government initiative to digitalise the UK tax system.

MTD bridging software

Many businesses currently keep their accounting data in spreadsheets and manually enter their VAT returns onto a government portal. Under MTD, this manual entry is no longer allowed.

MTD bridging software is a tool that links business records to HMRC’s system. This allows data from spreadsheets to be sent to HMRC via ‘digital links’.

MTD compliant

To be MTD compliant, all businesses must follow the rules set out by HMRC for MTD for VAT. This involves keeping and maintaining your records digitally and sending returns to HMRC via MTD-compatible software.

MTD exemptions

Making Tax Digital exemptions are sometimes referred to as being ‘digitally exempt’ or ‘digitally excluded’. Although MTD is compulsory, there are some exemptions. For example, people who are older, have a disability, live in a remote location or businesses run by religious societies where their beliefs prevent them from using computers could also be exempt.

MTDfB

MTDfB is an abbreviation of Making Tax Digital for Business.

MTD for ITSA

MTD for ITSA refers to Making Tax Digital for Income Tax Self Assessment. This will apply to the self-employed, sole traders and landlords who have an overall income above £10,000 from the 6th of April 2024.

MTD penalties

Making Tax Digital penalties are HMRC’s new points-based system for late tax submissions and payments. From January 2023 this will replace the current VAT penalty system, where penalties are calculated using a percentage of the outstanding VAT amount for the default period.

Making Tax Digital for Corporation Tax

MTD for Corporation Tax is the government’s initiative to digitalise how corporation tax is handled by businesses and agents.

Making Tax Digital deadlines

Making Tax Digital deadlines refer to the key milestones of the roll out of Making Tax Digital. Check out all the essential MTD deadlines here.

Making Tax Digital (MTD) VAT Phase 2

From April 2022, all VAT-registered businesses must comply with MTD for VAT rules unless exempt.

Multi-Factor Authentication (MFA)

Multi-factor authentication (MFA) is a security procedure that requires you to enter your account using at least two separate factors: something you know (your password) and something you have (your mobile device).

OAuth (Open Authorisation)

OAuth (Open Authorisation) is technology through which you can securely grant websites or applications access to other websites without sharing usernames and passwords.

Online Agent Authorisation (OAA)

Online Agent Authorisation (OAA) is the online service that a business must use to allow an agent to manage their tax via their Government Gateway account.

Soft landing period for MTD

The soft landing period for MTD refers to when HMRC gave businesses extra time to sign up and comply with MTD for VAT without the risk of MTD penalties. This period ended in April 2021.

Tax Gap

The Tax Gap is the difference between how much tax is supposed to be paid to the HRMC and the amount that is actually paid. This can happen due to taxes not being filed, taxes owed being underreported or taxes being underpaid. Making Tax Digital aims to close the tax gap by making it easier for people to file their taxes more efficiently and accurately.

Taxable turnover

Taxable turnover is the total value of taxable supplies made by a business, excluding VAT.

Time of supply or tax point

For VAT purposes, the tax point (or ‘time of supply’) for a transaction is the day the transaction occurs.

VAT account

A VAT account is a record businesses must keep of the VAT they charge and VAT they pay on purchases. The figures in a VAT account are used to complete VAT returns.

VAT Cash Accounting Scheme

This is a scheme by HMRC which means businesses only have to pay VAT when a customer pays them. This can be beneficial for businesses in terms of cash flow, as they don’t have to pay VAT until customers pay them.

VAT threshold

The VAT threshold is £85,000. This means you must register for VAT if your VAT taxable turnover goes over £85,000. You do not need to register for VAT if you earn less than the £85,000 threshold but if you do choose to register, you will need to comply with Making Tax Digital for VAT rules

VAT retail schemes

VAT retail schemes are used to calculate how much VAT a retail business must pay. There are three standard VAT retail schemes in the UK including; Point of Sale Scheme, Apportionment Scheme and Direct Calculation Scheme.

VAT652 form

The VAT652 can be used to tell HMRC if you made an error with a VAT claim and have already submitted the claim.

Zero rated VAT items

When items are zero-rated, they are still VAT-taxable, but the rate of VAT you must charge your consumers is 0%. Businesses must still account for them in their VAT books and disclose them on VAT returns.

VAT Notice 700/22

The VAT Notice 700/22 was published by HMRC in 2018 explaining the rules of MTD for VAT and what information businesses need to keep digitally to comply as well as what counts as compatible software suitable for MTD for VAT.