Making Tax Digital (MTD) is HM Revenue & Custom’s (HMRC’s) strategy to modernise the UK’s tax system. It involves a move to digital record keeping and reporting by taxpayers. Through the improvement of HMRC’s own internal systems to collate relevant information into one digital tax account for each tax payer.

HMRC has set out its intention to become one of the most advanced tax authorities in the world by enhancing customer experience. MTD covers both individuals and businesses across several tax bands. For businesses over the VAT registration threshold, VAT is the first tax selected for digitalisation in the UK. This will take effect from 1 April 2019. For Income Tax and Corporate Tax, MTD will not be mandated until April 2020 at the very earliest.

At present, most businesses submit their VAT returns through manually typing figures into HMRC’s online portal. This online portal will close from April 2019 and taxpayers will no longer be able to submit VAT returns this way. Instead, all submissions must be done digitally via HMRC’s Making Tax Digital API (Application Programming Interface).

There are two principles that businesses must be aware of:

  1. You must ensure you keep digital records. Full digital record of your VAT information will be required to be held on one digital system. This must also document sales which have had VAT applied, including the date of sale, the value of sale and the rate of VAT applied.
  2. You must provide detailed VAT return information to HMRC with MTD compatible software and not through the current HMRC portal. Many solutions including some Microsoft Dynamics products will be updated to comply with the new requirements and there will be a bridging solution available.

As part of MTD you will be required to digitalise your processes to ensure there is no breaks in the process and no manual steps, this is designed to improve the quality of your data. HMRC has announced that businesses will have 12 months to implement this on the run up to April 2020. You will still need to report on VAT digitally during this period, but for now spreadsheets and manual processes can be used to calculate the figures.