Making Tax Digital (MTD) in the UK

February 15, 2023

In 2019, the UK introduced a new way of handling VAT returns – the Making Tax Digital (MTD) system was implemented. The change was a part of the government’s efforts to modernise the UK tax system and make it easier for businesses to report their taxes.

From April 1, 2022, all businesses registered for VAT are required to keep digital records that update automatically and store all relevant company information in one place. The online system is designed to increase transparency and reduce errors that can occur during the filing of paper tax returns.

Thanks to this initiative, businesses will have access to a digital tax account where they can submit tax information to HMRC on a quarterly basis. This marks a step towards making HMRC one of the world’s most technologically advanced tax administrations. The MTD signals the end of annual tax filing in the UK.

In this article, we will help you understand what this change means and ensure you don’t miss any important deadlines.

What Is VAT?

Value Added Tax, or VAT, is a tax that is charged on the sale of goods and services. If a company’s taxable turnover surpasses a certain limit, a business must pay VAT. The VAT tax rate (the amount charged) depends on the types of goods and services, with 20% being the most common rate.

What Are the VAT Deadlines?

The due dates for VAT payments can be monthly, quarterly (over a three-month period), or yearly. Every company can decide how frequent its accounting period will be. If you choose to submit your VAT return yearly, you will still need to pay VAT more than once a year; meanwhile, the sum is based only on your estimations. This option is the least popular among businesses.

VAT Return Deadlines:

Monthly  1 calendar month and 7 days after the reported month ends

Quarterly 1 calendar month and 7 days after the reported quarter ends

If you choose a 1-month or 3-month accounting period, you must submit your returns and pay the tax within one calendar month and seven days after the end of the accounting period. If HMRC does not receive a payment within this time frame, they will assume that you missed the deadline, and you may be fined. It’s a good idea to pay taxes ahead of time to avoid potential penalties.

What Is Making Tax Digital?

Making Tax Digital is a compulsory system of online tax filing. 

Digital record-keeping:

HMRC went digital and now requires businesses and individuals to keep their records online rather than on paper. If you don’t comply with the new requirements, you could face fines and interest charges. 

When the initiative started, people weren’t allowed to use spreadsheets for record-keeping, but now you can use them too, as long as they’re connected to an accounting app to show/send any digital updates to HMRC.

Quarterly data:

The days of paper accounting and yearly returns in the UK are gone. With MTD, you’ll now need to submit updated information to HMRC every quarter instead of just once a year. This might take a bit more effort if you’re used to the old paper system. However, it’s still a move towards more efficient digital record-keeping.

Benefits of Making Tax Digital (MTD)

One of the main advantages of MTD is that it eliminates the errors and confusion associated with paper tax filing. But there are more. The most sustainable benefits of MTD include the following:

  1. Stress-free filing: Now, you have to submit your company’s data every quarter, which means you don’t have to cram 12 months of information into one tax return at the end of the year. This helps to reduce the risk of making mistakes. 
  2. Real-time tax view: You will be able to see your tax liabilities at any time. A continuous view means that you will not have to wait until the end of the year to find out how much you owe, which can help you plan your budget and set aside money to pay your taxes.
  3. Paperless taxes: MTD requires businesses to file their tax returns online and update HMRC regularly using accounting software. An app makes it easier to detect mistakes as they happen.
  4. Access from any device: With the digital tax process, all of your tax information is stored in one system, so you can access it from anywhere, anytime. You can log in from your smartphone, laptop, or tablet to view and edit your data.

Challenges with the New System

With MTD come many benefits you can enjoy right now, but there are still some issues you should be aware of. As with almost any modern governmental system, it takes time for improvements to be implemented. Here are the challenges you should keep in mind:

  1. Privacy: Since some of your online transactions and banking data are visible to HMRC, you might be concerned about privacy. But working online also comes with an additional layer of security. When using a secure online system, you can protect your bank accounts from unauthorised access – the system establishes appropriate control measures to prevent fraud. Additionally, it maintains an electronic control log of all completed transactions, making it easy to see what actions were performed by whom and when.
  2. Technology: Filing tax declarations online is a must for business owners, but it means that you need to embrace technology and start managing your accounts with software. The transition to digital accounting may be daunting, especially for those who still use the paper method. Thankfully, accounting software is quite user-friendly, and there are many applications available. So, even if you’re not tech-savvy, you can still file your returns online with a simple and intuitive app.
  3. Deadlines: Although the quarterly filing of declarations helps to eliminate errors, it also means that more deadlines must be met, and more applications must be submitted. But it also means that you know how much tax you owe, avoiding any unpleasant surprises.

The world of accounting is constantly changing, and new technologies like MTD are making that change happen faster. While it may seem like a significant change in the way taxation works, the advantages of MTD far outweigh any temporary inconveniences that may occur in the process.

Payrow Automation Tools for Tax Accounting

The MTD system requires businesses to adapt and embrace new ways of doing things, but there’s no need to worry! That’s where the Payrow platform comes in. We know how to make your work easier, especially when it comes to processing taxes. We are experts in automating business processes and eliminating routine tasks. Payrow is focused on helping small and medium-sized businesses, as well as sole traders. Our goal is to free up your time so you can focus on what’s really important – growing your business and achieving your dreams.

Simplify tax accounting with Payrow automation tools!