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HMRC is bringing in its Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system. Regulations have been issued which set out requirements for MTD for VAT.

Under the new rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD ‘functional compatible software’.

The new rules have effect from 1 April 2019, where a taxpayer has a ‘prescribed accounting period’ which begins on that date, and otherwise from the first day of a taxpayer’s first prescribed accounting period beginning after 1 April 2019.

VAT Regulations and guidance

HMRC have published VAT Notice 700/22 which defines ‘functional compatible software’ and details the transaction-level data that needs to be recorded and retained within the software. This notice can be found at https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat.

HMRC is running a pilot scheme for MTD for VAT this year which hopefully will iron out some of the teething issues that will arise.

Income tax

It is the intention of the government to extend the Making Tax Digital (MTD) regime to income tax. They have confirmed that keeping digital records and providing quarterly updates will not become mandatory before at least April 2020 – although it will be possible to start using the MTD for business regime voluntarily earlier than this.


Under the new MTD rules, businesses will have to use ‘functional compatible software’. This means a ‘software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)’. This must be capable of:

  • keeping records in digital form as specified by the new rules
  • preserving digital records in digital form
  • creating a VAT return from the digital records held in compatible software and submitting this data to HMRC digitally
  • providing HMRC with VAT data on a voluntary basis
  • receiving, via the API platform, information from HMRC to ascertain compliance. It is as yet unclear what this means, but it may relate to HMRC’s ability to send compliance prompts and nudges.

How are the records to be kept?

Keeping digital records does not require businesses to issue digital invoices or keep digital receipts but the actual recording of supplies made and received must be digital. It has been confirmed that software will not be made available by HMRC and therefore it is likely that third party software will be required. The use of spreadsheets will be allowed, but they will have to be combined with add-on software to meet HMRC’s requirements.

How can we help

These changes are some of the most significant changes to businesses in recent times, and we are on hand to help with the challenges that this may bring.

With the MTD for VAT deadline fast approaching, there are issues that VAT registered businesses would do well to consider now. One key area is whether business transactions are currently recorded digitally and whether your current software is (or will be) ‘functional compatible software’ .

As a firm we have substantial experience in submitting VAT and income tax returns to HM Revenue and Customs and so we are ideally placed to be able to undertake bookkeeping services for you to enable you to comply with the requirements.

Alternatively, we are also accredited Xero partners and we would be happy to help you set up your book-keeping on this piece of HMRC compliant software.

If you have any questions on Making Tax Digital please contact:

Chris Page

Tel:  0207 084 5771

Email: chris.page@charter-tax.com


The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and information contained herein is provided based on legislation as at 22 October 2018.

Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law. We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.

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