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Making Tax Digital for VAT (MTD for VAT) is set to take effect from 1 April 2019. The government recently published long-awaited legislation, in which it outlined the requirements for the initiative.

Meanwhile, an MTD for income tax pilot was also launched for self-employed taxpayers, which gives them the opportunity to test the new MTD system and influence how it operates. This blog post highlights the latest position in regard to MTD.

Examining the new legislation

The requirements for MTD for VAT are outlined in the government’s Value Added Tax (Amendment) Regulations 2018.

The regulations stipulate that firms within the scope of MTD must keep digital records using ‘functional compatible software’. An Application Programming Interface (API) will be used to calculate VAT returns, and these can be submitted using software, bridging software or API-enabled spreadsheets.

The transfer of data from compulsory digital records, however, must be carried out digitally: manual transfer or disposition of data will not be permitted.

‘Functional compatible software’ is defined by the government as a program or set of programs which can:

  • record and preserve records in an electronic form
  • supply HMRC with information in an electronic form from these records, via the API platform
  • receive information from HMRC using the API platform.

At the time of issuing draft guidance, HMRC stated that options for the digital transfer of information to HMRC will include XML import/export, macros and linked cells.

As outlined in guidance previously issued by HMRC, taxpayers will be able to calculate adjustments (such as for partial exemption) outside of the digital records, and these can be transferred in either digitally or manually, provided that the records are ultimately submitted to HMRC in a digital format.  

It has been suggested that HMRC will allow digital records to be contained within multiple pieces of software, as long as a ‘digital link’ exists between the types of software used.

These details are yet to be legislated for. However, HMRC has revealed that it intends to implement a ‘soft landing’ period following the introduction of MTD in 2019, during which time penalties will not apply for incorrect record keeping.

Piloting MTD for VAT

HMRC is live piloting MTD for VAT from April 2018 onwards. Businesses signed up to take part will be given the opportunity to submit VAT returns using the digital MTD system.

MTD for income tax: pilot for the self-employed

During March, HMRC launched a new MTD pilot for income tax for the self-employed. Sole traders participating in the pilot will be required to send income and expenses summaries to HMRC every three months using MTD-compliant software. A final report to confirm all income and expenses for the year will also need to be filed. Sole traders will be able to claim any allowances or relief they are entitled to within this report.

Currently, only two software providers are included on HMRC’s list as being able to support the MTD for income tax pilot. However, the Revenue has stated that this will be updated as more become available. The list can be located on the government’s website here.   

As always, Practice Track stays up-to-date in regard to the latest MTD developments. Our Making Tax Digital factsheet contains information on the key MTD issues your clients need to consider. For more information, or to place an order, please call 0800 181 343, or email