How to ensure your business is compliant with Making Tax Digital

2nd Mar 2020
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This year, a number of regulatory changes will shake up the business world, and finance leaders will have an entirely new set of rules and procedures to plan, implement and oversee. One of the most important updates in this regard refers to Making Tax Digital (MTD). There are three major changes set to be introduced to existing MTD regulations in April 2020 that finance leaders should be aware of — these involve digital bookkeeping, digital journey and penalties.

What is MTD?

MTD is a government initiative that is set to revolutionise the UK tax system, ultimately bringing an end to self-assessment. The primary objective is to bring about a more effective, efficient and easy tax administration system via fully digitised tax returns.

Commencing 1st April 2020, the second phase of MTD for VAT begins, subsequently bringing an end to the so-called ‘soft landing’ of the initial phase, introduced by HMRC in 2019. Phase two is important as the introduction of these new measures are expected to cause the most issues.

This article will explore how to make sure your business stays compliant with changing MTD regulations. Read on to find out how MTD is set to change the business landscape in 2020.

Digital bookkeeping

From 1st April 2020, finance leaders of small businesses based in the UK will be required to invest in digital recordkeeping. The Office for National Statistics states that there are currently 2.72 million VAT-registered businesses or registered employers, and while as much as 99% of VAT returns are already submitted online, just 13% of returns are currently submitted via compatible software. The remaining 87% of VAT returns are currently manually inputted through the HMRC Government Gateway interface.

Therefore, the switch to digital bookkeeping will be a dramatic change, likely to be felt strongest by smaller businesses that presently keep their records summarised on paper or through Excel spreadsheets. The April changes will make it compulsory for such businesses to digitise their recording of supplies made and received, including the time of supply, VAT rate and value. In addition to sales, this will be extended to purchases, fixed asset transactions and stocks.

Smaller businesses will be required to purchase a basic digital accounting package, perhaps for the first time. Business owners and finance teams are best advised to remember that the package they choose to invest in should also be MTD compliant when it comes to filing. Your finance system should integrate seamlessly with your MTD solution to comply with the new digital linking phase of the MTD regulation.

Digital journey

The next change will mostly apply to both large and enterprise-sized businesses. From April, data transfer between functional compatible software (i.e. accounting and invoice systems) must be executed using digital links. Therefore, manual input of any kind — including consolidation, manipulation, error-correcting or cut and paste — will be phased out. However, if the business in question can ensure the digital journey — from their invoices or accounting systems up to the bridging software and then onwards to HMRC — is uninterrupted, only then can they continue with their current method.

If your business has several group accounts or accounting systems, it's important to beware as these will often involve consolidations with regards to returns in an Excel spreadsheet. Integration or complex Excel macros may be necessary, while investment in VAT reporting software could be a lifesaver in this scenario.


The third and perhaps most noteworthy change involves financial penalties. A suspension on penalties for late or inaccurate MTD returns has been in place since April 2019. However, from April 2020, this will be lifted. That means finance leaders need to ensure their business is MTD compliant. Otherwise, they could be facing significant financial repercussions.

The UK government announced a two-tier penalty system in the draft Finance Bill 2018-19, which states that penalties will be enforced within 15 days of overdue tax payments. The penalty system is cumulative and is based on the number of offences incurred during the past year.

The bottom line

Useful government guidelines are available online for businesses that need some extra information while migrating and in anticipation of the new Making Tax Digital regulations. It is also worth remembering that businesses that were deferred during the first phase of MTD until 1st October 2019 will also be deferred on phase two until 31st October 2020.

These are sweeping changes, and finance leaders of businesses will need to run a tight ship in the run-up to April 2020 and beyond in order to ensure their businesses remains compliant.

Find out more about regulations, challenges and trends set to define the finance world this year.