Digital records

Under the Making Tax Digital (MTD) rules, UK VAT registered businesses above the VAT threshold must keep and maintain relevant VAT records digitally within “a compatible software package that allows you to keep digital records and submit VAT Returns” or “bridging software to connect non-compatible software (like spreadsheets) to HMRC systems”.

This digital record keeping requirement is mandated on all VAT reporting periods beginning on or after 1st of April 2021, following the ending of the two-year ‘soft-landing’ phase of MTD. The requirements apply to the first complete VAT return from or after this date.

Records included under this include sales and purchase invoices with VAT. Accounting records not specific to VAT return requirements are not included in this.

The data that must be stored digitally is:

  • your business name, address and VAT registration number
  • any VAT accounting schemes you use
  •  the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
  • the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
  • any adjustments you make to a return
  • the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
  • the rate of VAT charged on goods and services you supply
  • reverse-charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
  • your total daily gross takings if you use a retail scheme
  • items you can reclaim VAT on if you use the Flat Rate Scheme
  •  your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme

You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:

  • volunteers for charity fundraising
  •  a third-party business
  • employees for expenses in petty cash

You must add all your transactions to your digital records, but you do not need to scan paper records like invoices or receipts.  What this means in practice is that your business transactions must be recorded in accounting software (Sage, QuickBooks, Xero are examples of some), or on a spreadsheet that is then digitally linked to software that is then used to report the figures to HMRC on your VAT return.

Digital Links

If a business uses more than one software package to keep records and submit returns, these packages need to be linked digitally. Some of the ways that these can be linked include:

  •  using formulas to link cells in spreadsheets
  •  emailing records
  •  putting records on a portable device to give to your agent
  •  importing and exporting XML and CSV files
  •  downloading and uploading files.

Digital links do not include:

  • ‘Cut and paste’ manual process to move data; and
  •  Any manual adjustments and consolidations of group returns in spreadsheets.

There are some exceptions in the uninterrupted digital journey. HMRC has granted an exemption on manual calculations on special VAT schemes including the capital goods scheme, flat rate, Daily Gross Takings or partial exemptions.

The digital links between the software packages used need to be in place before the business’s first VAT period after the 1st of April 2021.

Will it affect me?

Almost certainly if you are a VAT registered business turning over £85,000.  For those VAT registered businesses that turnover less that £85,000 they will have to implement the above changes with effect from their first VAT return starting 1 April 2022.

If you own a business, you are self-employed and you pay income tax, national insurance, or you receive rental income, you are likely to be affected by MTD from April 2024.  For those business that operate through a limited company the expected start date for MTD is April 2026.  However, please look out for our updates over the coming months and years as these dates could be delayed. 

We can advise you on the software you will need and how to comply with the new quarterly reporting requirements - you can also visit our Further Help page.