Are you ready for phase 2 of Making Tax Digital (MTD) for VAT?

What is MTD for VAT?

Making Tax Digital requires businesses to maintain digital records and send regular VAT Returns to HMRC using compatible software.

In phase 1 (since April 2019) all VAT registered businesses with a taxable turnover above the VAT threshold of £85,000 have been required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns.

If you are registered for VAT but your taxable turnover is below the VAT threshold, you can choose to voluntarily join the Making Tax Digital service now.

Should you sign up voluntarily?

It’s worth getting ready for MTD, because from April 2022 all VAT registered businesses with a taxable turnover below £85,000 will also be required to follow Making Tax digital rules for their first return starting on or after 1st April 2022.

What are the changes in phase 2 and phase 3 for MTD?

When MTD was first introduced, the emphasis was on digital records. These records didn’t have to come from one source only – so long as they were linked, and allowances were made for manual adjustments (for example when consolidating group returns).

Phase 2 requires that “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” is used. Crucially, no manual adjustments are allowed.

Businesses were initially given a year from the introduction of phase 1 to make sure that systems were digitally linked, but because of the pandemic an eleventh-hour reprieve saw the mandate extended. The requirement is now compulsory for all VAT periods beginning on or after 1 April 2021.

Phase 3 will see the requirement for all VAT returns to be submitted digitally regardless of the taxable turnover of the business.

What is a digital link?

HMRC defines it as where a “transfer or exchange of data is made, or can be made, electronically between software programs, products or applications. That is without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between 2 or more pieces of software”.

Essentially HMRC wants companies to create a digital audit trail that shows a clear journey from the digital record to the VAT Return data that is submitted to HMRC.

In practice this audit trail can be quite convoluted

  • This could be a transfer, or exchange of data within a business (for example, between 2 systems) via mediums such as importing data through a .csv upload
  • It could include linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors/fetches the source’s value in another cell, then the cells are linked.
  • You can also email a spreadsheet containing digital records or load digital records onto a portable device so the information can be imported into another software product (for example to an accountant so that they can prepare a VAT Return or make a calculation such as, a Partial Exemption calculation).

This list is not exhaustive, but importantly HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link.

What records are required under MTD?

Under the MTD requirement, the records you must store digitally include sales and purchase invoices with VAT. Accounting records that are not specific to VAT return requirements are not required (for example nominal account journals).

The data that must be stored digitally includes:

Designatory data:

  • your business name, address and VAT registration number
  • the VAT accounting scheme(s) you use

Supplies made and received:

  • VAT on goods and services you supply (everything you sell, lease, transfer or hire out)
  • VAT on goods and services you receive (everything you buy, lease, rent or hire)
  • any adjustments you make on a VAT return
  • the ‘time of supply’ and ‘value of supply’ 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
  • total daily gross takings if you use a retail scheme
  • items you can recover VAT on if you use the Flat Rate Scheme
  • total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme


MTD does not change businesses’ tax liability or payment obligations, so why go to the effort of changing systems to enable it? HMRC says it “reduces the scope for error, which in turn contributes to a reduction in the tax gap, supporting public services and levelling the playing field for businesses”.

If you need assistance with your MTD obligations, or would like to get ahead of your upcoming requirements, or even just want to reduce your scope for error, please get in touch with us. At BOSS, not only can we supply HMRC approved Sage Accounting software, but we can help you get up and running in no time – so you can concentrate on the important job of running your business.

Call us on 01462 374073, or email for a no obligation enquiry.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top
Scroll to Top