Making Tax Digital (MTD): Digital record-keeping and filing in the UK

In the UK, the government is introducing additional tax reporting constraints under its Making Tax Digital (MTD) programme. Here’s what MTD means for Wave users in the UK, and how Wave will help you comply.

What is Making Tax Digital?

MTD is a UK initiative to eliminate the manual submission of tax returns. The government explains the goals of the programme like this:

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is a fundamental change to the way the tax system works – transforming tax administration so that it is more effective, more efficient, and easier for taxpayers to get their tax right.

What does that mean?

There are two practical consequences of the new MTD environment:

  1. Businesses must keep digital records. This could mean using dedicated financial software like Wave, or something as simple as a spreadsheet. If you’re keeping your financial records in old-school paper journals and ledgers (and you’re not exempt), you’ll have to switch to a digital solution. If you’re reading this, you probably use Wave, so you’re already meeting this requirement!
  2. In the future, tax reporting will be entirely digital. This means that the software where you keep your records will need to be able to connect to HMRC and upload your tax returns directly, or you will need to use approved “bridging software” to take data from your main accounting system and upload it to HMRC. The old ways of entering returns on the HMRC website are going away.

When does this happen? Am I affected?

MTD is rolling out progressively, starting with VAT in 2019, and moving on to income tax in 2020 at the earliest.

If your business is VAT registered, with a taxable annual turnover above the VAT threshold (£85,000), then there are two dates to remember.

Beginning April 1, 2019, you must keep your financial records digitally. If you use Wave Accounting, you are already doing this!

When you submit your first VAT return for a period starting on or after April 1, 2019, you must use an MTD-compliant software, which includes approved bridging software.

This means the earliest date that any business on standard quarterly VAT reporting would need to submit a VAT return under MTD is June 30th. This is the last day of the quarter that starts on April 1. The earliest deadline to submit VAT under MTD would be August 7th (1 month and 7 days after the end of the April-June quarter).

MTD VAT is starting out as a partial solution. It will replace manual entry of the VAT100 form data at the HMRC portal, but if you need to complete an EC Sales List (VAT101 form) or report larger errors on a prior return (VAT652 form), these will continue to be submitted as they are today.

How is Wave supporting MTD?

Wave has been closely following the development of the MTD agenda and its technical implementation. Given the partial nature of the launched solution by HMRC, the anticipated changes to the structure of the VAT100 return that will arise from the UK’s departure from the EU, and lack of clarity around future evolution of the MTD environment as it progresses towards income tax filing, we have decided at this time not to build a direct connection from Wave to HMRC. Instead, we will enable Wave customers to comply by using approved bridging software.

What is bridging software?

MTD rules allow you to use your preferred accounting software, regardless of whether or not it directly connects to HMRC to submit the VAT100 data. If you use software like Wave that does not directly connect, you may export data into a bridging software—typically a spreadsheet—that has the ability to perform the direct upload.

This rule is essential not just for smaller businesses that don’t want to pay for new accounting software, but also for huge companies with accounting software that was developed many years ago, or who have always needed to perform complex manipulation and aggregation of data across many divisions in a spreadsheet to calculate their VAT return(s).

Many different companies offer bridging software, and you can find an extensive list here from the Institute of Chartered Accountants of England and Wales. However, Wave currently recommends 2 simple solutions that plug into Microsoft Excel, and are free for the first year:

  • VitalTax. Currently free, but expected to start charging next year.
  • Tax Optimiser. Free for 1st year, then £30 per year.

How will I get my data from Wave?

Wave is developing additional downloadable sales tax reports specifically for our UK customers that will enable you to comply with the requirements of MTD through bridging software.

These reports, together with detailed instructions for preparing and submitting your VAT returns via recommended bridging software, will be available in your Wave account beginning April 1 to ensure your business is able to meet all the requirements of MTD VAT.

New Wave account sign-ups are limited to US and Canadian business owners only. We don’t provide support for this product outside of this region.