Making Tax Digital for VAT

Who has to follow it, and who is exempt

The notice applies MTD to “all VAT-registered businesses.” That includes a business registered voluntarily below the threshold, and, on our reading, an overseas business registered for UK VAT, for example a US software company selling to UK consumers: the exemption list in the notice doesn’t mention where a business is established.

Section 2.1 of the notice lists the exemptions. HMRC must be satisfied that it isn’t “practical” for you to use digital tools because of “age, disability or location,” that you are subject to an insolvency procedure, that the business is run entirely by members of a religious society whose beliefs are incompatible with electronic communications, or that you are already exempt from filing VAT returns online. Cost isn’t a reason on its own: “You will not get an exemption solely due to any extra effort, time or cost that may be needed when transitioning.” You ask for an exemption through HMRC’s VAT general enquiries service, and the decision comes in writing.

The records that must be digital

Section 3.3 calls the required records your “electronic account.” It has four parts.

Designatory data: the business name, the address of your principal place of business, your VAT registration number, and any VAT accounting schemes you use.

Supplies made: for each sale on the return, the time of supply (the tax point), the value “excluding VAT,” and the rate of VAT charged, plus the period’s output value split between standard-rate, reduced-rate and zero-rate supplies. Several supplies on one invoice, in the same period and at the same rate, can be one entry.

Supplies received: for each purchase, the time of supply, the value, and “the amount of input tax that you’ll claim.”

Summary data behind each return: total output tax, tax under the reverse charge, total input tax, corrections, and “a total of each type of adjustment” on a separate line. Calculations for adjustments can be done outside the software as long as the totals go in.

The invoices themselves don’t have to be digital. The notice says you must keep additional records such as invoices, but “you do not have to keep these digitally.”

The digital links rule

This is the part that catches spreadsheet users. Section 3.2.1: “Once data has been entered into software that you use to keep and maintain your electronic account, any further transfer, recapture or modification of that data must be done using digital links.” Retyping figures from one program into another is “not acceptable under Making Tax Digital.”

HMRC lists what does count: linked cells in a spreadsheet, “emailing a spreadsheet containing digital records, so the information can be imported into another software product,” moving files on a memory stick for someone else to import, “XML, CSV import and export, and download and upload of files,” automated data transfer, and API transfer. And one thing that doesn’t: HMRC “does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, as a digital link.”

The software doesn’t have to be one program. Functional compatible software can be “a set of software programs,” provided that together they keep the records, send returns through the API and receive information from HMRC. The original grace period ended long ago: the notice’s update history records the end of the soft landing for digital links for VAT periods starting on or after 1 April 2021.

Where Stripe and QuickBooks sit in the chain

The question that decides your obligations is where your electronic account starts. The notice’s examples put it plainly: the digital link requirement starts at “the point where the electronic account information is being stored.”

If the per-sale records live in your accounting software, with each Stripe invoice or charge recorded there with its tax point, net value and rate, then the accounting software is the start of the electronic account. Section 3.2.1 says that when VAT information is captured in other software, such as “sales invoicing software,” and that software “is not used to maintain your electronic account, there is no requirement for a digital link to be used when data is transferred to the electronic account.” HMRC’s Example 4 matches this: a booking website sends invoices into the accounting software by a “non-mandatory digital link,” and the requirement starts in the accounting software.

If your accounting software holds only summaries, say a monthly sales total per VAT rate, then the per-sale records live in Stripe, and Stripe is part of the electronic account. That is HMRC’s Example 2: an online shop whose sales software holds the invoice-level data, with weekly summaries downloaded to a spreadsheet. There the requirement starts “at the online sales software,” and every step after it must be digital. Downloading a Stripe Tax itemized export (a CSV, which Stripe describes as “a detailed view of the line item level tax breakdown for every transaction”) and importing it, or linking it by formula, is a digital link. Typing the totals from the export into a journal, or copying and pasting them, is not.

The last step is the same either way. Stripe’s filing documentation lists automated filing “in the US” and “for selected registrations in Ireland and Canada,” so a UK return goes through MTD software you choose, or a filing partner, connected to HMRC’s API. Check that the package that files your return appears in HMRC’s “Find software that’s compatible with Making Tax Digital for VAT” finder on GOV.UK.

Filing the return and the penalties for missing it

Section 3.2.2: “The submission of information to HMRC must always be through an API.” That can be accounting software with the API built in, bridging software that connects a spreadsheet or another package to HMRC, or an API-enabled spreadsheet. Once you submit, the software shows you the return, asks you to declare it correct, and confirms receipt.

Late returns now earn points rather than a surcharge. HMRC’s penalty guidance says that for VAT periods starting on or after 1 January 2023, “late submission penalties apply if you submit your VAT Return late,” and that “this includes nil or repayment returns.” Each late return earns a point until you reach the threshold for your filing frequency: 2 for annual returns, 4 for quarterly and 5 for monthly. At the threshold you get a £200 penalty, and “a further £200 penalty for each subsequent late submission while you’re at the threshold.” Late payment is penalised separately.

Making Tax Digital in practice for a Stripe and QuickBooks business

Decide where the electronic account starts, and write it down. If you record every Stripe sale in your accounting software with its rate and tax point, that is the start, and the path from Stripe in is not a mandatory digital link. If you post summaries, Stripe is the start, and you need a digital trail from Stripe’s records to the return.

Keep the sales records in the shape the notice asks for. A sale needs a tax point, a net value and a rate. A month-end journal with one “Stripe sales” total doesn’t give you that by itself, so record sales so that the UK VAT on each one can be identified, and check that standard-rated, reduced-rated and zero-rated sales can be totalled separately.

Treat the reconciliation as part of the trail. Most businesses compare Stripe’s UK figures with their books before filing. If that comparison leads to a correction, enter the adjustment as its own line in the software, as the notice’s summary data rules require, rather than editing the figures on the return.