How Has Making Tax Digital Changed Record Keeping?

The latest figures would suggest that 120,000 businesses have missed the 7th August deadline (the first quarterly deadline for MTD) to sign up to Making Tax Digital! This represents 10% of the businesses that should have filed their VAT Return under MTD for the quarter ended 30 June.

So, what does this mean in terms of fines and penalties?

The VAT man is going to be more lenient in this “soft landing” period running up to April 2020 and will not be charging fines in the normal way.  During this first year, the fines will be waived for record keeping penalties where businesses can demonstrate that they are doing their best to comply with the digital record keeping requirements.

What is Digital Record Keeping

The following are examples of digital records

  • Spreadsheets that can be imported into software in XML & CSV formats including downloads and uploads.
  • API (Application Programming Interface) transfer.
  • Linked cells between spreadsheets.
  • Compliant software such as QuickBooks Online, Xero etc.

Data transferred between spreadsheets using cut and paste does not qualify as digital records. Moreover, data cannot be transferred manually between software products.

The final transfer of data into the MTD compliant software product from which the VAT return is filed must be digital.

The level of details in the Digital Record Keeping

The basic rule remains that there must be a digital record of every supply made and every supply received.

So, businesses that applied the cash accounting scheme for VAT and used the bank statements as the main driver for recreating the accounting records, will need to adopt a different approach because of the necessity to keep digital records.

Retailers can record daily takings rather than individual takings.  There does not need to be a digital link between the till and the accounting records.  For the moment there is a relaxation in the rules allowing for example, the use of a spreadsheet to record the daily takings and then use an upload to a software or a link to another spreadsheet.

Businesses using invoices must ensure that the record of output VAT is split between the different rates of VAT; standard, zero, reduced, exempt and outside the scope.

The rules for supplies received are a bit more relaxed, if an invoice includes supplies at different rates, the business can record the totals.

Exceptions from Digital Record Keeping

Where calculations are carried out for adjustments such as partial exemption, retail scheme, fuel scale charge and capital goods scheme, these do not have to be kept digitally. They can be kept outside the digital records and single-entry adjustments can be made to the digital records. 

Those operating a flat rate scheme do not need to keep digital records of supplies received unless of course they are claiming the VAT on capital items costing more than £2,000 (including VAT).

The MTD for VAT regulations allow HMRC to take a more lenient approach where digital record keeping would be impossible, impractical or unduly onerous.  Examples of these are third party agents (such as chambers for barristers), employee expenses, petty cash and charity fund raising events.


It is still early days to see how well businesses are going to cope with this added layer of obligation for the record keeping and how these rules are going to be enforced by HMRC.

Given the fact that HMRC will be taking a relaxed approach until April 2020, this gives businesses the opportunity to talk to us and get their house in good order.