How Microsoft Business Central Supports Making Tax Digital
Making Tax Digital (MTD) is a UK government initiative that requires VAT-registered businesses above a certain threshold to maintain digital records and submit VAT returns electronically to HMRC using HMRC-recognised software. This significant shift aims to modernise the tax system and reduce errors. For finance teams navigating these new regulations, having an integrated and compliant software solution is crucial. Microsoft Dynamics 365 Business Central offers built-in features to streamline MTD compliance, making the process more efficient and accurate.
Understanding the Core Requirements of MTD
MTD regulations impose several key requirements on businesses. From April 2026 if you have an annual business or property income of more than £50,000 you must comply with MTD regulations. For Business Central users, this requirement is inherently met as the system stores all financial data digitally. Secondly, VAT returns must be submitted to HMRC electronically using compliant software. It is important to note that Business Central is on HMRC's list of recognised software. Also, for VAT all sales, purchase, stock, cash, and fixed asset transactions and their associated VAT must be digitally recorded. Any transfer of this data between software programs must occur through "digital means".
Business Central's Built-in Functionality for MTD
Business Central provides a robust set of features designed to help finance teams comply with MTD seamlessly. Firstly, Business Central offers a direct service connection to communicate with HMRC through their APIs (GovTalk service). This eliminates the need for manual data transfer between systems. Secondly, finance teams can directly retrieve a list of their VAT obligations, including reporting periods and due dates, from HMRC within Business Central. This helps ensure timely filing and avoids potential penalties. To do this, users can navigate to the VAT Return Periods page and choose the Get VAT Return Periods action. It's crucial to retrieve VAT return periods from HMRC and avoid manual creation, as manually created periods cannot be used for MTD submissions.
Also, Business Central simplifies the VAT return process. Users can select the relevant period on the VAT Return Periods page and choose Create VAT Return. They can then utilise the Suggest Lines action to automatically calculate and populate the VAT return amounts based on the recorded transactions.
Before submission, the VAT return must be Released, which locks it to prevent further editing. Finally, users can Submit the released VAT return electronically to HMRC directly from within Business Central.
The system provides clear statuses for VAT returns (Open, Released, Rejected, Submitted, Accepted, Partially Accepted, Closed) allowing finance teams to easily track the progress of their submissions. A successful submission will result in an Accepted status. Finance teams can view submitted VAT returns, VAT payments made to HMRC, and outstanding VAT liabilities directly within Business Central.
This provides a centralised view of VAT-related information. To access this information, users can navigate to the VAT Liabilities and VAT Payments pages and use the Get Liabilities and Get Payments actions.
Frequently Asked Questions (FAQ)
1. What is Making Tax Digital (MTD) and who does it affect?
MTD is a government initiative that requires businesses to use a digital system for keeping tax records, submitting tax data, and making payments. This initiative is a core component of the government’s Tax Administration Strategy, aiming to reduce the tax gap. MTD directly affects businesses by mandating the use of digital tools for their tax obligations. Specifically for VAT, if a business is VAT registered, they are now obligated to maintain digital records and submit their VAT returns using compatible software. HMRC will automatically enrol all remaining VAT-registered businesses into MTD for VAT unless they have an exemption or have applied for one.
2. How does Business Central help in keeping digital records for VAT?
Business Central, as a comprehensive financial management system, inherently meets the MTD requirement for digital record-keeping. All financial transactions, including sales, purchases, stock movements, cash transactions, and fixed asset transactions, along with their associated VAT, are recorded and stored digitally within the system. This eliminates the need for manual, paper-based record-keeping and ensures that all necessary VAT-related data is readily accessible and auditable within a single digital platform.
3. Can Business Central directly submit VAT returns to HMRC?
Yes, Business Central is recognised by HMRC as compliant software for submitting VAT returns electronically under the MTD regulations. It provides a direct service connection to HMRC through their APIs (GovTalk service), allowing finance teams to submit VAT returns directly from within the Business Central environment. This integration streamlines the submission process, reducing the risk of errors associated with manual data transfer and ensuring that submissions include the necessary fraud prevention information required by HMRC.