Making Tax Digital in the United Kingdom

Article
09/28/2023

His Majesty's Revenue and Customs (HMRC) has implemented the first steps of Making Tax Digital, which imposes new requirements on VAT registered businesses above the VAT threshold. Business Central supports the first rounds of Making Tax Digital, which took effect in April 2019:

Keeping records digitally

Businesses must now keep all their records digitally. For users of finance systems, such as Business Central, this requirement is already met because they already keep their records digitally.
Submit VAT return electronically using software recognized by HMRC.

Since 2021, the electronic statements must also include information that helps prevent fraud. For more information, see Send Fraud Prevention Data.

Business Central supports Making Tax Digital and the GovTalk service.

Making Tax Digital for VAT capabilities in Dynamics 365 Business Central

In Business Central, you can use the VAT Return report for creating VAT reports. The Making Tax Digital VAT features extend this capability to communicate with HMRC. For example, the Making Tax Digital VAT extension lets you:

Retrieve VAT obligations from HMRC
Get reminded about VAT obligations that are approaching or already past due
Submit VAT returns to HMRC
View the VAT return
View VAT payments with HMRC
View VAT liabilities with HMRC

Set up Making Tax Digital for VAT

The Making Tax Digital integration uses a service connection to communicate with HMRC. To make it easy to establish communications, Business Central provides the HMRC VAT Setup service connection, which contains most of the information needed to communicate with HMRC. To finish the connection, you must give the Dynamics 365 Business Central MTD VAT application the authority to interact with HMRC on your behalf. Microsoft manages the Dynamics 365 Business Central MTD VAT application on the HMRC web site, and the application is a requirement for the connection. You give permission by requesting an authorization code from HMRC, and then copying the code to the service connection. The following steps describe how to set up the service connection.

Note

The following procedure describes the steps to set up Making Tax Digital in Business Central online. If you're using Business Central on-premises, there are some additional steps. For more information, see the Setup requirements for on-premises versions section before you start to set up the service connection.

Choose the icon, enter Service Connections, and then choose the related link.
On the Service Connections page, choose HMRC VAT Setup.
To open a GOV.UK website and request an authorization code, choose Process, then Request Authorization Code, and then choose Continue.
Sign in with your HMRC credentials. To allow the Dynamics 365 Business Central MTD VAT application to interact with HMRC on your behalf, choose Grant authority.
A confirmation page displays "Authorization granted" and an authorization code. To copy the authorization code, choose Copy.
Return to the service connection you are setting up, and paste the authorization code in the Enter Authorization Code field. Then choose Enter. Note that the authorization code is valid for 10 minutes. To set up the connection, you must enter the code in Business Central before it expires.

Note

Business Central will use the authorization code to test whether the service connection can communicate with HMRC. If the connection is successful, a confirmation page prompts you to verify your VAT registration number. To open the Company Information page and verify the number is correct, and the one you have used to register with HMRC, choose Yes.

You must also fill in the fields on the VAT Report Setup page. Hover over a field to read a short description. For more information, see Set up VAT reporting.

Important

Starting in March 2022, the User IP Address Service must specify an endpoint for the service that your company uses to extract and submit the IP address of the user who sends the VAT report. For more information, see IP addresses.

Setup requirements for on-premises versions

You must add a VAT report configuration on the VAT Reports Configuration page.

a. Create a new configuration, and choose the VAT Return type.
b. Give the configuration a descriptive name, such as HMRC MTD.
c. In the Suggest Lines Codeunit ID field, choose codeunit 745.
d. In the Content Codeunit ID field, choose codeunit 10531.
e. In the Submission Codeunit ID field, choose codeunit 10532.
f. In the Validate Codeunit ID field, choose codeunit 10533.
g. Fill in the remaining fields as necessary. Hover over a field to read a short description.
You must edit the VAT report setup on the VAT Report Setup page.

a. Expand the Return Period FastTab.
b. In the Report Version field, choose the VAT report configuration that you created in the previous step.
c. In the Manual Receive Codeunit ID field, choose codeunit 10534.
d. In the Receive Submitted Return Codeunit ID field, choose codeunit 10536.
e. Optional: If you want to automatically update the information about VAT obligations, specify how often to do so in the Update Period Job Frequency field, and then specify codeunit 10535 in the Auto Receive Codeunit ID field.
f. Fill in the remaining fields as necessary. Hover over a field to read a short description.
Create an application registration for Business Central in Azure portal. For more information, see Registering Business Central On-Premises in Microsoft Entra ID for Integrating with Other Services. When you set up the service connection in Business Central, you'll need the following information from the registration:
- Client ID
- Client Secret
- Redirect URL

VAT obligations

HMRC maintains a list of VAT obligations for companies, which are the periods for which they must report VAT and the due date for the report. HMRC exposes this information through their APIs, which enables Business Central to retrieve the obligations. Business Central stores VAT obligations as VAT Return Periods, and uses them to:

Remind you about VAT returns that are due or overdue.
Automatically enter start and end dates when you create VAT returns.

To retrieve the VAT return periods from HMRC

Choose the icon, enter VAT Return Periods, and then choose the related link.
On the VAT Return Periods page, choose the Get VAT Return Periods action.
Enter the Start Date and End Date to specify the period for which to get the VAT return periods, and then choose OK.

The VAT obligations are now retrieved from HMRC and you can view them on the VAT Return Periods page. A confirmation page shows how many obligations were retrieved.

Note

Do not create VAT return periods manually when submitting VAT Returns to HMRC. VAT return periods must be retrieved from HMRC using the steps above. Creating them manually will result in inability to submit VAT Returns.

VAT Returns

Use this report to submit VAT for sales and purchase documents. For example, purchase and sales orders, invoices, and credit memos.

To create and submit a VAT return

Choose the icon, enter VAT Return Periods, and then choose the related link.
On the VAT Return Periods page, choose the relevant period, and then choose the Create VAT Return action.
If you want to open the VAT return, on the confirmation page, choose Yes.
On the VAT Return page, to calculate and prepare the amounts for the VAT return, choose Process, and then choose the Suggest Lines action.
Fill in the fields as necessary, and then choose the OK button. Hover over a field to read a short description.

VAT amounts display in the Report Lines section on the VAT Return page.
To release the VAT return and prepare it for submission, choose Process, and then choose the Release action. After you release a VAT return, you cannot edit it. If you need to change something, you must reopen the return. Releasing the VAT return does not submit it.
To submit the VAT return to HMRC, choose Process, and then choose the Submit action.

A successful submission of the VAT Return will result in a status of Accepted on the VAT Return. This status is based on the submission result at the HMRC. If the status after submission is not set to Approved, a previously submitted VAT Return can be retrieved from the HMRC.

To receive previously submitted VAT returns from HMRC

Choose the icon, enter VAT Return Periods, and then choose the related link.
On the VAT Return Periods page, choose the relevant VAT return period.
On the VAT Return Period Card page, choose the Receive Submitted VAT Returns action.

VAT Return Statuses

Dependding on where they are in the process, VAT returns can have one of the following statuses:

Status	Description
Open	When you create a new VAT Return. This status lets you run the Suggest Lines action. If you need to correct values, run the Suggest Lines action again. You can't submit a VAT Return with this status.
Released	Status will be changed when you manually run the Release action. The Errors and Warnings FastTab is available. You can't make changes or run the Suggest Lines action. To make changes, you must reopen this VAT Return.
Rejected	If your submission was not successful (for example, if authentication failed), the VAT Return status will be changed to Rejected. You Can't reopen the VAT Return from this status.
Submitted	VAT Return is submitted using the Submit action or it is marked as submitted using the Mark as Submitted action.
Accepted	VAT Return will get this status if the report is marked with the Mark as Accepted action. The Accepted status can be assigned automatically after user sends the VAT Return to the tax authority (Business Central calls the Get VAT Returns method and checks whether the VAT return is in the response). If the VAT Return report is marked as Accepted, you can run the Calculate and Post VAT Settlement action.
Partially Accepted	Business Central can assign the Partially Accepted status related to GovTalk information that was collected using the Get VAT Returns method.
Closed	When request called Get VAT obligations check whether the obligation for which the user created the VAT return is closed. Business Central automatically marks the VAT Return as Closed.

VAT liabilities and payments

If you want to check the status of your VAT, you can retrieve information from HMRC about your VAT liabilities and payments. VAT liabilities are the amounts that you owed to HMRC, and show if there are outstanding amounts to be paid. VAT payments are the actual payments your company has made to HMRC.

To retrieve VAT liabilities:

Choose the icon, enter VAT Liabilities, and then choose the related link.
On the VAT Liabilities page, choose Process, and then select Get Liabilities.
Enter the Start Date and End Date of the period to retrieve VAT liabilities for, and then choose OK.

The VAT liabilities are now retrieved from HMRC and you can view them on the VAT Liabilities page. A confirmation page shows how many liabilities were retrieved.

To retrieve VAT payments from HMRC:

Choose the icon, enter VAT Payments, and then choose the related link.
On the VAT Payments page, choose Process, and then choose Get Payments.
Enter the Start Date and End Date of the period to retrieve VAT payments for, and then choose OK.

The VAT payments are now retrieved from HMRC and you can view them on the VAT Payments page. A confirmation page shows how many VAT payments were retrieved.

Not in scope of this feature

This integration to HMRC and support of Making Tax Digital for VAT does not include support for:

Group VAT scenarios

If you submit VAT on behalf of a group of companies that share a VAT registration number (Group VAT), there isn't a built-in way to retrieve VAT entries from companies in the group. There are currently no plans to support Group VAT, and we refer to Microsoft partners to add this functionality.
Agent services

Agents can submit VAT returns on behalf of their customers, and HMRC has agent services. Business Central does not support agent services.

Connection errors with HMRC

If you experience "The operation has timed out" errors on an on-premises installation of Business Central, check any firewall settings that may be blocking the communication to and from HMRC.

Testing the integration to HMRC in a sandbox

Due to a limitation at HMRC, it is not possible to send test submissions of VAT Returns and test the integration in non-production scenarios. You can only send real VAT returns.

Some online documentation at HMRC uses the term Sandbox. A sandbox is an environment that software developers, such as Microsoft and others, can use to test features during development. This environment is not intended for customer testing, and it isn't related to Business Central sandboxes.