Making Tax Digital For Charities
- MAZ
- Jul 15
- 15 min read
The Audio Summary of the Key Points of the Article:
Understanding Making Tax Digital and Its Impact on UK Charities
What Is Making Tax Digital, and Why Should Charities Care?
Now, if you’re running a charity in the UK, you’ve probably heard the buzz about Making Tax Digital (MTD). It’s HMRC’s big push to modernise the tax system, moving everything from paper-based records to digital submissions. For charities, this isn’t just another bureaucratic hoop—it’s a fundamental shift in how you report VAT, and soon, income tax. Since April 2019, VAT-registered charities with a turnover above £85,000 (currently £90,000) have been required to keep digital records and submit VAT returns using MTD-compatible software.
By April 2022, this extended to all VAT-registered charities, regardless of turnover. Looking ahead, MTD for Income Tax kicks in from April 2026 for sole traders and landlords with qualifying income over £50,000, and April 2027 for those over £30,000. While most charities won’t face MTD for Income Tax directly, those with trading subsidiaries or self-employed trustees might.
The goal? HMRC wants to reduce errors, streamline processes, and make tax reporting real-time. For charities, this means less paperwork but potentially more upfront costs for software and training. The catch is that non-compliance can lead to penalties, which could hit your charity’s tight budget hard.
How Does MTD for VAT Apply to Charities Specifically?
Let’s get into the nitty-gritty. If your charity is VAT-registered, you’re already in the MTD net. Since April 2022, every VAT-registered charity must use MTD-compliant software to submit VAT returns, even if your turnover is below £85,000. This includes keeping digital records of all VAT-related transactions, like sales, purchases, and adjustments. Unlike businesses, charities often deal with complex VAT scenarios, such as partial exemptions (where some activities are VAT-exempt, like fundraising events, while others, like trading, are taxable). You’ll need software that can handle these nuances.
Here’s a quick breakdown of MTD for VAT requirements for charities:
Requirement | Details | Key Date |
Digital Record-Keeping | All VAT transactions (e.g., income from trading, expenses) must be recorded digitally. | April 2019 (turnover > £85,000); April 2022 (all VAT-registered charities). |
MTD-Compatible Software | Use HMRC-approved software for submitting VAT returns. Bridging software was allowed during the soft-landing period (until April 2020/October 2020 for deferred charities). | Full compliance by April 2020/October 2020. |
VAT Return Submission | Submit returns digitally via an API link to HMRC. Manual entry isn’t allowed post-soft-landing. | Quarterly, aligned with your VAT schedule. |
Adjustments | Record totals for adjustments (e.g., partial exemptions) in software, but calculations can be done externally. | Ongoing. |
Charitable trusts and unincorporated not-for-profits got a deferral until October 2019, but that grace period is long gone. Now, everyone’s on the same page, and HMRC expects digital links between all parts of your accounting software—no more cutting and pasting data.
Why Is the Soft-Landing Period Still Relevant?
You might be wondering about the “soft-landing period” you’ve heard mentioned. Back in 2019, HMRC gave charities a break: for the first year (until April 2020 for most, or October 2020 for deferred organisations like trusts), you could use bridging software to connect your records to HMRC without fully digital links.
This was a lifesaver for smaller charities still figuring out their systems. While the soft-landing period is over, it’s worth understanding because it highlights HMRC’s phased approach. They know charities need time to adapt, which is why they’re now offering a testing phase for MTD for Income Tax starting April 2025. If your charity has a trading subsidiary or self-employed staff, you can volunteer for this pilot to get ahead of the curve.
What Are the MTD Challenges for Charities?
None of us loves change, especially when it comes with a price tag. For charities, MTD brings unique challenges:
Complex VAT Structures: Charities often mix business (e.g., shop sales) and non-business activities (e.g., donations). Apportioning VAT correctly is tricky, and not all software handles this well. For example, a charity running a second-hand bookshop must separate taxable sales from exempt fundraising income.
Cost of Compliance: MTD-compliant software isn’t free. Prices range from £10/month for basic packages (e.g., QuickBooks) to £50+/month for advanced systems like Xero that support partial exemptions. Smaller charities, especially those with budgets under £100,000, might struggle with these costs.
Staff Training: Volunteers or part-time staff may lack the tech skills to manage digital records, requiring investment in training.
Penalties for Errors: HMRC’s penalty points system for late or incorrect VAT submissions can hit charities hard. For example, a late quarterly return could cost £100 per point, escalating to £400 for persistent issues.
Take the case of St. Dunstan’s Trust, a small Leicester-based charity supporting visually impaired people. With a turnover of £90,000, they were VAT-registered and had to adopt MTD in April 2019. Their treasurer, Marjorie, used a mix of spreadsheets and manual records. Switching to Xero cost £300 annually, plus £500 for training. While it streamlined their VAT returns, the upfront cost ate into their fundraising budget, forcing them to delay a community event.
How Can Charities Choose the Right Software?
So, the question is: how do you pick software that won’t break the bank? Over 250 MTD-compatible software options are listed on GOV.UK, but not all are charity-friendly. Some, like Sage, are robust but expensive (£20–£70/month). Others, like PwC’s free spreadsheet-based tool for charities, are cost-effective but limited to basic VAT submissions. Here’s what to consider:
Charity-Specific Features: Look for software that handles partial exemptions and Gift Aid integration. Xero and QuickBooks offer these, but check if your existing accounting software (e.g., Sage 50) has an MTD upgrade.
Cost vs. Functionality: Free or low-cost options like Wave are tempting but may lack advanced features. Compare costs against your charity’s turnover and complexity.
Ease of Use: If your team isn’t tech-savvy, opt for user-friendly interfaces like QuickBooks or FreeAgent.
HMRC Approval: Always verify the software is on HMRC’s approved list (check GOV.UK’s software list).
For example, Elmwood Community Hub, a Bristol charity, switched to QuickBooks in 2022. Their turnover was £60,000, mostly from grants and a small café. QuickBooks’ £12/month plan handled their VAT and partial exemptions, saving their volunteer treasurer hours each quarter. They also used HMRC’s testing phase to trial the software, avoiding penalties during the transition.
What About Non-VAT-Registered Charities?
Now, consider this: if your charity isn’t VAT-registered (e.g., turnover below £85,000 and no voluntary registration), MTD for VAT doesn’t apply. But don’t relax just yet. If you have a trading subsidiary or self-employed staff, MTD for Income Tax could still affect you from April 2026. For instance, if your charity runs a consultancy arm with £60,000 in income, that subsidiary must comply with MTD for Income Tax, submitting quarterly digital updates. Even non-VAT-registered charities should start exploring digital record-keeping to future-proof their operations, especially if you plan to scale up.
Practical Steps and Strategies for Charities to Comply with Making Tax Digital
How Can Charities Get Started with MTD Compliance?
Right, so you’ve got the basics of Making Tax Digital (MTD) down, but how do you actually make it work for your charity? The good news is that compliance doesn’t have to be a nightmare if you plan ahead. For VAT-registered charities, the focus is on setting up digital record-keeping and submitting VAT returns through MTD-compatible software. Here’s a step-by-step guide to get you on track, tailored for UK charities as of April 2025.
Step-by-Step Guide to MTD Compliance for VAT
Assess Your VAT Status: Confirm whether your charity is VAT-registered. If your turnover exceeds £85,000 or you’ve voluntarily registered, MTD for VAT applies. Check your status on HMRC’s VAT portal.
Review Current Processes: Look at how you currently manage VAT records. Are you using spreadsheets, paper ledgers, or accounting software? Identify gaps, like manual data transfers, that MTD won’t allow.
Choose MTD-Compatible Software: Select software from HMRC’s approved list (available at GOV.UK). For charities, software like Xero (£28/month) or QuickBooks (£12–£30/month) supports partial exemptions and Gift Aid. Smaller charities might opt for free tools like PwC’s MTD spreadsheet for basic needs.
Set Up Digital Records: Transfer your VAT records (sales, purchases, adjustments) into the software. Ensure all transactions are digitally linked—no cutting and pasting. For example, if you run a charity shop, record sales and expenses directly in the software.
Test Your Setup: Use HMRC’s sandbox environment to trial VAT submissions. This is especially useful if you’re new to digital systems. Contact HMRC’s MTD helpline (0300 200 3700) for support.
Train Your Team: Invest in training for staff or volunteers. Many software providers offer free webinars or tutorials. For instance, QuickBooks has a charity-specific training module.
Submit Your First VAT Return: File your quarterly VAT return via the software’s API link to HMRC. Double-check partial exemptions (e.g., separating exempt fundraising income from taxable sales).
Monitor Compliance: Set reminders for quarterly submissions to avoid HMRC’s penalty points. Late returns can cost £100 per point, escalating to £400 for repeated errors.
Take the case of Willowbrook Hospice, a Wigan-based charity with £120,000 turnover from donations and a café. They adopted Xero in 2022 after struggling with spreadsheets. The treasurer, Nigel, spent £500 on setup and training but saved 10 hours monthly on VAT calculations. Their first MTD-compliant return was error-free, avoiding penalties.
How Can Charities Save Costs on MTD Compliance?
Let’s face it—charities are rarely flush with cash. MTD compliance can feel like an extra burden, but there are ways to keep costs down. Software subscriptions and training can add up, but strategic choices can make a big difference. Here’s how:
Leverage Free Tools: PwC’s MTD spreadsheet is free for simple VAT submissions, ideal for smaller charities with turnover under £100,000. It’s basic but HMRC-compliant.
Negotiate Discounts: Some providers, like QuickBooks, offer charity discounts (up to 50% off). Contact them directly to negotiate.
Use Existing Software: If you already use Sage or Xero, check for MTD upgrades rather than buying new software. Sage 50’s MTD module, for example, costs £10/month extra.
Train Volunteers In-House: Instead of pricey external courses, use free resources like HMRC’s YouTube tutorials or software provider webinars.
Share Resources: Partner with other local charities to share software licenses or training costs. For instance, two York charities split a £200 Xero training session, halving the cost.
Consider Pendleton Youth Trust, a Manchester charity with £70,000 turnover. They opted for PwC’s free spreadsheet tool in 2023, avoiding subscription costs. Their volunteer accountant, Siobhan, used HMRC’s free webinars to learn MTD rules, saving £300 on external training. This kept their budget intact for youth programs.
How Does MTD Integrate with Charity Tax Reliefs Like Gift Aid?
Now, here’s where things get interesting. Charities often rely on tax reliefs like Gift Aid, which lets you reclaim 25p for every £1 donated by a UK taxpayer. MTD doesn’t directly affect Gift Aid, but it can streamline your processes if your software integrates both. Many MTD-compliant platforms, like Xero or Donorfy, have Gift Aid modules that automatically calculate claims and link them to your VAT records.
For example, a donor gives £100, and you reclaim £25 via Gift Aid. If your charity also runs a taxable activity (e.g., a training course), the software can separate the exempt Gift Aid income from taxable sales, ensuring accurate VAT returns. This is crucial for partially exempt charities, where miscalculating VAT can lead to HMRC audits.
Here’s a table showing how MTD software can support Gift Aid and VAT:
Software | Gift Aid Integration | VAT Support | Cost (Per Month) | Best For |
Xero | Yes, automated claims | Full MTD compliance, partial exemptions | £28–£50 | Medium/large charities |
QuickBooks | Yes, with add-ons | MTD-compliant, basic partial exemptions | £12–£30 | Small/medium charities |
Donorfy | Yes, built-in | Basic VAT support, MTD-compliant | £19–£79 | Fundraising-focused charities |
PwC Spreadsheet | No | Basic MTD compliance, no exemptions | Free | Small charities |
Be careful! If your software doesn’t handle Gift Aid, you’ll need to manually reconcile claims with HMRC, which can be time-consuming. For instance, a Kent animal shelter, Furfield Rescue, used QuickBooks but missed £2,000 in Gift Aid claims in 2023 because their add-on wasn’t configured properly. They fixed it by upgrading to Donorfy, which integrated both systems seamlessly.
What Are the Risks of Non-Compliance?
Nobody wants to be on HMRC’s bad side. Failing to comply with MTD can lead to penalties, audits, or reputational damage. Since April 2022, HMRC’s points-based penalty system applies to VAT submissions. You get one point per late return, with fines starting at £100 after four points. Persistent issues can lead to surcharges up to 15% of the VAT due. For a charity with £10,000 quarterly VAT, that’s a £1,500 hit—money better spent on your cause.
There’s also the risk of errors in partial exemptions. If you incorrectly classify exempt income (e.g., donations) as taxable, you could overpay VAT or face an audit. In 2024, a Birmingham community centre was fined £800 for submitting a manual VAT return, unaware that MTD required API submission. They switched to Sage after a costly lesson.
How Can Smaller Charities Prepare for MTD for Income Tax?
Now, consider this: MTD for Income Tax, starting April 2026, won’t directly affect most charities, as they’re exempt from Corporation Tax on charitable activities. But if your charity has a trading subsidiary or self-employed staff (e.g., consultants or fundraisers), you’ll need to prepare. From April 2026, sole traders or landlords with income over £50,000 must submit quarterly digital updates via MTD-compliant software. By April 2027, this drops to £30,000.
For example, if your charity’s trading arm earns £60,000 from events, it’ll need software like FreeAgent (£19/month) to submit income updates. Smaller charities can prepare now by:
Reviewing staff contracts to identify self-employed roles.
Testing MTD for Income Tax in HMRC’s 2025 pilot (sign up at GOV.UK).
Budgeting for software costs to avoid surprises in 2026.
Take Rowan Arts, a London charity with a £40,000 trading subsidiary. They joined the 2025 pilot, using FreeAgent to track income digitally. This caught errors in their tax codes early, saving £1,200 in overpaid tax.
How Can Technology Streamline Compliance?
So, the question is: how can tech make MTD less of a headache? Beyond compliance, MTD software can save time and improve accuracy. Cloud-based platforms like Xero let trustees access records remotely, ideal for charities with volunteer teams. Automation features, like bank feeds, link transactions directly to your accounts, reducing manual entry. For instance, a Leeds food bank used Xero’s bank feeds to cut bookkeeping time by 15 hours monthly, letting them focus on food distribution.
Key Takeaways for Charities Navigating Making Tax Digital
What Are the Most Critical Points for Charities to Understand About MTD?
Now, let’s wrap things up with the essentials you need to keep in mind about Making Tax Digital (MTD). Whether you’re a trustee, treasurer, or small business owner running a charity, these points distil the must-knows to stay compliant and avoid headaches. Each one is designed to give you a clear, actionable nugget of insight based on the latest rules as of April 2025, drawn from HMRC guidance and real-world charity experiences. Here are the top 10 takeaways, each summarised in a single sentence for clarity.
MTD for VAT is mandatory for all VAT-registered charities: Since April 2022, every VAT-registered charity, regardless of turnover, must keep digital records and submit VAT returns using MTD-compliant software, as mandated by HMRC. For example, a small charity with £60,000 turnover from a shop must use software like QuickBooks to file returns, or risk penalties starting at £100 per late submission.
Digital record-keeping eliminates manual processes: Charities must record all VAT transactions (sales, purchases, adjustments) digitally, with no cutting and pasting allowed, ensuring accuracy and HMRC compliance. This means a charity like Willowbrook Hospice, which switched to Xero, saved hours by linking transactions directly to their software.
MTD-compliant software is non-negotiable: You need HMRC-approved software, like Xero (£28/month) or PwC’s free spreadsheet, to submit VAT returns via an API link, as manual submissions are no longer accepted. Smaller charities, like Pendleton Youth Trust, saved costs by using free tools but had to ensure they met basic compliance needs.
Partial exemptions require special attention: Charities with mixed exempt (e.g., donations) and taxable (e.g., trading) activities must use software that handles partial exemptions accurately to avoid overpaying VAT or facing audits. A Birmingham community centre learned this the hard way, facing an £800 fine for misclassifying income in 2024.
Penalties can hit charity budgets hard: HMRC’s points-based penalty system imposes £100 fines per late or incorrect VAT return, escalating to £400 or 15% surcharges for persistent issues, which could strain tight budgets. For instance, a late quarterly return for a charity with £10,000 VAT liability could cost £1,500 in surcharges.
Cost-saving options exist for smaller charities: Free tools like PwC’s MTD spreadsheet or discounted software (e.g., QuickBooks’ charity rates) can reduce compliance costs, especially for charities with turnovers below £100,000. Pendleton Youth Trust, for example, avoided £300 in training costs by using HMRC’s free webinars.
Gift Aid integration can streamline processes: MTD-compliant software like Donorfy or Xero can automate Gift Aid claims alongside VAT, saving time and reducing errors for fundraising charities. Furfield Rescue in Kent missed £2,000 in Gift Aid claims in 2023 due to poor software integration but fixed this with Donorfy.
MTD for Income Tax looms for trading subsidiaries: From April 2026, charity trading subsidiaries or self-employed staff with income over £50,000 must submit quarterly digital updates, dropping to £30,000 in April 2027, so planning now is key. Rowan Arts in London saved £1,200 by joining HMRC’s 2025 pilot to test their setup early.
Training and preparation are critical: Investing in staff or volunteer training, using free resources like HMRC webinars or software tutorials, ensures smooth MTD compliance without costly mistakes. St. Dunstan’s Trust in Leicester spent £500 on training but avoided penalties by getting it right from the start.
Technology can save time beyond compliance: Cloud-based MTD software like Xero offers bank feeds and remote access, cutting bookkeeping time and letting charities focus on their mission, as seen with a Leeds food bank that saved 15 hours monthly.
FAQs
Q1: What is the deadline for charities to comply with Making Tax Digital for VAT?
A1: All VAT-registered charities must comply with MTD for VAT, using digital records and MTD-compliant software for VAT returns, with no specific deadline as it has been mandatory since April 2022.
Q2: Which charities are exempt from Making Tax Digital for VAT?
A2: Charities not registered for VAT, typically those with a turnover below £85,000 and not voluntarily registered, are exempt from MTD for VAT requirements.
Q3: Can charities use spreadsheets for MTD compliance?
A3: Charities can use spreadsheets if they are part of MTD-compatible software or bridged to HMRC via approved tools, but manual data entry or non-digital links are not allowed.
Q4: How does MTD affect charities with trading subsidiaries?
A4: Trading subsidiaries with income over £50,000 must comply with MTD for Income Tax from April 2026, requiring quarterly digital updates via compatible software.
Q5: What happens if a charity misses an MTD VAT submission deadline?
A5: Missing a VAT submission deadline incurs a penalty point, with fines starting at £100 after four points and escalating to £400 or 15% surcharges for repeated failures.
Q6: Are there free MTD software options for small charities?
A6: Yes, tools like PwC’s MTD spreadsheet are free and suitable for small charities with simple VAT needs, though they lack advanced features like partial exemption handling.
Q7: How does MTD impact Gift Aid claims for charities?
A7: MTD doesn’t directly affect Gift Aid, but using software with integrated Gift Aid modules can simplify claims and ensure accurate separation from taxable income.
Q8: Can charities still use paper records for VAT under MTD?
A8: No, charities must maintain digital records for all VAT transactions under MTD, as paper-based records are not compliant.
Q9: What is the cost range for MTD-compliant software for charities?
A9: Costs range from free (e.g., PwC’s spreadsheet) to £10–£70 per month for software like QuickBooks or Sage, depending on features and charity size.
Q10: How can charities verify if their software is MTD-compliant?
A10: Charities can check if their software is MTD-compliant by reviewing HMRC’s approved software list on the GOV.UK website.
Q11: What support does HMRC offer for charities transitioning to MTD?
A11: HMRC provides a sandbox environment for testing VAT submissions, free webinars, and an MTD helpline (0300 200 3700) for guidance.
Q12: Can charities with partial exemptions use basic MTD software?
A12: Basic software may not suffice for partial exemptions, so charities should choose platforms like Xero or QuickBooks that handle complex VAT calculations.
Q13: How does MTD for Income Tax affect self-employed charity workers?
A13: Self-employed charity workers with income over £50,000 must submit quarterly digital updates under MTD for Income Tax starting April 2026, dropping to £30,000 in April 2027.
Q14: Are there penalties for incorrect VAT calculations under MTD?
A14: Incorrect VAT calculations can lead to audits or penalties, especially for partial exemptions, with fines based on the error’s severity and frequency.
Q15: Can charities share MTD software licenses with other organisations?
A15: Some charities may share software licenses or training costs with others, but they must ensure the software meets individual compliance needs and HMRC regulations.
Q16: What is the HMRC sandbox environment for MTD?
A16: The HMRC sandbox environment is a testing platform where charities can trial MTD-compliant VAT submissions without affecting live records.
Q17: How can charities budget for MTD compliance costs?
A17: Charities can budget by exploring free or discounted software, using free training resources, and planning for annual costs like subscriptions or audits.
Q18: Does MTD apply to charities with only exempt activities?
A18: Charities with only exempt activities, like donations, are not subject to MTD for VAT unless they voluntarily register for VAT.
Q19: Can volunteers manage MTD compliance for charities?
A19: Volunteers can manage MTD compliance if trained properly, using user-friendly software and free resources like HMRC tutorials to minimise costs.
Q20: How does MTD affect charity audits by HMRC?
A20: MTD’s digital records make audits easier by providing HMRC with real-time data, but charities must ensure accurate records to avoid audit penalties.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
Disclaimer:
The information provided in our articles is for general informational purposes only and is not intended as professional advice. While we strive to keep the information up-to-date and correct, My Tax Accountant makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the website or the information, products, services, or related graphics contained in the articles for any purpose. Any reliance you place on such information is therefore strictly at your own risk. The graphs may also not be 100% reliable.
We encourage all readers to consult with a qualified professional before making any decisions based on the information provided. The tax and accounting rules in the UK are subject to change and can vary depending on individual circumstances. Therefore, My Tax Accountant cannot be held liable for any errors, omissions, or inaccuracies published. The firm is not responsible for any losses, injuries, or damages arising from the display or use of this information.
Comments