Making Tax Digital for VAT is the part of HMRC’s MTD programme that affects VAT-registered businesses. Since April 2022, all VAT-registered businesses have been required to keep digital records and submit VAT returns through MTD-compatible software. If your business is VAT-registered and is not already using MTD-compatible software, you are currently non-compliant.
What Is Making Tax Digital for VAT?
Making Tax Digital for VAT requires VAT-registered businesses to:
- Keep digital records of VAT-relevant transactions
- Submit VAT returns to HMRC digitally using MTD-compatible software
- Maintain a digital audit trail from source transactions to the VAT return
You can no longer submit VAT returns manually through the HMRC online portal if you are VAT-registered. The submission must come directly from MTD-compatible software, or from a spreadsheet connected to a recognised bridging tool.
Who Does MTD for VAT Apply To?
MTD for VAT applies to all VAT-registered businesses. There is no minimum turnover threshold. If you are registered for VAT, you must comply, regardless of how small your business is.
The only exceptions are businesses that HMRC has specifically agreed can be exempt due to genuine inability to use digital tools. These exemptions are rare and require a specific application to HMRC.
What Are Digital Records?
Digital records means keeping the information that feeds into your VAT return in a digital format, not on paper. This includes:
- The VAT number and name of your business
- Details of each supply made and received that is relevant to VAT
- The VAT account showing VAT on sales, VAT on purchases, and adjustments
The digital records do not need to include scanned images of every invoice, but the data from those invoices must be held digitally. Most accounting software captures this automatically as you enter transactions.
What Is a Digital Link?
MTD for VAT requires a digital link between your records and the VAT return submission. This means the data must flow digitally from your records to the return without being manually re-keyed at any point.
For example, if you use accounting software and it submits the VAT return directly to HMRC, a digital link exists. If you copy figures from your accounting software into a spreadsheet and then submit from the spreadsheet manually, that re-keying breaks the digital link and creates non-compliance.
This is why bridging software exists. It provides the digital link between a spreadsheet and HMRC’s systems. But for most businesses, proper accounting software is simpler.
How Does the VAT Return Submission Work?
With MTD-compatible accounting software, the VAT return process is straightforward. The software collects all VAT-relevant transactions during the VAT period, calculates the net VAT figure, and presents a summary for your review. You confirm the figures and the software submits the return directly to HMRC.
Most software also retrieves the acknowledgement from HMRC and stores it as confirmation of submission. You no longer need to log in to HMRC’s portal separately.
What Happens If You Are Not Compliant?
HMRC can issue penalties for failure to comply with MTD for VAT. These can include penalties for failing to keep digital records, failing to use compatible software, and failing to submit returns through the MTD system.
If you are not currently using MTD-compatible software, moving to a compliant system should be treated as urgent.
Choosing MTD-Compatible Software
HMRC maintains a list of MTD-compatible software on gov.uk. Most mainstream accounting packages including well-known UK-focused products are fully MTD-compatible. Confirm the specific software you are using or considering is on the current approved list, as approval status can change.
For what to look for more broadly, see our guide on MTD-compatible accounting software. If you are just starting to look at software options, our guide on how to choose accounting software for your UK small business covers the full picture.
Spreadsheets and Bridging Software
If you currently use a spreadsheet for your accounts, you cannot submit VAT returns directly from it unless you use a recognised bridging tool. Bridging software reads the VAT figures from your spreadsheet and submits them to HMRC through the MTD API, maintaining the required digital link.
Bridging is a compliant option, but it adds cost and an extra step to your process. For most businesses, it is more practical to move to dedicated accounting software that handles VAT natively.
What Comes Next: MTD for Corporation Tax
MTD for Corporation Tax is still in development and has not yet been mandated. HMRC has been consulting on the requirements and a pilot programme is underway. If your business pays Corporation Tax, keep an eye on HMRC guidance for when this will come into effect.
For an overview of all aspects of Making Tax Digital, see our guide on What Is Making Tax Digital.
