Making Tax Digital for VAT: rules, software and how to comply

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Making Tax Digital for VAT requires every VAT-registered business in the UK to keep its VAT records digitally and submit VAT returns to HMRC through compatible software. It applies regardless of turnover, so even businesses that registered voluntarily must follow it. This guide explains what the rules require, how digital links work, how to choose software, the filing deadlines and penalty points system, and how MTD is expanding to income tax.

What Making Tax Digital is

Making Tax Digital (MTD) is HMRC's programme to move tax records and returns online. For VAT, it has two core requirements: keep VAT records in digital form, and submit VAT returns from software that connects to HMRC through its API. The old practice of typing figures into HMRC's online form is no longer allowed for VAT returns.

MTD for VAT started in April 2019 for businesses above the VAT registration threshold and was extended to all VAT-registered businesses from April 2022. MTD for Income Tax Self Assessment starts in phases from April 2026, as covered below.

Who must comply

All VAT-registered businesses must follow MTD for VAT, including sole traders, partnerships, companies and voluntarily registered businesses below the threshold. The VAT registration threshold is currently £90,000 of taxable turnover in a rolling twelve-month period. A small number of businesses can apply for exemption, for example where it is not reasonably practical to use computers because of age, disability, remoteness or religious beliefs, or where the business is subject to an insolvency procedure.

Non-UK businesses registered for UK VAT, such as overseas sellers, are also within MTD.

What counts as digital records

You must keep certain records digitally, including your business name, address and VAT number, any VAT accounting schemes you use, and for each supply made and received: the date, the value and the VAT rate. You must also keep the VAT account summary that links your records to your return.

Digital records can be kept in accounting software or in spreadsheets, as long as the data flows into your VAT return through digital links. Paper invoices can still be received; you record their details digitally. You do not have to scan every invoice, though many businesses do.

Digital links explained

Once data is in a digital record, any transfer of that data to another piece of software, or to your VAT return, must be done digitally, without retyping or copying and pasting by hand. Examples of digital links include formulas linking spreadsheet cells, importing or exporting files, and API connections between software.

A typical compliant setup is accounting software that records every sale and purchase and submits the return directly. Another is spreadsheet records combined with "bridging software" that reads the totals from the spreadsheet and submits them to HMRC. What is not allowed is copying figures by hand from one system into another along the way.

Choosing MTD-compatible software

HMRC publishes a list of software that supports MTD for VAT. Most cloud accounting packages used by UK small businesses are compatible, including tools like Xero, Sage Accounting, FreeAgent and QuickBooks. Compare options for UK businesses in our UK accounting software ranking, UK accounting software guide and Xero vs Sage Accounting.

Look at pricing for Xero, Sage Accounting, FreeAgent and Zoho Books. If you prefer spreadsheets, bridging software is cheaper but leaves more manual work.

Features to look for

• Direct MTD VAT return submission and viewing of obligations.
• Bank feeds to import transactions automatically.
• Support for your VAT scheme: standard, cash accounting, flat rate or others.
• Domestic reverse charge for construction services, if relevant.
• Invoicing with correct VAT details.
• Receipt capture for purchases.
• Multi-currency, if you trade abroad.
• Payroll, so you can run UK payroll in the same system.
• Accountant access.

Signing up and authorising software

Most VAT-registered businesses are now automatically enrolled in MTD for VAT. New registrations are set up for MTD from the start. To file, you authorise your software to connect to your HMRC account using your Government Gateway credentials. Agents such as accountants can file on your behalf through their own software once you authorise them.

Make sure the email address and contact details on your HMRC account are current, so you receive notices.

VAT return deadlines

Most businesses file VAT returns quarterly. The deadline for filing and paying is one calendar month and seven days after the end of the VAT period. For example, for a quarter ending 31 March, the return and payment are due by 7 May. Businesses on the Annual Accounting Scheme file once a year and make advance payments, and some file monthly, for example if they regularly receive repayments.

Pay by direct debit through your software or HMRC account, or by bank transfer in time for the funds to clear. Direct debits are collected a few days after the deadline.

Penalty points and late payment

Since January 2023, late VAT returns are handled by a points-based system. Each late return earns a point; once you reach a threshold based on your filing frequency, four points for quarterly filers, you receive a £200 penalty, and a further £200 for each late return while at the threshold. Points expire after a period of compliance.

Late payment penalties are separate and depend on how late the payment is, with interest charged from the day after the due date. If you cannot pay in full, contact HMRC early about a time-to-pay arrangement, which can reduce penalties.

VAT schemes and MTD

MTD works with all the main VAT schemes. With the Flat Rate Scheme, you pay a fixed percentage of gross turnover and keep digital records of turnover. With Cash Accounting, VAT is accounted for when cash is received or paid, so your software must record payment dates. The Annual Accounting Scheme changes return frequency. Make sure your software is set up for the scheme you use, or your returns will be wrong.

MTD for Income Tax

MTD is expanding to Income Tax Self Assessment for sole traders and landlords. From April 2026, those with qualifying income from self-employment and property above £50,000 must keep digital records and send quarterly updates to HMRC through compatible software, then submit a final declaration after the tax year. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028.

If you are a sole trader or landlord near these thresholds, choose accounting software that supports both MTD for VAT and MTD for Income Tax now, to avoid changing systems later.

Moving from spreadsheets

Spreadsheets remain allowed with bridging software, but they are error-prone and make digital links harder to maintain. Moving to accounting software usually saves time: bank feeds import transactions, rules categorise them, and VAT returns are calculated automatically. Start at the beginning of a VAT quarter, enter opening balances, and reconcile the first quarter carefully. Our guide to moving from spreadsheets to a CRM covers the general approach to migrating data cleanly, which applies here too.

Overseas businesses and UK VAT

Non-UK businesses selling goods or digital services to UK consumers may need to register for UK VAT, and then MTD applies. Many use an accountant or tax agent in the UK to file. For selling internationally more broadly, see how to invoice international clients and our UK VAT calculator. For card payments in the UK, see the UK payment fee calculator.

Common mistakes

• Copying figures by hand between spreadsheets and bridging software, breaking digital links.
• Using software set up for the wrong VAT scheme.
• Missing the one month and seven days deadline.
• Ignoring penalty points until they trigger a fine.
• Not recording supplies at the correct VAT rate.
• Forgetting that voluntarily registered businesses must comply too.

Example: a small consultancy's VAT routine

A two-person consultancy registered for VAT uses cloud accounting software with a bank feed. Each week, transactions are imported and categorised, with VAT codes applied automatically by rules. Sales invoices are raised in the same software, so they are already digital records. Receipts are photographed with the app and attached to purchases.

At the end of each quarter, the owner reviews the VAT report, checks unusual items, and submits the return through the software, which sends it to HMRC's API. The direct debit collects the payment after the deadline. The whole process takes under an hour a quarter, and every figure can be traced back to transactions, which is exactly what MTD intends.

Example: a business using spreadsheets

A small shop keeps its sales and purchase records in a spreadsheet. To comply with MTD, it uses bridging software that reads the nine VAT box totals from a summary tab and submits them to HMRC. The summary tab must calculate its totals from the transaction records using formulas, not typed figures. If the shop also uses a till system, sales data must be exported from the till into the spreadsheet as a file, not retyped.

This works, but it relies on careful spreadsheet design and discipline. Many shops find that accounting software with a POS integration saves time and reduces errors. See how to choose a POS system.

Record keeping periods

VAT-registered businesses must generally keep VAT records for at least six years. Digital records should be kept in a format you can access and export if you change software. Before cancelling a subscription, export all transactions, invoices and VAT returns. Many providers offer read-only access or archive plans for this purpose.

Using an accountant or agent

Many small businesses have an accountant prepare and submit VAT returns. Under MTD, your accountant needs agent authorisation from HMRC and either access to your software or digital records they can import. Agree who records transactions, who reviews the return, and who submits it. You remain responsible for the accuracy of the return, so review it before submission even if your accountant files it.

Linking VAT with other taxes

MTD software often handles payroll, Corporation Tax preparation and Self Assessment data too, which reduces duplication. If you employ staff, see how to run payroll in the UK. If you sell through online marketplaces or take card payments, make sure fees and payouts are recorded correctly, since marketplace and payment provider fees often carry VAT treatments of their own.

A quarterly MTD checklist

1. Make sure every sale and purchase for the quarter is recorded and categorised.
2. Reconcile bank accounts and card statements.
3. Check VAT codes on unusual items, such as imports, reverse charge services and exempt supplies.
4. Review the VAT return figures against last quarter for anything unexpected.
5. Submit the return through your software before the deadline.
6. Confirm the payment method and that funds will be available.
7. Save a copy of the submission receipt.

A routine like this keeps returns accurate and avoids penalty points.

Questions