Making Tax Digital for VAT: Everything You Need to Know

Making Tax Digital for VAT is now fully mandatory — every VAT-registered business, regardless of turnover, must comply. This guide cuts through the jargon and tells you exactly what you need to do.

What is Making Tax Digital for VAT?

Making Tax Digital (MTD) is HMRC's programme to move the UK tax system onto digital platforms. For VAT, it means businesses must:

• Keep digital VAT records using MTD-compatible software
• Submit VAT returns directly from that software to HMRC via their API

Paper records and manual filing through HMRC's old online portal are no longer permitted for most businesses. The aim is to reduce errors (HMRC estimates a significant portion of the "tax gap" — the difference between tax owed and tax collected — comes from avoidable mistakes in self-calculated returns).

Who must comply with MTD for VAT?

Since 1 April 2022, all VAT-registered businesses must comply with MTD for VAT — regardless of their size or turnover.

Timeline of the rollout:

• April 2019: MTD became mandatory for businesses above the VAT threshold (then £85,000). Some complex businesses received a deferred start date.
• October 2019: Deferred businesses joined MTD.
• April 2022: MTD became mandatory for all VAT-registered businesses, including those voluntarily registered below the threshold.

What digital records must you keep?

MTD for VAT requires you to keep digital records of:

• Your business name and VAT registration number
• The VAT accounting scheme(s) you use
• For each supply you make: the time of supply (tax point), value of supply, and rate of VAT charged
• For each supply you receive: the time of supply, value, and amount of input tax you'll claim
• The VAT account — the totals of your output tax, input tax, and net VAT payable for each period
• Any adjustments (e.g., fuel scale charges, partial exemption calculations)

You do not need to keep digital copies of invoices or receipts themselves (the underlying documents) — just the data recorded from them. However, HMRC recommends keeping these for at least 6 years.

MTD-compatible software requirements

To be MTD-compatible, software must be able to:

• Keep the required digital records as listed above
• Prepare VAT returns from those records
• Communicate directly with HMRC's systems via the MTD API (submit returns and receive confirmation)

Crucially, the transfer of data between functional compatible software and HMRC must be done digitally. You cannot manually copy figures from your software into a separate submission tool.

Approved MTD VAT software

HMRC publishes a list of approved MTD-compatible software on gov.uk. Popular options include:

• Xero — well-regarded accounting software, strong UK VAT support
• QuickBooks Online — widely used, includes MTD VAT submission
• Sage Business Cloud Accounting — established UK software, good for small businesses
• FreeAgent — popular with freelancers and micro-businesses, includes free subscription with many business bank accounts
• Zoho Books — more affordable option with good MTD support
• Wave Accounting — free option (US-based but has MTD capability)

The right choice depends on your business size, complexity, and budget. Most offer free trials — test a few before committing.

Bridging software — for spreadsheet users

If you currently use a spreadsheet (e.g., Excel) to manage your VAT records, you don't necessarily need to switch to dedicated accounting software. Bridging software acts as a connection between your spreadsheet and HMRC's API.

You continue keeping records in your spreadsheet, then use the bridging software to extract the required data and submit it to HMRC digitally. However, the link between your spreadsheet and the bridging software must also be digital — you cannot copy and paste the final figures manually.

Popular bridging software includes VT+ (VT Software), Absolute VAT Filer, and DataDear. They typically cost £10–30 per year.

Exemptions from MTD

A small number of businesses are exempt from MTD for VAT on the grounds of:

• Age, disability, or location — if the technology is not reasonably practicable given your circumstances
• Religious grounds — if using electronic communications is contrary to your religion
• Business subject to insolvency proceedings

Exemptions are granted by HMRC on application. If you believe you qualify, you must apply — you cannot simply not comply. The bar is quite high: "I find it difficult" or "I prefer paper" is not sufficient grounds for exemption.

Penalties for non-compliance

HMRC has a penalty regime specifically for MTD non-compliance, separate from the standard late filing penalties. Non-compliance with MTD requirements (e.g., not using approved software, not keeping digital records) can result in penalties calculated based on the behaviour involved:

• Reasonable excuse: no penalty
• Careless non-compliance: 30% of potential lost revenue (minimum)
• Deliberate non-compliance: 70%
• Deliberate and concealed: 100%

In practice, HMRC has taken a "light touch" approach during the transition period, focusing on education rather than punishment. But this grace period will not last indefinitely.

Getting started with MTD

1. Choose your software — select an MTD-compatible package that suits your business.
2. Sign up for MTD for VAT — do this through your HMRC online account before your next VAT return is due. You cannot sign up during your VAT return period.
3. Authorise your software — connect your software to HMRC's API using your Government Gateway credentials.
4. Migrate your records — move your existing VAT data into the new system if needed.
5. File your next return digitally — from this point, all submissions must go through your MTD software.

For more guidance, see our guides on VAT return deadlines and VAT registration.