Making Tax Digital for VAT (MTD for VAT) has now become mandatory for all VAT-registered businesses in the UK, replacing manual VAT returns with a fully digital process. Businesses must now keep digital records, use HMRC-compatible software, and submit VAT returns through digital links rather than HMRC’s old online portal. Continuing to file manually or rely on paper records is no longer compliant and can lead to penalties.
MTD for VAT goes beyond a simple change in submission method—it requires an end-to-end digital system for recording and reporting VAT. This guide explains what digital record-keeping really means, which software options are available (including spreadsheets with bridging tools), how digital links work, and when exemptions may apply. It also covers special VAT schemes and outlines the practical steps businesses need to take to achieve and maintain compliance with confidence.
Key Takeaways: Making Tax Digital For VAT Essentials
Making Tax Digital for VAT was introduced in April 2019 for VAT-registered businesses with taxable turnover above the £85,000 VAT threshold and has been mandatory for all VAT-registered businesses since April 2022.
Digital record-keeping is required for supplies made, supplies received, and your VAT account
Compatible software is non-negotiable – it must connect to HMRC's API platform
Digital links are mandatory between software products – no copy-paste allowed
Exemptions are limited to genuine cases of age, disability, remote location, religious beliefs, or insolvency
Special schemes continue – retail schemes, flat rate scheme, and margin schemes work within MTD for VAT
Non-compliance has consequences – you cannot file returns without proper MTD for VAT setup
What is Making Tax Digital For VAT?
Making Tax Digital for VAT is HMRC's digital tax initiative that requires VAT-registered businesses to maintain digital records and submit VAT returns using compatible software. Unlike the traditional online filing system, MTD for VAT mandates a complete digital ecosystem from record creation to submission.
The system replaces HMRC's online VAT return service, which is now only available to businesses with approved exemptions. For everyone else, Making Tax Digital for VAT compliance isn't optional—it's a legal requirement.
The Core Principle
Making Tax Digital for VAT operates on a simple but strict principle: digital by default. Your VAT records must be created, stored, and transmitted digitally through software that connects directly to HMRC's API (Application Program Interface) platform.
Who Must Comply With MTD For VAT?
The answer is straightforward: all VAT-registered businesses and organisations.
All VAT-registered businesses have been required to comply with MTD for VAT since April 2022, when HMRC completed the mandatory sign-up of all VAT-registered traders. This includes:
Limited companies
Sole traders
Partnerships
Charities and non-profits
Any other VAT-registered entity
Important: New businesses registering for VAT are automatically enrolled in MTD for VAT unless they qualify for an exemption.
Who's Currently Exempt?
These remain exempt from Making Tax Digital for VAT:
VAT GIANT users – Government departments and NHS (National Health Service) Trusts that submit additional information with returns. Their MTD for VAT start date remains indefinitely deferred.
Businesses with approved exemptions – Those who've successfully applied for digital exclusion.
Business subject to an insolvency procedure -If you're not in either category, you must comply with Making Tax Digital for VAT rules.
MTD For VAT Digital Record-Keeping Requirements
Understanding what records, you must keep digitally is crucial for MTD for VAT compliance. HMRC distinguishes between records that must be digital and those that can remain in other formats.
Mandatory Digital Records
Under Making Tax Digital for VAT, you must maintain digital records of:
Category | Digital Record Requirement |
|---|---|
Designatory D ata |
|
For Supplies Made (Sales) |
|
For Supplies Received (Purchases) |
|
Your VAT Account (Electronic Account) |
|
What Doesn't Need to Be Digital?
Making Tax Digital for VAT doesn't require you to:
Scan and store paper invoices and receipts digitally
Keep fuel scale charge calculations digitally
Maintain partial exemption calculations in digital format
Store capital goods scheme adjustments digitally
You can calculate these outside your digital records and make journal entries for each adjustment type.
The Six-Year Rule
All digital records must be preserved for at least six years (or ten years if you used VATMOSS/OSS schemes). Following deregistration, you can convert digital records to alternative formats, but the six-year retention period still applies.
MTD Compatible Software for VAT and Digital Links
Choosing the right compatible software is fundamental to MTD for VAT compliance. Your software must do more than just file returns—it must maintain a complete digital record-keeping system.
Software Requirements for MTD for VAT
For MTD for VAT compliance, HMRC-compatible software must fulfill several key requirements. First, it must be able to keep records in digital form and ensure that these records are preserved digitally. The software should also be capable of creating VAT returns directly from these digital records and submitting those returns to HMRC via the API platform. Additionally, the software must be able to receive information from HMRC via the API platform.
Businesses have multiple options for software: they can use commercial accounting software, spreadsheets with API-enabled functionality, or even a combination of compatible products to meet MTD for VAT requirements.
Understanding Digital Links
If you use multiple software products or spreadsheets for MTD for VAT, they must be connected through digital links. This is where many businesses fall foul of the rules.
Acceptable Digital Links: | Unacceptable Methods: |
|---|---|
|
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Critical Point: You cannot manually transfer information between software products for MTD for VAT purposes. Breaking this rule means you're not compliant.
Making Tax Digital For VAT Exemptions: Can You Apply?
While Making Tax Digital for VAT is mandatory for most businesses, genuine exemptions exist for those who cannot reasonably comply.
Automatic Exemptions
You're automatically exempt from MTD for VAT if:
Your business is subject to an insolvency procedure, including:
Bankruptcy orders
Winding-up orders
Administration
Administrative receivership
Voluntary arrangements under the Insolvency Act 1986
You've cancelled your VAT registration but still need to submit a final return.
Application-Based Exemptions
You can apply for an Making Tax Digital for VAT exemption if it is not practicable to use digital tools due to specific circumstances. These include age, disability, or remote location. HMRC does not specify a particular age threshold for the exemption; instead, each case is assessed individually.
The disability exemption applies if you are unable to use computers, tablets, or smartphones for the time needed to maintain digital records. Additionally, the remote location exemption applies if you cannot access the internet at your home or business premises, and it would be unreasonable to access it elsewhere.
You can also apply for an MTD for VAT exemption based on religious beliefs or internet access. If you are a practising member of a religious society whose beliefs are incompatible with electronic communications or record-keeping, you may qualify for an exemption. Additionally, if you genuinely cannot obtain internet access note that choosing not to get internet access does not qualify — you may also be eligible for the exemption.
What Won't Qualify?
HMRC will not grant MTD for VAT exemptions solely because:
Complying would involve time, effort, and cost (provided these are reasonable)
You could hire an agent or accountant to handle it
You find technology challenging but have basic digital skills
Making Tax Digital For VAT in Special Situations
HMRC recognises that certain businesses operate differently. Here's how MTD for VAT applies to specific scenarios.
Special Situation | Details |
|---|---|
Retail Schemes and MTD For VAT | If you use a retail scheme, you can record gross daily takings rather than individual transactions. This means:
Many businesses use retail schemes without realising it—check if you qualify. |
Flat Rate Scheme Under MTD For VAT | If you use a retail scheme, you can record gross daily takings rather than individual transactions. This means:
Many businesses use retail schemes without realising it—check if you qualify. |
Margin Schemes and MTD For VAT | The Flat Rate Scheme continues under MTD for VAT with simplified requirements:
|
Third-Party Records | MTD for VAT includes relaxations for records maintained by others: Letting Agents and Barristers' Clerks:
Employee and Volunteer Expenses:
Supplier Statements:
|
Petty Cash Under MTD For VAT | Petty cash transactions do not need to be individually recorded; you can record multiple small transactions as a single entry if:
|
Making Tax Digital For VAT Compliance: What Hasn't Changed?
Despite the digital transformation, several aspects of VAT remain unchanged under MTD for VAT:
VAT Rules: Core VAT legislation remains the same—only record-keeping and filing methods have changed.
Information Submitted: Your VAT return still contains the same nine boxes. The regulations allow voluntary submission of additional information, but it's not required.
Deadlines: Filing and payment deadlines haven't changed under MTD for VAT.
Return Frequency: Whether you file monthly, quarterly, or annually remains the same.
Penalties for Making Tax Digital For VAT Compliance Non-Compliance
Failing to comply with Making Tax Digital for VAT can lead to two main types of penalties:
Late Submission Penalties
Late Payment Penalties
Understanding how this work can help you avoid unnecessary costs.
Late Submission Penalties (Points-Based System)
Since January 2023, HMRC applies a points-based penalty system for late VAT return submissions.
How the Points System Works?
The points system works as follows: you receive one penalty point each time you submit a VAT return late. Once you reach the penalty threshold, HMRC will issue a £200 penalty. For every further late return after reaching the threshold, an additional £200 penalty will be applied.
Penalty Point Thresholds (by Filing Frequency)
Quarterly filers: 4 points
Monthly filers: 5 points
Annual filers: 2 points
Penalty points are not permanent. Penalty points can be removed if:
You submit returns on time for a defined compliance period, and
All outstanding returns for the previous 24 months have been filed.
The length of this period varies depending on whether returns are filed monthly, quarterly, or annually.
VAT Returns Not Affected by Late Submission Penalties
Late submission penalties do not apply to:
Your first VAT return after registering for VAT
Your final VAT return after cancelling VAT registration
One-off VAT returns covering non-standard periods (for example, when switching from quarterly to annual filing)
Returns from businesses subject to an automatic exemption, such as those in formal insolvency procedures.
Non-Standard Accounting Periods
If HMRC has agreed that you can use non-standard VAT periods, different thresholds apply:
Over 20 weeks: 2-point threshold (annual rules)
Over 8 weeks up to 20 weeks: 4-point threshold (quarterly rules)
8 weeks or less: 5-point threshold (monthly rules)
Late Payment Penalties
Late payment penalties apply separately from late submission penalties and are based on how overdue your VAT payment is.
Payments That Attract Late Payment Penalties
VAT due on your VAT return
VAT arising from amended or corrected returns
VAT charged following HMRC assessments
Not applicable to:
VAT payments on account
Instalments under the Annual Accounting Scheme
How Late Payment Penalties Are Calculated?
Days VAT Payment Is Late | Late Payment Penalty | Interest Charged |
|---|---|---|
Up to 15 days late | No penalty | Late payment interest applies from day 1 |
16–30 days late | 3% of the VAT outstanding at day 15 | Late payment interest continues to apply |
31 days or more late | 3% of VAT outstanding at day 15 plus 3% of VAT outstanding at day 30, and an additional 10% per annum calculated daily from day 31 until paid | Late payment interest continues to apply |
Late payment interest
Late payment interest is charged from day 1 and is set at the Bank of England base rate + 4% (rate changes in line with the base rate).
Practical Example: Late VAT Payment
A business owes £15,000 in VAT and pays 51 days late.
First penalty at day 16: 3% of £15,000 = £450
Additional charge to First penalty at day 31: 3% of £15,000 = £450
Second penalty (days 31–51): (£15,000 × 10% × 21 ÷ 365) = £86.30
Total penalties: £986.30
For the further information regarding penalties, you can visit to HMRC’s website
Conclusion: MTD For VAT Compliance is Non-Negotiable
Making Tax Digital for VAT represents a fundamental shift in how UK businesses manage VAT obligations. Digital record-keeping and software-based filing haven't been optional extras—they're legal requirements for all VAT-registered traders now. The transition to MTD for VAT demands more than just downloading software. It requires understanding digital record-keeping requirements, implementing compliant digital links, and ensuring your entire VAT process meets HMRC's specifications.
For businesses still using traditional methods, the time to act is now. Every VAT period filed outside Making Tax Digital for VAT compliance (without a valid exemption) exposes you to penalties, filing failures, and potential HMRC challenges. The good news? With proper guidance and the right software, MTD for VAT compliance is achievable. Whether you manage compliance in-house or work with specialist accountants, the key is ensuring your digital infrastructure meets HMRC's requirements.
Don't let Making Tax Digital for VAT compliance become a barrier to your business growth. Take control of your VAT obligations, implement the necessary digital systems, and ensure you're meeting HMRC's expectations.
Frequently Asked Questions
No. HMRC's online VAT return service is only available to businesses with approved exemptions. All other VAT-registered businesses must use MTD for VAT-compatible software.
No. Making Tax Digital for VAT doesn't require you to store invoices and receipts digitally. You can keep paper documents, but you must record each transaction digitally in your software.
Yes, but only if they connect to HMRC's API platform through compatible software. A standalone Excel spreadsheet won't work for MTD for VAT—you need additional bridging software.
Yes. Many businesses appoint agents to manage Making Tax Digital for VAT compliance. Your accountant needs an Agent Services Account and your authorisation to submit returns on your behalf.
Age alone doesn't automatically qualify you for exemption. HMRC assesses whether it's impracticable for you to use digital tools. The exemption considers your specific circumstances, not just age.
