MTD and VAT: How the Two Systems Work Together

If you're already VAT-registered and filing returns through Making Tax Digital for VAT, you might be wondering how the new MTD for Income Tax fits alongside your existing VAT obligations. Do the two systems talk to each other? Will you be filing twice as many returns? Does your VAT software automatically handle income tax too?

I'm Penny, the AI bookkeeper at Accounted, and I'll clear up how the two MTD systems work together — and more importantly, how to manage both without doubling your workload.

A Brief History: How We Got Two MTD Systems

Making Tax Digital was always designed to cover multiple taxes, but HMRC rolled it out in phases:

Phase 1 — MTD for VAT (April 2019): Businesses above the VAT threshold were first to comply, keeping digital records and submitting VAT returns through compatible software.

Phase 2 — MTD for VAT extended (April 2022): All VAT-registered businesses were brought in, regardless of turnover.

Phase 3 — MTD for Income Tax (April 2026): Self-employed individuals and landlords with qualifying income over £50,000 must now keep digital records and submit quarterly updates for income tax purposes.

The two systems were developed separately, with different technical specifications, different APIs, and different submission formats. This means they don't automatically interact with each other, even though the underlying business data is often the same.

What's Different Between MTD for VAT and MTD for Income Tax?

Understanding the key differences helps you manage both obligations effectively.

Submission Frequency

MTD for VAT: You submit VAT returns at your existing VAT periods — typically quarterly, though some businesses use monthly or annual periods. The standard quarters are April-June, July-September, October-December, January-March (though stagger groups mean your dates may differ).

MTD for Income Tax: Quarterly updates follow the tax year quarters: April-July, July-October, October-January, January-April. Plus an End of Period Statement and Final Declaration after the year end.

The key point: VAT quarters and income tax quarters don't necessarily align. VAT periods follow your VAT registration stagger group, while income tax quarters follow the fixed tax year pattern. This means you might be submitting VAT returns and income tax updates in different months.

What You Report

MTD for VAT: Box-by-box VAT return data — output VAT, input VAT, net VAT, total sales, total purchases, and any adjustments. It's fundamentally about VAT amounts.

MTD for Income Tax: Income and expenses categorised by HMRC's standard categories. It's about your business profit, not your VAT position.

The underlying transactions are the same (your sales and purchases), but they're reported differently for each system. Your accounting software handles this mapping automatically — you record a transaction once, and the software reports it correctly for both VAT and income tax purposes.

Penalties

Both systems use the new points-based penalty regime, but each has its own separate points tally. Late VAT submissions earn VAT penalty points; late income tax submissions earn income tax penalty points. They don't cross-contaminate.

However, the penalty structure is identical: points accumulate until you reach the threshold (usually four points), at which point you receive a £200 penalty, with further £200 penalties for subsequent late submissions.

For the complete penalty breakdown, see our MTD penalties guide.

How the Two Systems Use Your Data

Here's what happens at the transaction level when you're subject to both MTD for VAT and MTD for Income Tax:

Recording a Sale

When you record a sale of £1,200 (including £200 VAT):

For VAT purposes: The software records £200 of output VAT in Box 1, and £1,000 of net sales in Box 6 of your VAT return.

For income tax purposes: The software records £1,000 as turnover in your quarterly income tax update. (The VAT element is excluded from your income — it belongs to HMRC, not you.)

Recording a Purchase

When you record a business purchase of £600 (including £100 VAT):

For VAT purposes: The software records £100 of input VAT in Box 4, and £500 of net purchases in Box 7 of your VAT return.

For income tax purposes: The software records £500 as a business expense in the appropriate category in your quarterly income tax update. (Again, the VAT element is excluded.)

The Software Does the Heavy Lifting

Good MTD-compatible software handles this dual reporting automatically. You record each transaction once, and the software:

• Calculates the VAT element for your VAT return
• Categorises the net amount for your income tax update
• Submits the right data to the right HMRC API at the right time

You don't need to manually separate VAT and income tax figures. If you're doing this manually, you need better software. This is exactly the kind of thing Accounted handles seamlessly.

Managing the Submission Calendar

With both VAT returns and income tax quarterly updates, you'll have more submission deadlines to track. Here's a typical calendar for a business with standard VAT periods:

| Month | VAT Return Due | Income Tax Update Due | |-------|---------------|----------------------| | May | Q1 VAT (Jan-Mar) | — | | August | Q2 VAT (Apr-Jun) | Q1 IT (Apr-Jul) | | November | Q3 VAT (Jul-Sep) | Q2 IT (Jul-Oct) | | February | Q4 VAT (Oct-Dec) | Q3 IT (Oct-Jan) | | May | Q1 VAT (Jan-Mar) | Q4 IT (Jan-Apr) | | January | — | EOPS + Final Declaration |

Note: Your specific VAT deadlines depend on your stagger group. Check your VAT registration for your actual periods.

The good news is that if you're already disciplined about VAT filing, adding income tax quarterly updates is incremental rather than transformational. The same habits — keeping records up to date, reviewing before deadlines, submitting on time — apply to both.

The VAT Flat Rate Scheme and MTD for Income Tax

If you use the VAT Flat Rate Scheme, there's an important distinction to understand.

Under the Flat Rate Scheme, you charge VAT at the standard rate but pay HMRC a lower, industry-specific percentage of your gross turnover. The difference is yours to keep and is treated as business income.

For MTD for Income Tax purposes, the Flat Rate Scheme "profit" (the difference between VAT collected and VAT paid to HMRC) is part of your taxable business income. Your software should account for this, but it's worth checking that the figures are correct, as it can catch people out.

For more on the Flat Rate Scheme, see our VAT Flat Rate Scheme guide.

VAT Cash Accounting and Income Tax Reporting

If you use VAT cash accounting (where you account for VAT when you receive or make payment, rather than when you issue or receive invoices), you need to be aware of a potential mismatch with income tax reporting.

For income tax under MTD, you can use either the cash basis or the accruals basis. If you use the cash basis for both VAT and income tax, things align neatly. But if you use accruals for income tax while using cash accounting for VAT, the timing of when transactions appear in each return may differ.

This doesn't cause compliance problems — both bases are legitimate — but it can be confusing if you're comparing your VAT return to your income tax quarterly update and the numbers don't match. Your software should handle the accounting basis correctly for each obligation, but it's worth understanding why differences arise.

Practical Tips for Dual Compliance

Use One Software Platform

The simplest way to manage both MTD for VAT and MTD for Income Tax is to use a single software platform that handles both. This ensures:

• Transactions are recorded once and reported correctly for both taxes
• Digital links are maintained automatically
• You have one dashboard showing all your compliance obligations
• Deadlines for both taxes are tracked in one place

Switching between different tools for VAT and income tax adds complexity and increases the risk of errors or missed deadlines.

Align Your Review Schedule

Rather than reviewing your records separately for VAT and income tax, do a single comprehensive review that covers both. When you're preparing for a VAT submission, also check that your income tax categorisation is correct. This dual-purpose review takes marginally longer than a single review but saves you from doing the same work twice.

Keep Clean VAT Records

Under MTD for VAT, you already need to maintain records of every transaction with the correct VAT treatment. These same records — with the addition of income tax categorisation — serve your MTD for Income Tax obligations. If your VAT records are already clean and comprehensive, adding income tax compliance is straightforward.

If your VAT records are messy, fix them now. Poor VAT record-keeping will compound into poor income tax reporting, doubling your compliance risk.

Understand the Interaction with VAT Registration

There's a subtle interaction between VAT registration and MTD for Income Tax that's worth noting. Your VAT-inclusive turnover is not the same as your qualifying income for MTD for Income Tax purposes. For income tax, qualifying income is your gross income before expenses but excluding VAT.

For example, if your VAT-inclusive turnover is £60,000 and you're standard-rated, your net turnover (excluding VAT) is £50,000. This is your qualifying income for MTD for Income Tax purposes. So you'd be right at the threshold — check carefully whether you're just above or just below.

Our guide to VAT registration covers how VAT interacts with income thresholds.

What About Deregistering for VAT?

Some businesses registered voluntarily for VAT might consider deregistering to simplify their compliance obligations. While this reduces your MTD for VAT burden, it doesn't affect your MTD for Income Tax obligations — if your income exceeds the threshold, you still need to comply.

Deregistering for VAT is a significant decision with implications beyond MTD. Consider the impact on your pricing, your ability to reclaim input VAT, and how your customers perceive your business. Our guide to VAT deregistration covers the pros and cons.

Looking Ahead: Will the Two Systems Merge?

HMRC has discussed the possibility of a more integrated approach to tax reporting in the future, where a single submission could cover multiple taxes. However, this is a long-term aspiration rather than an immediate plan.

For now, MTD for VAT and MTD for Income Tax remain separate systems with separate submissions, separate APIs, and separate penalty regimes. The only integration point is at the software level — good software reports both correctly from the same underlying data.

As HMRC's digital infrastructure matures, we may see closer integration. But for planning purposes, assume the two systems will remain separate for at least the next several years.

Getting Set Up for Both

If you're already filing VAT through MTD and now need to add income tax, check whether your current software supports MTD for Income Tax. Most major platforms do, but it may require upgrading your plan or activating an additional feature.

If your current VAT software doesn't support income tax, you have two options:

1. Switch to software that handles both — this is usually the cleaner option
2. Add income tax software alongside your VAT software — this works but adds complexity

Accounted handles both MTD for VAT and MTD for Income Tax in a single platform. Sign up and Penny will manage your dual compliance obligations so you can focus on running your business.

For a comprehensive view of all MTD obligations, see our Making Tax Digital complete guide. And for specifics on quarterly submissions, our quarterly reporting guide covers both VAT and income tax.

Accounted handles your MTD ITSA submissions automatically, with direct HMRC filing built in. See how MTD works in Accounted →