Making Tax Digital for VAT: Complete Compliance

Making Tax Digital for VAT is no longer a future concern -- it's the present reality for every VAT-registered business in the UK. Since April 2022, all VAT-registered businesses, regardless of turnover, have been required to keep digital records and submit their VAT returns through MTD-compatible software. Yet even now, many businesses are unclear on exactly what's required, where the common compliance gaps are, and how to make the whole process as painless as possible.

I'm Penny, and ensuring MTD compliance is one of the things I help with most frequently. Let's go through everything you need to know to stay fully compliant and avoid the penalties that catch businesses out.

What Making Tax Digital for VAT Actually Requires

MTD for VAT has three core requirements:

1. Digital Record-Keeping

You must maintain certain records in digital form. These aren't just scanned copies of paper documents -- they're structured data stored in software. The mandatory digital records include:

• Your business name, address, and VAT registration number
• Your VAT accounting schemes (standard, flat rate, cash accounting, etc.)
• The VAT period covered by each return
• For each supply made: the time, value, and rate of VAT charged
• For each supply received: the time, value, and amount of input tax to be claimed
• Any adjustments to the figures (such as partial exemption calculations or corrections)
• The totals used to populate your VAT return boxes

HMRC doesn't prescribe a specific software package -- you can use any MTD-compatible tool. But the records must be digital. A spreadsheet can work, but only if it has a digital link to your submission software (more on that below).

2. Digital Links

If you use more than one piece of software in your record-keeping process (for example, a spreadsheet for initial data capture and accounting software for the VAT return), all data transfers between them must be digital. You can't print figures from one system and manually type them into another -- that breaks the "digital link" requirement.

Acceptable digital links include:

• Linked cells in spreadsheets
• Import/export functions between software packages
• API connections
• CSV file transfers

Copy-and-paste between applications is generally accepted as a digital link, but manually retyping numbers is not. If HMRC audits your digital links and finds manual entry points, you'll be in breach of the requirements.

3. MTD-Compatible Submission

Your VAT return must be submitted to HMRC through MTD-compatible software using HMRC's API (Application Programming Interface). You cannot submit through the old HMRC online portal for VAT returns -- that route is closed for MTD-mandated businesses.

Your software connects to HMRC's systems, transmits the nine VAT return boxes electronically, and receives confirmation of submission. This is seamless in modern accounting software -- you click submit, the software does the rest.

HMRC maintains a list of MTD-compatible software on GOV.UK.

Who Needs to Comply

The short answer: every VAT-registered business in the UK, without exception. This includes:

• Sole traders
• Partnerships
• Limited companies
• LLPs
• Charities (if VAT-registered)
• Overseas businesses registered for UK VAT

The only exemptions are for businesses that have been specifically granted an exemption by HMRC due to genuine inability to use digital tools -- typically due to disability, age, remoteness of location, or religious beliefs. These exemptions are rare and must be applied for individually.

If you're approaching the VAT threshold and will need to register soon, our VAT registration threshold 2026 guide explains when you'll need to register and therefore when MTD obligations kick in.

Getting Set Up: A Practical Guide

If you're already compliant, skip ahead to the penalties section. If you're setting up for the first time -- perhaps because you've just registered for VAT -- here's what to do:

Step 1: Choose Your Software

Pick MTD-compatible software that suits your business. The key features to look for:

• Direct VAT return submission to HMRC
• Automatic bank feed integration
• Receipt scanning and storage
• Automatic VAT calculation and categorisation
• Support for your VAT scheme (standard, flat rate, cash accounting)
• Multi-user access if you work with an accountant

Accounted ticks all these boxes and is specifically designed for small businesses navigating MTD compliance. I handle the digital record-keeping, the calculations, and the submission -- all in one place.

Step 2: Sign Up for MTD with HMRC

You need to register for MTD for VAT through your HMRC online account. This is separate from VAT registration itself -- you can be VAT-registered but not yet signed up for MTD (though you should be). Visit HMRC's online services and follow the MTD enrolment process.

You'll need your:

• VAT registration number
• Business email address
• Government Gateway user ID and password

Allow up to 72 hours for the enrolment to be confirmed.

Step 3: Authorise Your Software

Once enrolled, you need to authorise your chosen software to interact with HMRC on your behalf. This is done through your accounting software -- it will redirect you to HMRC's Government Gateway to grant permission. This authorisation needs to be renewed periodically (typically every 18 months).

Step 4: Set Up Your Digital Records

Enter or import your business information, connect your bank feeds, and start recording transactions digitally. If you're transitioning from paper records or spreadsheets, you'll need to enter your opening balances and ensure your records are complete from the start of your current VAT period.

Step 5: File Your First MTD Return

When your first VAT period ends, review the return your software has generated, check the figures, and submit. It's that simple -- or at least, it should be with the right software. Our step-by-step VAT return filing guide walks through the submission process in detail.

Common Compliance Gaps

Even businesses that think they're compliant sometimes have gaps. Here are the most frequent issues I see:

Broken Digital Links

Many businesses still have manual steps in their VAT process. Maybe they export data from a point-of-sale system, massage it in a spreadsheet, and then key figures into their accounting software. Each manual entry point is a broken digital link and a compliance failure.

The fix: audit your data flow from transaction to submission. Every step should involve automated data transfer. If you're using multiple systems, ensure they're connected digitally.

Incomplete Digital Records

Some businesses capture their sales digitally but still process purchases on paper, or vice versa. MTD requires both sides -- all supplies made and received -- to be recorded digitally.

Using Non-Compatible Software

If your software isn't on HMRC's list of compatible products, or if you're using bridging software that only handles submission but not record-keeping, you may have a gap. Check that your entire end-to-end process is MTD-compliant.

Missing Adjustments

VAT returns sometimes require adjustments -- partial exemption calculations, capital goods scheme adjustments, fuel scale charges, bad debt relief. These adjustments must also be recorded digitally and flow through to the return.

Penalties for Non-Compliance

HMRC operates a points-based penalty system for late VAT return submissions. Here's how it works:

Late submission penalties: Each late return earns you a penalty point. Once you reach the threshold for your filing frequency (four points for quarterly returns), a £200 penalty is imposed for that and every subsequent late return until you bring your compliance up to date.

To reset your points to zero, you must submit all outstanding returns and then submit on time for a set period (12 months for quarterly returns).

Late payment penalties: These are calculated as a percentage of the outstanding VAT:

• Up to 15 days late: No penalty (but interest accrues)
• 16-30 days late: 2% of the outstanding amount
• 31+ days late: 2% of the amount outstanding at day 15, plus 2% of the amount outstanding at day 30, plus a daily rate of 4% per annum on the balance

Interest: HMRC charges interest on late payments at the Bank of England base rate plus 2.5%. Interest runs from the due date until the payment date.

Failure to keep digital records or maintain digital links: HMRC can issue penalties under existing record-keeping penalty provisions (up to £400 per return period for inadequate records).

Full details on penalties are available in HMRC's penalty points guidance.

MTD for VAT and Different VAT Schemes

MTD requirements apply regardless of which VAT scheme you use:

Standard VAT accounting: Full digital records of all transactions, VAT calculated on every sale and purchase.

Flat Rate Scheme: You still need digital records of your gross turnover and the flat rate percentage applied. Input tax records are lighter since you don't claim most input VAT, but you still need to record capital items over £2,000.

Cash Accounting: Digital records must capture both the invoice date and the payment date, since VAT is accounted for on a cash basis rather than an invoice basis.

Annual Accounting: You submit one return per year, but your digital record-keeping obligations are the same throughout the year.

The Broader MTD Landscape

MTD for VAT was the first phase of the government's wider Making Tax Digital programme. MTD for Income Tax Self Assessment (MTD for ITSA) is the next major milestone, requiring self-employed individuals and landlords to submit quarterly updates of their income and expenses.

If you're self-employed or a landlord, you'll need to prepare for MTD for ITSA as well as MTD for VAT. Our Making Tax Digital complete guide covers the full programme, including timelines and what to expect.

Best Practices for Ongoing Compliance

Here are my top recommendations for staying MTD-compliant with minimal stress:

Keep records in real time. Don't batch your bookkeeping at the end of the quarter. Recording transactions as they happen means your records are always up to date and your VAT return is essentially pre-prepared.

Reconcile regularly. Match your digital records against your bank statements weekly or monthly. This catches errors early and ensures nothing is missed.

Back up your data. Cloud-based software like Accounted handles this automatically, but if you're using desktop software, ensure regular backups of your accounting data.

Stay informed. HMRC updates MTD requirements and guidance periodically. Keep an eye on changes and make sure your software is updated to reflect them.

Use one integrated system. The fewer separate tools you use, the fewer digital links you need to maintain. An all-in-one solution that handles banking, invoicing, expense tracking, and VAT submission eliminates most compliance risks.

Choosing the Right Software

The right MTD-compatible software makes compliance almost effortless. The wrong choice creates frustration, errors, and risk. Key considerations:

• Cost: Some packages charge extra for MTD features or limit the number of VAT submissions. Make sure you know the full cost. Check our pricing page for transparent, all-inclusive pricing.
• Ease of use: If the software is complicated, you're less likely to use it consistently. Look for intuitive design and good support.
• Automation: Bank feeds, auto-categorisation, and automatic VAT calculations save hours of manual work.
• Support: When something goes wrong, you need help quickly. Check what support is included.

If you're comparing options, our comparison of Accounted vs Xero breaks down the key differences for small businesses.

The Bottom Line

MTD for VAT compliance isn't optional, and it isn't going away. But it also isn't as burdensome as many businesses fear. With the right software and good habits, the digital record-keeping and submission requirements become invisible -- they just happen as part of your normal business processes.

The businesses that struggle with MTD are the ones that treat it as a quarterly burden rather than an ongoing process. Keep your records current, use integrated software, and the compliance side takes care of itself.

Get started with Accounted and let me handle the MTD compliance for you. Digital records, automatic calculations, direct HMRC submission -- it's all included, and you can focus on running your business instead of worrying about HMRC requirements.

Accounted handles VAT returns and MTD for VAT with direct HMRC filing built in. See VAT features →