Making Tax Digital for VAT: a simple guide for UK businesses
Making Tax Digital for VAT is already part of everyday life for UK businesses – even if it doesn’t always feel that way. Since its introduction, MTD has quietly changed how VAT records are kept and how VAT returns are submitted, shifting businesses away from manual processes and towards digital reporting.
Making Tax Digital (MTD) is a government initiative that began its rollout in April 2019, initially targeting VAT-registered businesses. The aim of making tax digital MTD is to modernise tax reporting by requiring businesses to keep digital records and submit VAT returns using compatible software, reducing errors and simplifying compliance.
If you’re VAT registered, this guide explains what Making Tax Digital for VAT actually requires, what hasn’t changed, and how to stay compliant without making things more complicated than they need to be.
What Making Tax Digital for VAT really means
Making Tax Digital is a government initiative designed to modernise the UK tax system and reduce errors caused by manual record keeping. For VAT, it focuses on two core requirements: keeping VAT records digitally and submitting VAT returns using MTD compatible software that connects directly to HMRC’s system. Paper ledgers are no longer sufficient; businesses must keep digital records (an electronic account) of all VAT-relevant transactions, including designatory data and transaction details. Digital records must include sales and purchases with the tax point date, net value, and VAT rate charged. Only HMRC approved software or approved software can be used for compliance, and all VAT-registered businesses must use Making Tax Digital (MTD) compatible software to submit their VAT returns.
What it doesn’t do is change VAT rates, VAT thresholds or how often you pay. The timing of VAT return periods and VAT payments remains exactly the same as under the previous system.
In short, MTD for VAT changes how you report – not what you report.
Who MTD for VAT applies to
MTD for VAT applies to all VAT registered businesses, not just those above the VAT registration threshold.
That includes:
- Businesses registered because their taxable turnover exceeded the VAT threshold
- Businesses that registered voluntarily below the threshold
- Sole traders, partnerships and limited companies
- Newly VAT registered businesses
Initially, only businesses above the VAT threshold were required to comply with Making Tax Digital for VAT, but now all VAT-registered businesses, regardless of size, must follow the rules.
As of 2024, HMRC automatically enrolls all new VAT-registered businesses for MTD for VAT unless they are exempt. VAT registration for new businesses is handled automatically by HMRC to ensure MTD compliance.
If your business has a VAT registration number, MTD applies automatically. There’s no opt-out based on size or sector, and very limited exemptions.
Keeping VAT records digitally
Under MTD regulations, businesses must maintain digital VAT records. All accounting records related to VAT must be kept using digital record-keeping, which is required for compliance. These records include standard VAT information such as sales and purchase totals, output VAT, input VAT, VAT adjustments and details of the VAT accounting scheme used.
It is essential to use compliant software, either a full accounting solution or bridging software, to ensure records are kept and submitted correctly to HMRC. Paper records alone are no longer sufficient. While paper receipts can still exist, the VAT data itself must be recorded and stored digitally, with figures transferred using digital links rather than manual copy-and-paste.
Before submitting your VAT return, you should check your digital VAT account generated by your accounting software for mistakes to avoid errors in your submission. Businesses must also keep hold of all supporting documents and invoices in case HMRC asks to see them after submitting their VAT return. Digital records make it easier to track expenses and create an audit trail, simplifying record checks if HMRC investigates.
MTD-compatible software often includes built-in reporting features that generate real-time cash flow projections. Digital record-keeping reduces errors and provides real-time insight into cash flow and performance, streamlining administrative tasks and improving financial management.
Submitting VAT returns under MTD
Manual submissions are no longer allowed under Making Tax Digital (MTD); businesses must now submit returns digitally. VAT returns must now be submitted through compatible software rather than typed directly into HMRC’s website. Businesses use MTD-compatible software to submit returns electronically to HMRC, ensuring compliance with digital record-keeping requirements. The software sends VAT data digitally to HMRC via an application programming interface (API), removing the risk of errors introduced during manual re-keying.
The VAT return periods, filing deadlines and payment dates are unchanged. VAT returns and payments are due one month and seven days after the end of each accounting period, and late submissions are subject to a points-based penalty system. Businesses must submit their VAT returns by the deadline for their accounting period to avoid penalties. If you pay by Direct Debit, that still works in the same way. MTD simply replaces the submission method behind the scenes.
Choosing the right software
Businesses can meet MTD requirements in different ways, depending on how they currently manage their VAT records. To comply with Making Tax Digital for VAT, businesses must use HMRC approved software or approved software that supports MTD.
Some use full accounting software packages that handle VAT, income and reporting in one place. Others rely on bridging software to submit VAT returns from spreadsheets. Both approaches are allowed, provided the software is MTD compatible, HMRC-approved, and maintains digital VAT records.
You must authorise your chosen software to communicate with HMRC, and this authority typically needs to be renewed every 18 months. Using MTD-compatible software should reduce the amount of time you spend calculating and submitting your VAT return. MTD aims to simplify the process of record keeping and payment, helping to reduce costly administrative errors.
The right choice depends on transaction volume, future growth and whether wider tax reporting – such as income tax or corporation tax – is likely to follow.
What happens if you don’t comply
MTD for VAT operates under HMRC’s points-based penalty system, and businesses must follow MTD rules to avoid penalties. Failing to comply with MTD for VAT can result in penalties for businesses that are not exempt. For every late VAT return submission, a penalty point is issued, and once a penalty point threshold is reached, a penalty fee is incurred. The penalty for late submissions is £200 for each late VAT return once the threshold is reached. Points for late submissions expire after 24 months if all outstanding returns are submitted and a period of compliance is maintained. Exemptions from MTD can be requested if it is impractical for a business to use digital tools due to reasons such as age or disability, and certain businesses, including those subject to an insolvency procedure, may be exempt from MTD for VAT. Repeated late submissions can result in penalties, even where no VAT is due. Staying compliant isn’t about doing more work – it’s about having systems in place that make compliance routine rather than stressful.
Why MTD for VAT can actually help businesses
Once it’s embedded properly, digital VAT record keeping often gives businesses better visibility over their finances. The key benefits of Making Tax Digital (MTD) include reducing errors, saving time, and improving financial management through integrated reporting features. MTD helps businesses save time by streamlining essential processes such as invoicing, payroll, and expenses. Digital record-keeping and reporting provide real-time insight into a business’s financial position, enabling better cash flow analysis and decision-making. With more accurate, up-to-date figures, businesses can make better decisions and plan ahead with confidence. MTD requires businesses to submit updates every quarter to bring the tax system closer to real-time. Since April 2022, all VAT-registered businesses in the UK have been required to comply with MTD for VAT, regardless of turnover, unless HMRC grants an exemption. VAT liabilities are easier to track, records are more accurate, and the overall tax reporting process becomes more predictable.
For many businesses, MTD for VAT is also a stepping stone towards broader digital reporting – particularly as Making Tax Digital expands across other taxes.
Final thoughts on Making Tax Digital for VAT registered businesses
Making Tax Digital for VAT isn’t something to “get through” – it’s about building VAT reporting into everyday business processes in a way that’s reliable and low-stress. With the right digital tools, MTD becomes part of the background rather than a compliance headache.
If you’re looking for a simple way to stay fully compliant, Capium’s MTD-ready VAT software helps UK businesses keep digital VAT records, submit VAT returns directly to HMRC, and manage tax reporting in one secure system.
