MTD VAT rules explained: thresholds, deadlines and penalties

Making Tax Digital for VAT is now business as usual for most VAT registered businesses – but questions still come up around thresholds, submission rules and what actually triggers penalties. Making Tax Digital (MTD) for VAT is mandatory for all VAT-registered businesses as of April 2022. For accountants, this is often where confidence (or confusion) sets the tone of client conversations.

This is a clear, practical explanation of the MTD VAT rules as they stand, grounded in HMRC guidance and focused on what matters in day-to-day compliance. The VAT registration threshold is currently £90,000, and businesses with a taxable turnover above this certain threshold must comply with MTD for VAT.

When MTD for VAT applies

MTD for VAT is mandatory for all VAT registered businesses, regardless of size or turnover. This is where many clients still get caught out.

Originally, MTD only applied to businesses above the VAT registration threshold. That’s no longer the case. Today, if a business is VAT registered – whether because it exceeded the VAT threshold or registered voluntarily – it must comply with MTD VAT rules.

This applies to:

• Limited companies
• Sole traders
• Partnerships
• Small businesses registered below the VAT threshold.

Businesses with turnover below £90,000 that are voluntarily registered for VAT must also comply with MTD rules. In addition, businesses with a taxable turnover below the VAT threshold can sign up for MTD for VAT voluntarily. HMRC encourages these businesses to join MTD and sign up voluntarily so they can benefit from improved record-keeping and streamlined processes.

Once registered, MTD applies immediately. There’s no grace period and no option to delay because a business is “small”.

What the VAT threshold still matters for

The VAT registration threshold still determines whether a business must register for VAT in the first place. It does not determine whether MTD applies after registration.

This distinction is worth reinforcing with clients. Many still assume that MTD only applies once taxable turnover exceeds the VAT registration threshold, when in fact the act of VAT registration is what triggers MTD compliance.

If a business expects its taxable turnover for the next 12 months to be less than £88,000, it can apply to have its VAT registration cancelled. Additionally, businesses seeking to be exempt from MTD requirements must apply directly to HMRC, and exemptions are only granted in specific circumstances.

Digital record keeping – what HMRC expects

Under Making Tax Digital rules, VAT businesses must keep digital VAT records. This includes:

• Sales and purchase figures
• Input VAT and output VAT
• VAT return totals
• Details of the VAT accounting scheme used
• The time of supply, the value of the supply, and the rate of VAT charged for each supply
• Records of expenses relevant to VAT calculations

Records must be stored digitally for at least six years.

If you use spreadsheets to keep business records, you will need MTD for VAT software, such as bridging software, to send your VAT returns to HMRC. All VAT-registered businesses must use MTD-compatible software to comply with MTD for VAT rules. Making Tax Digital (MTD) software can include full accounting programs or bridging software, and must maintain clear digital links between systems if multiple tools are used. Your digital records should be linked to your VAT account, which is central to managing submissions and ensuring compliance. Businesses should check with their software provider to ensure their software is MTD-compatible before the deadline. Good software will also provide support for digital record keeping, tracking expenses, and seamless data exchange with HMRC.

The data must be stored digitally and transferred using digital links. Figures must not be physically re-typed between systems – whether that’s from a spreadsheet into software, or from software into HMRC.

HMRC expects VAT return information to flow digitally from business records to submission via an application programming interface (API).

Submitting VAT returns under MTD

All VAT-registered businesses must keep digital records and file their VAT returns through MTD-compatible software. You must keep digital VAT business records and send returns using MTD-compatible software if your taxable turnover is above the VAT registration threshold.

VAT returns must be submitted using MTD compatible software. The HMRC portal can no longer be used for manual submissions. You need to keep your business records digitally from the start of your accounting period to prepare for MTD for VAT.

This can be done through:

• A full accounting software package
• A spreadsheet with compliant bridging software.

Both approaches are valid, provided digital links are maintained throughout the process. When you complete your VAT return, you must file it electronically and submit it to HMRC by the deadline. After you submit your return, you may need to wait for confirmation from HMRC that your submission has been received. VAT return periods, deadlines and payment dates remain unchanged. MTD changes the submission method – not the reporting timetable.

Penalties and non-compliance

MTD VAT uses HMRC’s points-based penalty system for late submissions: which means each tax return late earns penalty points. For quarterly VAT submissions, the penalty for late submission is £200, and accountants must also ensure their wider regulatory obligations, such as anti-money laundering compliance processes, are robust to avoid compounding risk. Once you reach a certain threshold of penalty points, you pay a penalty fee. Points expire after 24 months if you have submitted all outstanding returns for the previous 24 months and completed a period of compliance without further issues.

Penalties can apply even when:

• No VAT is owed
• A return is submitted but late, missing the deadline date
• Payment is made on time but submission is missed

If you receive a penalty notice for a tax return late or tax late, you can challenge the penalty by making an appeal if you have a reasonable excuse. Your appeal must be made in writing within 30 days of the penalty notice being issued. HMRC will only accept appeals if your reasonable excuse counts as valid throughout the period between the deadline and the date you file the return. If HMRC does not accept your appeal, you can ask for a review by an HMRC officer who has not been involved in your tax affairs before.

Late payment interest may also apply separately. Repeated non-compliance can escalate quickly, particularly for clients managing VAT manually or using non-compliant systems.

Exemptions and edge cases

There are very limited exemptions from MTD VAT. These generally apply where it is not reasonably practicable to use digital tools due to age, disability, location or insolvency procedures.

Landlords, along with sole traders, are required to comply with MTD requirements. From April 2026, sole traders and landlords with income over £50,000 must use MTD for Income Tax software for quarterly submissions, and from April 2027, the threshold drops to £30,000.

Exemptions are not automatic. They must be agreed with HMRC, and supporting evidence may be required. In most cases, VAT businesses are expected to comply.

Why MTD VAT still matters for accountants

Even though MTD VAT is established, it continues to influence:

• Software choices across client portfolios
• Record keeping standards
• Internal review processes
• Risk exposure for non-compliance.

It’s also often the first step clients take into digital tax reporting – shaping how they respond to future MTD changes for income tax and beyond, and whether they adopt fully integrated MTD-compatible accounting software across taxes. Handled well, MTD VAT becomes routine. Handled poorly, it creates repeated compliance issues and unnecessary client stress.

Supporting VAT registered businesses with Making Tax Digital

The MTD VAT rules themselves are relatively simple – but clarity around thresholds, submission methods and penalties is what keeps clients compliant and confident.

The right software and processes make all the difference.

If you’re looking to simplify VAT compliance across your client base, Capium’s MTD-ready VAT software supports digital record keeping, seamless VAT return submission and clear audit trails – helping accountants stay compliant without adding complexity, especially when combined with an MTD hub for managing all client obligations. The software also provides ongoing support for digital record keeping and ensures your practice is always ready for HMRC requirements, while tools like Capium 365 for businesses, sole traders and landlords help clients maintain compliant digital records day to day.

Refer to this page for updated information on MTD VAT rules explained thresholds and further resources, and explore dedicated Making Tax Digital resources and guides when planning client communications and internal processes.