Making Tax Digital for VAT: What Every VAT-Registered Business Must Do

Making Tax Digital (MTD) for VAT has been in force for a while now, but it still catches out businesses that have grown into VAT registration, or whose record-keeping hasn’t kept pace with the rules. It applies to how you keep records for, and file, Value Added Tax (VAT). Here’s what’s required.

MTD for VAT is mandatory for everyone

Unlike some other Making Tax Digital rules, MTD for VAT applies to every VAT-registered business, regardless of turnover. There’s no small-business exemption based on how much you turn over, if you’re VAT registered, you’re within MTD, as confirmed in GOV.UK’s Making Tax Digital for VAT collection. This applies whether you registered voluntarily below the current VAT registration threshold of £90,000 or you registered because your taxable turnover went over it.

HMRC sets out the detail of the rules in VAT Notice 700/22, which covers who must comply, the digital record-keeping requirements, and how to submit VAT returns using compatible software. Businesses that keep paper VAT records, or a mix of paper and spreadsheets with manual re-entry, need to move their VAT records onto a compliant digital footing before their next VAT return is due, not after.

What you have to do

Three things are required:

1. Keep digital records of your VAT-relevant transactions, rather than paper records or records kept only in your head. This covers core details such as your business name and VAT registration number, the time and value of each supply, and the VAT rate applied, so software needs to capture this information digitally, not just the final return figures.
2. Use MTD-compatible software to prepare and submit your VAT return for each VAT period, filing electronically rather than through a paper or manual route.
3. Maintain digital links between the software or systems that make up your records, no manual re-entry of figures between systems.

If you’re newly registering for VAT, these three requirements apply from the outset, there’s no transition period where you can defer setting up digital records or MTD-compatible software once you’re VAT registered.

Compatible software

You need software that’s recognised by HMRC as MTD-compatible. In practice this is either:

• Cloud accounting software such as Xero, QuickBooks, or Sage, which handles digital records and MTD filing together, or
• A spreadsheet plus bridging software, if you keep records in a spreadsheet, bridging software can extract the figures and submit them to HMRC digitally without you needing to switch to full accounting software.

What isn’t compliant is manually typing your VAT figures into HMRC’s old online portal, that route no longer exists for standard VAT filing, submissions must go through MTD-compatible software. Whichever route you use to submit your VAT return, the software needs to be recognised on HMRC’s list of MTD-compatible software before you rely on it for filing.

Digital links

This is the part that trips up businesses using a mix of spreadsheets and manual processes. A digital link means data moves between systems electronically, an automatic export, a formula-linked cell, an API connection, rather than someone copying and pasting, or retyping figures by hand.

For example, if your sales data lives in one spreadsheet and your VAT calculation in another, a manual copy-paste between them breaks the digital link requirement, even if the final return is submitted through compatible software. The data needs to flow through without manual re-entry at any stage.

Penalties for non-compliance

HMRC can penalise businesses that fail to keep digital records or don’t file through MTD-compatible software, separately from the standard late filing and late payment penalties that apply to VAT returns generally. Given how long MTD for VAT has now been the norm, non-compliance is treated as an established requirement being ignored, not a new or unfamiliar rule.

Who can be exempt

Exemption from Making Tax Digital for VAT exists, but it’s narrow and isn’t based on turnover or business size. HMRC will consider an exemption where you’re digitally excluded, for example because of age, disability, location, or a religious objection to using computers, or where your business is subject to an insolvency procedure. You have to apply to HMRC for exemption, it isn’t automatic, and you’ll need to explain why keeping digital records and using compatible software isn’t practical for you.

MTD is expanding to Income Tax too

Making Tax Digital isn’t limited to VAT. Making Tax Digital for Income Tax is being phased in for self-employed people and landlords, starting with those earning over £50,000 a year from April 2026, extending to lower income thresholds in the following years. It works on similar principles, digital records and quarterly digital updates, but is a separate requirement from MTD for VAT. See our Making Tax Digital for Income Tax guide for the detail and the timeline.

Getting your VAT process compliant

Whether you’re setting up VAT registration for the first time or reviewing an existing process that’s grown a bit informal over the years, it’s worth checking your software and workflow genuinely meet the digital link requirement, not just the surface-level “we use software” box. You can keep digital records and submit your own VAT return once the software is set up correctly, or use a tax agent or accountant to submit VAT returns on your behalf, many VAT-registered businesses do the latter once their record-keeping spans more than one system. Our VAT Returns service sets up MTD-compliant bookkeeping and handles your quarterly returns end to end.