VAT and Making Tax Digital
Making Tax Digital for VAT is now fully established and applies to almost all VAT registered businesses. It introduced mandatory digital record keeping and digital VAT return submission, changing how VAT is managed and reported without changing the underlying VAT rules themselves.
Businesses are now required to maintain VAT records in compatible software, which ensures that all data flows digitally between records and VAT submissions. This has streamlined reporting, reduced errors from manual calculations, and provides HMRC with a more accurate, near real-time view of VAT activity. For businesses new to MTD, early adoption of compliant software helps avoid last-minute stress and ensures smooth integration with existing accounting processes.
What Making Tax Digital for VAT Is
Making Tax Digital for VAT requires VAT registered businesses to keep their accounting records digitally and submit VAT returns to HMRC using compatible software. These requirements have applied to all VAT registered traders since April 2022.
You must use software that can connect directly to HMRC through its API platform. HMRC’s online VAT return is no longer available unless you are formally exempt from MTD for VAT.
Importantly, MTD for VAT does not change VAT rates, schemes, or payment deadlines. The VAT return still contains the same nine boxes and is filed and paid on the same timetable as before.
Key Features of MTD for VAT
Under MTD for VAT, all VAT registered businesses must maintain digital records for all transactions relevant to VAT. This includes sales and purchase invoices, VAT collected, and VAT paid. These digital records form the basis for submitting VAT returns directly through HMRC-compatible software.
MTD also requires that these records are linked digitally to avoid manual copying of totals between systems. The goal is to reduce errors, ensure accurate reporting, and give HMRC a more timely view of VAT activity.
Digital Record Keeping for VAT
MTD for VAT requires all VAT-registered businesses to record each individual transaction digitally. You do not need to scan or store invoices digitally, but the details of every sale and purchase must exist in a compatible digital record before the VAT return is filed.
What Must Be Included in Digital Records
Digital records must include your business details, VAT registration number, and any VAT accounting schemes you use. For sales transactions, record the time of supply, the value of the transaction, and the applicable VAT rate. For purchases, include the time of supply, the value including any non-reclaimable VAT, and the amount of input tax claimed.
Where invoices contain items with different VAT rates, each rate must be recorded separately to ensure accurate reporting. This level of detail ensures your VAT submissions are compliant with HMRC requirements and can be verified if needed.
Special Rules for Certain Schemes
Some VAT accounting schemes, such as the Retail Scheme or Flat Rate Scheme, allow simplified VAT calculations. However, digital records are still required for all transactions, and the specific rules of your scheme must be reflected in your records. Keeping clear, digital records ensures compliance and prevents errors during VAT submissions.
Maintaining accurate digital records not only helps with compliance, but also allows businesses to quickly generate reports, reconcile accounts, and prepare for audits or HMRC checks. Properly structured records reduce the risk of mistakes and simplify the submission process.
Who Must Comply With MTD for VAT
MTD for VAT now affects all VAT-registered businesses in the UK, regardless of size or turnover. Understanding the requirements is essential to avoid penalties and ensure smooth compliance.
Automatic Sign-up
HMRC automatically enrolled all existing VAT-registered businesses when MTD for VAT became mandatory. Newly registered VAT traders are also enrolled automatically at the point of registration, meaning no separate sign-up is required.
Scope
Sole traders, partnerships, limited companies, non-UK businesses registered for UK VAT, trusts, and charities all fall under MTD if they are VAT-registered. The rules apply irrespective of business size, turnover, or accounting method.
Consequences of Non-Compliance
Failing to submit VAT returns digitally, maintain accurate digital records, or comply with digital link rules can trigger HMRC’s points-based penalty system. This may result in fines, interest, and increased scrutiny.
Accountants often identify compliance gaps, such as missing digital links between systems or incorrect transaction categorisation. Proactive reviews can prevent avoidable errors before HMRC intervention.
VAT Exemptions and Digital Audit Trail
VAT Exemptions Under MTD
You do not need to comply with MTD for VAT if HMRC agrees that it is not practicable for you to do so. This may apply where digital tools cannot reasonably be used due to age, disability, or lack of internet access. It also applies to businesses subject to insolvency procedures and those run entirely by practising members of a religious order whose beliefs prevent electronic record keeping.
Exemptions are not automatic. Businesses registering for VAT are signed up to MTD by default and must apply separately if they believe they qualify for exemption. Applications are made directly to HMRC, and decisions are confirmed in writing. While an exemption request or appeal is under review, HMRC allows businesses to continue filing VAT returns using their existing method.
The VAT Account and Audit Trail
Your VAT account forms the digital audit trail between your records and the VAT return. It shows how output tax and input tax figures are calculated and adjusted. This includes reverse charge VAT, corrections, error adjustments, and any other VAT required under VAT rules.
Some calculations, such as partial exemption or capital goods scheme adjustments, do not need to be kept digitally, but a digital journal entry must be recorded to reflect the adjustment in the VAT account.
Software and Digital Links
MTD for VAT allows records to be kept across more than one system, including spreadsheets, but there must be digital links between them. Information cannot be transferred manually by copying or retyping data.
Digital links include automated transfers, API connections, linked spreadsheet cells, file imports such as CSV or XML, or securely transferring files to an agent for import into software. Copy and paste does not meet HMRC’s definition of a digital link.
MTD compatible software must be able to keep and preserve digital records, create a VAT return, submit it to HMRC, and receive confirmation and messages back from HMRC. GOV.UK maintains a list of approved VAT software.
MTD for VAT Compared to MTD for Income Tax
MTD for VAT and MTD for Income Tax follow the same digital principles, but they apply differently. VAT reporting remains quarterly and transactional, while MTD for Income Tax introduces quarterly updates alongside a final year-end declaration. VAT applies to all VAT registered businesses, while MTD for Income Tax is being phased in based on income thresholds.
Choosing the Right Software
Choosing software that supports both VAT and Income Tax reporting can reduce duplication and simplify compliance as MTD expands. This is especially important for businesses that are both VAT registered and within scope of MTD for Income Tax. Integrated software helps maintain digital links, avoids errors, and ensures both VAT and income records are accurate and easily accessible.
Staying Compliant
If you are VAT registered, MTD is not optional. Ensuring your software is compatible, your records are digital, and your digital links are in place is essential to avoid disruption, missed filings, and penalties. Proper preparation ensures submissions are accurate and deadlines are met consistently.
We help businesses review their VAT processes, choose suitable software, and set up compliant digital records so VAT returns are filed accurately and on time. This becomes even more important for businesses that will also need to comply with MTD for Income Tax, where quarterly reporting and year-end declarations require consistent, reliable digital records.
Need Help With Making Tax Digital?
If you’re unsure about software, digital record keeping, or how to comply with MTD, our specialist team can guide you every step of the way.
We provide tailored advice for any businesses' that need it. Helping you stay compliant while saving time and reducing stress.