If you run a VAT-registered business in the UK, you are already living under Making Tax Digital, whether you have properly got to grips with...
If you run a VAT-registered business in the UK, you are already living under Making Tax Digital, whether you have properly got to grips with what it actually requires or not. It has been mandatory since April 2022, so this is not a future change to prepare for. It is a current set of rules that a lot of small business owners are still only partially compliant with, often without realising it.
This guide breaks down what Making Tax Digital for VAT actually means in practice: who has to comply, what “digital records” and “digital links” really mean, what software choices you have, and what happens if you get it wrong.
What Making Tax Digital for VAT actually is
Making Tax Digital, usually shortened to MTD, is HMRC’s programme to move tax record-keeping and reporting away from paper and manual spreadsheet entry and into connected digital systems. MTD for VAT was the first part of the programme to become mandatory, and it has been fully in force since April 2022.
At its simplest, MTD for VAT requires three things at once: your VAT records have to be kept digitally, your VAT return has to be submitted to HMRC using software that connects directly via HMRC’s API rather than typed manually into the old online portal, and the data has to move between any systems involved in preparing that return through a digital link, not by being retyped or copied and pasted by a person along the way.
Missing any one of those three requirements makes you non-compliant, even if the VAT figure you actually submit is completely correct. This catches out a lot of otherwise careful business owners, because it is entirely possible to file an accurate VAT return and still be in breach of MTD, simply because of how the numbers got from your accounting system onto that return.
Who has to comply
Every VAT-registered business in the UK has to follow MTD rules, regardless of turnover. This is an important point that trips a lot of people up. The current VAT registration threshold sits at £90,000 of taxable turnover, but that threshold is only relevant to whether you have to register for VAT in the first place. Once you are VAT registered, MTD applies to you, even if you registered voluntarily while trading well below the threshold.
HMRC automatically enrols existing VAT registrations into MTD, and new VAT registrations are enrolled automatically through the VAT Registration Service as part of signing up. There is no separate opt-in step and, for the vast majority of businesses, no way to opt out.
The three core obligations, in practice
Keep digital records
Your VAT records need to be held digitally rather than on paper, and they need to include the specific transaction-level detail HMRC requires: the time of supply, the net value of each supply, and the VAT rate charged. A digital record does not just mean “I have a spreadsheet somewhere.” It means the record is held and maintained in a digital format that can feed directly into your VAT return without being re-entered by hand at the point of filing. Learn Why VAT Training Is Essential for Small Business Owners.
Use compatible software to file
Your VAT return itself has to be submitted using software that connects to HMRC through its Making Tax Digital API. The old manual entry portal on the HMRC website, where you could log in and type your VAT figures directly into a web form, is no longer a valid route for MTD-mandated businesses. You need either a full accounting package with built-in MTD filing, or bridging software that connects a spreadsheet or legacy system to HMRC’s API for submission purposes.
Maintain digital links throughout
This is the requirement that catches the most businesses out, because it governs how data moves between systems, not just where it ends up. Once a transaction has been entered into your functional compatible software, any further movement of that data, into a consolidation spreadsheet, a separate reporting tool, or a filing system, has to happen through a digital link rather than manual re-entry.
What counts as a digital link, and what doesn’t
A digital link is any transfer of data between software programs, products or applications that happens electronically, without a person manually retyping or otherwise re-entering the figures along the way. Acceptable digital links include linked spreadsheet cells that pull data through with a formula, automated file imports using XML or CSV, direct API connections between systems, and other automated data exchanges.
What is explicitly not allowed is copying and pasting or cutting and pasting figures between systems, manually retyping numbers you can see on one screen into another, or taking a screenshot of a report and using it as your source figures elsewhere. It sounds like a minor technicality, but it is the single most common way otherwise well-run small businesses fall out of MTD compliance. A finance team might keep clean digital records in their accounting software all year, then have someone manually copy a summary total into a separate spreadsheet before filing, and that one manual step is enough to break the chain and put the whole submission out of compliance.
If your VAT preparation process involves more than one piece of software, an accounting package feeding into a separate spreadsheet, for example, or a spreadsheet feeding into standalone filing software, every single handoff point in that chain needs to be a genuine digital link. It is worth mapping out your own process end to end and checking each step honestly, since this is exactly the kind of thing that looks fine on the surface and only becomes a problem when HMRC asks to see how a figure was actually produced.
Choosing compliant software
There are two broad routes to compliance, and which one suits your business depends on how you currently keep your records.
Full accounting software, such as Xero, keeps your records digitally from the point of entry and files your VAT return directly via HMRC’s API in one connected system. This is the simpler route for most small businesses, particularly ones that are setting up their bookkeeping from scratch or are already unhappy with a manual, spreadsheet-heavy process. It removes most of the digital link risk almost entirely, because there are fewer separate systems for data to move between.
Bridging software is the other route, and it exists specifically for businesses that keep records in a spreadsheet or an older system that was never built to file directly with HMRC. Bridging software connects that spreadsheet to HMRC’s API purely for the filing step, without requiring you to rip out and replace your existing record-keeping. Both routes are permanently valid options under MTD, not a temporary workaround, provided the digital links within the wider process stay unbroken throughout.
Whichever route you choose, the software has to be on HMRC’s list of recognised MTD-compatible products. Not every accounting tool or spreadsheet add-in qualifies automatically, so it is worth checking a product’s MTD status directly rather than assuming.
Exemptions
A small number of businesses are exempt from MTD for VAT, though the bar for qualifying is genuinely high and exemptions are the exception rather than a realistic route out of compliance for most small businesses. Recognised grounds include digital exclusion, where a business owner cannot reasonably be expected to use digital tools due to age, disability, location or another genuine barrier, insolvency, and religious belief that is incompatible with using electronic communications or keeping electronic records. Exemption is not automatic and has to be applied for and accepted by HMRC rather than simply assumed.
What happens if you don’t comply
HMRC operates a points-based penalty system for late VAT submissions. Points build up with each missed deadline, and once a business reaches the relevant threshold, a fixed penalty is charged, with a further fixed penalty for every subsequent late submission after that. Late payment is penalised separately and escalates the longer the amount remains outstanding, on top of interest charged on the overdue tax itself. There are also specific, smaller daily penalties that can apply where digital record-keeping or digital link requirements are broken, though HMRC is required to give a written warning before those particular penalties start accruing.
The exact figures and thresholds in HMRC’s penalty regime are reviewed and can be adjusted, so rather than quote specific amounts here that could be out of date by the time you read this, the practical takeaway is straightforward: non-compliance is not a one-off risk that gets forgiven quietly. It compounds, both through escalating penalties and through the interest that continues to accrue on anything unpaid, and it is worth checking the current rates directly on GOV.UK or with your accountant rather than relying on a figure that may have moved.
How this fits into the wider Making Tax Digital rollout
It is worth knowing that MTD for VAT is only one part of a larger programme. Making Tax Digital for Income Tax Self Assessment, a separate scheme covering sole traders and landlords rather than VAT, is rolling out on its own timetable, starting with higher earners and phasing down to lower income thresholds over the following few years. If you are VAT registered and also file Self Assessment as a sole trader, it is worth being aware that you may eventually need to meet both sets of requirements, on their own separate schedules, rather than assuming compliance with one automatically covers the other.
Common mistakes small businesses make
A handful of issues come up repeatedly, particularly among small businesses that set up their MTD process once, several years ago, and have not revisited it since.
Manually adjusting a figure after export is a common one. A business keeps clean digital records all year, then spots what looks like an error just before filing and corrects it by hand directly in the filing software or a summary spreadsheet, rather than correcting it at source in the accounting system and letting the digital link carry the correction through properly.
Using software that was never actually MTD-compatible, or that lost its compatibility after an update, is another. Not every spreadsheet template or older accounting tool on the market genuinely meets the API and digital-link requirements, and it is worth confirming rather than assuming.
Treating a one-off manual step as harmless is probably the most common mistake of all. A single copy-paste, done once because “it was quicker this time,” is enough to break an otherwise fully compliant chain, and it is exactly the kind of thing that is easy to miss because nothing about the resulting VAT return looks wrong on the surface.
Forgetting that voluntary VAT registration still means mandatory MTD compliance also catches out small, growing businesses that registered for VAT early, often to reclaim input tax on start-up costs, without realising the same digital record-keeping and filing rules apply to them as to a business turning over millions.
Getting help
For most small businesses, the simplest way to be confidently compliant is to move onto proper cloud accounting software that handles digital records and MTD filing as a single connected process, rather than trying to maintain a manual or semi-manual system and hoping every handoff stays compliant. Getting this set up correctly once, with someone who understands both the software and the underlying MTD requirements, is generally far cheaper than the time and stress of untangling a non-compliant process after HMRC flags it.
This is exactly the kind of practical, real-world skill covered on our Bookkeeping & VAT Training course, where MTD-compliant record-keeping and VAT return preparation are taught hands-on, using the same cloud accounting software real UK businesses rely on. Whether you are a business owner who wants to understand and manage this yourself, or you are building a career helping other businesses stay compliant, it is one of the most immediately useful, in-demand skills in UK bookkeeping right now.
To speak to the team about the course, call 020 3038 8548 or email enquiries@pctrainings.co.uk.
