- MTD for VAT: mandatory for all VAT-registered businesses since April 2022
- Manual portal entry is not permitted — returns must come from MTD-compatible software
- Spreadsheets are allowed only with bridging software connecting to HMRC's API
- Digital records required: date, supplier/customer, net amount, VAT amount for each transaction
- Penalty regime: points-based — points accumulate for late submissions, triggering financial penalties
MTD for VAT: what is required
Since April 2022, every VAT-registered business in the UK must comply with Making Tax Digital for VAT. There are two core obligations:
- Keep digital VAT records — the key transaction data for every sale and purchase must be recorded digitally
- Submit VAT returns digitally via MTD-compatible software — not manually via HMRC's online VAT portal
These requirements apply regardless of business size or VAT scheme (standard rate, Flat Rate Scheme, Annual Accounting, Cash Accounting — all are within MTD for VAT).
What counts as digital records?
HMRC requires digital records of the following for each VAT transaction:
| Data field required | For sales (output tax) | For purchases (input tax) |
|---|---|---|
| Date of supply | Yes | Yes |
| Supplier or customer name | Customer (if VAT invoice issued) | Supplier |
| Net value (ex-VAT) | Yes | Yes |
| VAT amount | Yes | Yes |
| VAT rate applied | Yes (20%, 5%, or 0%) | Yes |
You do not need to scan and upload images of every invoice. The data fields above, entered into your MTD software at or near the time of the transaction, satisfy the digital records requirement. Paper originals can be retained physically.
How MTD-compatible software works
MTD-compatible software connects directly to HMRC's API (Application Programming Interface). When you are ready to file your VAT return, the software generates the 9-box return figures from your digital records and submits them electronically to HMRC via the API. You do not type numbers into HMRC's website.
Three categories of compliant software:
| Software type | How it works | Examples |
|---|---|---|
| Full accounting package (native MTD) | Records transactions, generates VAT return, submits directly | FreeAgent, Xero, QuickBooks, Sage |
| Dedicated VAT software | Specifically designed for VAT — enter data and submit | VAT Bridge, various HMRC-listed tools |
| Bridging software | Takes data from your spreadsheet and submits it via API | Tax Blaster, Absolute, DataDear |
Bridging software: staying with spreadsheets
If you maintain VAT records in Excel or Google Sheets and do not want to switch to accounting software, bridging software is a compliant option. It connects to your spreadsheet, reads the summary VAT return figures (the 9 boxes), and submits them to HMRC's API.
Requirements for bridging software compliance:
- The data in your spreadsheet must be digitally linked — no re-keying of figures from one cell to another manually (copy and paste is not acceptable; formula links are)
- The bridging software must be on HMRC's approved list
- The submission must go via the API — not typed into HMRC's portal
The digital link rule: If you use multiple spreadsheets or copy figures between cells, the connections must be formula-based (e.g., =Sheet1!A1), not manually typed. "Digital linking" ensures there is an unbroken electronic trail from transaction data to the VAT return figures. This rule exists specifically to prevent errors introduced by manual re-entry.
The VAT account
MTD regulations require businesses to maintain a VAT account as part of their digital records. The VAT account is a running record that shows, for each VAT period:
- Total output VAT (VAT charged on sales)
- Total input VAT (VAT reclaimed on purchases)
- Adjustments (corrections from prior periods, Flat Rate Scheme adjustments, etc.)
- Net VAT payable or reclaimable
Most accounting software maintains this automatically as you enter transactions — it is not a separate document you need to create manually.
Penalty regime for MTD for VAT non-compliance
HMRC uses a points-based penalty system for late submissions, introduced in January 2023:
| Event | Consequence |
|---|---|
| Each late VAT return submission | One penalty point added to your account |
| Quarterly filers reach 4 points | £200 financial penalty charged |
| Each subsequent late submission at threshold | Additional £200 penalty per late submission |
| Points reduction | After a sustained period of compliance and all returns up to date |
Separate from late-submission penalties, HMRC also charges late-payment interest and penalties for unpaid VAT — these are independent of the submission penalty points system.
What MTD for VAT does NOT require
Common misconceptions:
- You do not need to send invoices electronically or receive e-invoices
- You do not need to scan every receipt — only digital transaction data is required
- You do not need to use cloud accounting — desktop software with an MTD API connection is acceptable
- You do not need to change your VAT scheme — Flat Rate, Annual Accounting, and Cash Accounting all work within MTD
Voluntary VAT registration and MTD
If you have voluntarily registered for VAT (below the £90,000 threshold), MTD for VAT still applies to you. Voluntary registration does not exempt you from digital record-keeping and MTD submission requirements. This catches some smaller businesses that registered voluntarily for commercial reasons without realising the compliance implications.
Deregistering from VAT
If your taxable turnover falls below the deregistration threshold (£88,000) and you choose to deregister, you exit the MTD for VAT regime. After deregistration you revert to no VAT filing obligations. Note: deregistration can affect your VAT recovery on costs, so model the impact before deregistering.
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Frequently asked questions
Can I still use a spreadsheet for VAT?
What if I make an error on a VAT return?
What if my accounting software does not connect to HMRC?
Does MTD for VAT apply if I use the Flat Rate Scheme?
I missed signing up for MTD for VAT — what should I do?
Important: This guide is for general information only and does not constitute tax or legal advice. Tax rules change — always verify current rates and thresholds with HMRC or a qualified accountant before making decisions.