Making Tax Digital (MTD) has reshaped how VAT-registered businesses handle their tax obligations.
If you’re a small business owner in the UK, understanding what MTD for VAT means, and how to comply with it, is essential to avoid penalties and keep your financial records in good order.
In this guide, we’ll explain how MTD works for VAT, who it applies to, and what steps you need to take to stay compliant.
What Is Making Tax Digital for VAT?
Making Tax Digital is a government initiative by HMRC aimed at making tax administration more effective, efficient, and easier for taxpayers.
MTD for VAT requires most VAT-registered businesses to:
- Keep digital records of all VAT transactions
- Use MTD-compatible software to submit VAT returns
- Follow digital links for all VAT-related processes
This system replaces manual submissions and paper-based records with streamlined, software-driven reporting.
Who Must Comply with MTD for VAT?
As of April 2022, all VAT-registered businesses must follow MTD rules regardless of turnover.
Previously, only those above the VAT threshold (£90,000) were included.
This means even voluntarily VAT-registered businesses earning below the threshold must:
- Maintain digital records
- File VAT returns using approved software
There are very limited exemptions (e.g. for religious reasons, insolvency, or where it’s not practical due to age, disability, or remote location).
What Does Digital Record-Keeping Involve?
Under MTD, you must maintain digital records for:
- Business name, address, VAT number
- VAT accounting scheme used
- Sales and purchase invoices
- Time, value, and VAT rate for each transaction
You must use functional compatible software to record and preserve this data, and to submit VAT returns directly to HMRC.
At Legacy Figures Accountancy, we focus on your finances so you can focus on your business.
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What Is Functional Compatible Software?
This refers to accounting or bridging software that:
- Stores digital VAT records
- Connects to HMRC’s MTD system via an API
- Can submit VAT returns digitally without re-keying information
Popular MTD-compatible options include:
- QuickBooks
- Xero
- FreeAgent
- Sage Business Cloud
You can also use spreadsheets if you connect them to bridging software that links to HMRC.
What Are Digital Links?
MTD rules require a clear digital trail between your records and the VAT return. This means no copying and pasting or manual calculations.
Examples of digital links:
- Formulas between cells in spreadsheets
- Import/export of CSV files between systems
- API links between software packages
You must maintain these links from the source data through to your final VAT submission.
What Happens If You Don’t Comply?
HMRC now operates a points-based penalty system for VAT return failures. You can receive penalty points for:
- Missing submission deadlines
- Failing to maintain digital records
- Submitting incorrect returns
Penalties can add up quickly and even result in fines if you repeatedly miss obligations. Keeping compliant from the start is far less costly.
Benefits of MTD for Small Businesses
Although it may feel like extra admin, MTD can actually help streamline your finances:
- Reduces errors from manual entry
- Improves bookkeeping accuracy
- Makes it easier to track cash flow
- Encourages regular record-keeping
With the right tools and support, MTD can save you time and reduce last-minute VAT stress.
Final Thoughts: What’s Best for You and Your Business?
Making Tax Digital is here to stay, and it affects every VAT-registered business, big or small.
The key is to get set up with the right software, understand your obligations, and stay consistent with your record-keeping.
If you’re unsure whether your setup is compliant, or you’re still using spreadsheets and feel overwhelmed, we can help you make the switch smoothly.
If you have any questions or need some guidance, get in touch today for a friendly, no-obligation chat.
