What is Making Tax Digital for VAT?

Making Tax Digital for VAT (MTD VAT) is HMRC’s system that requires VAT-registered businesses to:

  • Keep VAT records digitally, and

  • Submit VAT Returns to HMRC using MTD-compatible software, via an API connection (not by typing figures into the HMRC portal).

MTD for VAT is fundamentally about improving the accuracy and traceability of VAT reporting by removing manual re-keying and building a clearer “digital audit trail.”

If your process still looks like spreadsheets + copy/paste + manual entry into HMRC, you’re exposed on compliance (and you’re also making VAT harder than it needs to be). HMRC is explicit that copy/paste is not considered a compliant “digital link.”

Who must follow MTD for VAT?

In plain English: if your business is VAT registered, MTD for VAT applies.

That includes:

  • Limited companies

  • Sole traders

  • Partnerships

  • New VAT registrations

MTD for VAT became mandatory for all VAT-registered businesses from April 2022 (it previously applied only above the VAT threshold).

Are any businesses exempt?

Yes—but exemptions are specific and not automatic.

HMRC may grant an exemption if they’re satisfied that it’s not practical for you to use digital tools due to factors like age, disability, or location, or if your business is in an insolvency procedure, or if it’s run by a religious order with beliefs incompatible with electronic record-keeping, or you’re already exempt from filing VAT returns online.

Quick self-check:
If you submit VAT Returns, assume MTD applies unless HMRC has formally exempted you.

What records do you need to keep digitally?

MTD doesn’t mean “go paperless overnight.” It means the required VAT records must be stored in a digital system and maintained in a way that supports VAT reporting and submission through software.

At a practical level, that usually includes:

  • Business details (name, address, VAT number) and VAT schemes used

  • Sales (VAT invoices) and purchases (bills/receipts) recorded digitally

  • VAT rate and VAT amount for transactions

  • Any adjustments where relevant

The key point is this: your VAT position should be calculable from digital records, and those records should live in functional software (not a pile of manual notes and last-minute spreadsheet totals).

“Digital links” explained (this is where people get caught out)

A major MTD VAT trap is breaking the digital journey.

A digital link is the transfer of data between software/products without manual re-keying. HMRC lists examples such as CSV import/export, emailing a spreadsheet for import, automated transfers, and API transfers.

What HMRC will not accept

HMRC is clear: copy/paste (or cut/paste) is not a digital link.

Simple examples

✅ Compliant workflows

  • Accounting software → VAT Return submitted through that software

  • Spreadsheet → bridging software → VAT Return submitted to HMRC

  • Spreadsheet totals exported (CSV) → imported into VAT software → submitted

❌ Non-compliant workflow

  • Spreadsheet → copy totals → manually type into the HMRC VAT portal

If your VAT process relies on manual copying into HMRC, your next step is not “try harder.” Your next step is: fix the system.

What software can you use for MTD for VAT?

You have three common routes. The best choice depends on how you run your bookkeeping today (and how clean your records are).

HMRC states you must use either compatible record-keeping software or bridging software (to connect spreadsheets to HMRC).

1) Full accounting software (best long-term)

This is ideal if you want:

  • Cleaner bookkeeping

  • Faster VAT prep

  • Better cash flow and profit visibility

  • Fewer VAT “surprises” at quarter-end

If you’re growing, hiring, or want tighter control of finances, this usually pays for itself in saved time and fewer mistakes.

2) Bridging software (best if you love spreadsheets)

If you run everything in spreadsheets, bridging software can submit your VAT Return in an MTD-compliant way.

This works well when:

  • Your spreadsheet is structured and consistent

  • You keep it up to date (not rebuilt at the deadline)

  • You maintain digital links (no manual copy/paste into HMRC)

HMRC explicitly recognises bridging software as a tool that uses the required MTD APIs to connect to HMRC systems.

3) Mixed systems (only if managed carefully)

Some businesses use invoicing software + spreadsheets + add-ons.

This can work, but it’s easier to accidentally break the digital journey. If your records are already messy, mixed systems often create more work, not less.

How to check software is MTD-compatible

HMRC provides a service to find software that’s compatible with Making Tax Digital for VAT, including record-keeping software and bridging software.

Penalties: what happens if you get it wrong?

MTD for VAT sits alongside HMRC’s VAT compliance and penalty rules. If you submit VAT Returns late, HMRC uses a points-based late submission system:

  • Each late return = 1 penalty point (until you reach the threshold)

  • When you hit the threshold, you get a £200 penalty

  • If you remain at the threshold and submit late again, you can be charged another £200 for each further late submission while at threshold

Penalty point thresholds (VAT)

HMRC’s published thresholds depend on how often you submit:

  • Annual VAT returns: threshold 2 points

  • Quarterly VAT returns: threshold 4 points

  • Monthly VAT returns: threshold 5 points

The practical takeaway: don’t treat VAT deadlines like a last-minute admin task. If you slip repeatedly, the points stack and the £200 penalties become predictable.

A simple MTD for VAT setup checklist (clean, compliant, low-stress)

Use this to get your workflow compliant and keep it that way:

  1. Confirm your VAT scheme

  • Standard / Flat Rate / Cash Accounting / Annual Accounting (your scheme affects how you track VAT and how often you submit).

  1. Choose your route

  • Full accounting software or spreadsheet + bridging software.

  1. Centralise the source of truth

  • Sales and purchase entries must be consistent and complete.

  • Stop keeping half the info in messages, paper notes, and bank app screenshots.

  1. Lock in the digital journey

  • Ensure data moves via imports/exports, linked formulas, or API connections—not copy/paste into HMRC.

  1. Submit VAT through software

  • Submission to HMRC must be through an API (your software handles this).

  1. Run a monthly VAT routine

  • Reconcile bank transactions

  • Check VAT coding

  • Review unusual items (fuel, entertainment, mixed-use, reverse charge, etc.)

  • Keep your VAT return “ready” before the quarter ends

This is what stops the end-of-quarter VAT panic.

Common MTD VAT mistakes (and how to avoid them)

Mistake 1: “We’re VAT-registered but still file the old way”

If you’re still using the portal with manual entry, you need to move to MTD-compatible submission. The requirement is software-based submission and digital records.

Mistake 2: Copy/paste between systems

Copy/paste breaks digital links and is explicitly not accepted as a digital link by HMRC.

Mistake 3: Treating VAT as a quarterly scramble

That’s how errors happen: missed invoices, wrong VAT coding, missing adjustments, and late submissions (hello, penalty points).

Mistake 4: “Cheapest option first” without counting rework

If your records are messy, the “cheap” option often turns into expensive cleanup work.

How JMC Accounts helps you with MTD for VAT

If you don’t want to figure this out alone, JMC Accounts can:

  • Review your current VAT process and identify compliance gaps

  • Recommend the simplest MTD-compliant setup (software or bridging)

  • Help you move from spreadsheets to software (or set up bridging correctly)

  • Manage VAT Returns end-to-end so you stay compliant and on time

Want a quick compliance check? Visit jmcaccounts.co.uk/contact-us  and book an MTD for VAT review.