Making Tax Digital for businesses

MTD for VAT

All VAT-registered businesses must use MTD-compatible software to keep digital VAT records and file VAT returns. This has been mandatory since April 2019 for businesses above the VAT registration threshold and since April 2022 for all VAT-registered businesses, including voluntary registrations.

Key requirements:

• Keep digital records of all VAT transactions — designatory data (business name, VAT number, accounting schemes) plus transaction records (time of supply, value, VAT rate) for each supply made and received
• Submit VAT returns through MTD-compatible software via the HMRC API — not through the HMRC online portal
• Maintain digital links between software programmes — manual re-typing or copy-and-paste between programmes is not permitted

Spreadsheets: You can still use spreadsheets for record-keeping, but they must be linked to bridging software that submits VAT returns to HMRC electronically. Formulas linking cells or sheets within a spreadsheet count as digital links.

Record retention: VAT records must be kept for 6 years (10 years in some circumstances involving land or property).

Choosing MTD-compatible software

You must use software that HMRC recognises as MTD-compatible. There are two types:

• Full record-keeping and submission software — keeps your digital records and submits directly to HMRC (e.g. Xero, QuickBooks, FreeAgent, Sage)
• Bridging software — connects to your existing records (such as spreadsheets) and transmits data to HMRC, without replacing your current record-keeping method

HMRC requires at least one free software product to be available for MTD ITSA compliance.

For MTD ITSA quarterly updates: Businesses with turnover below £90,000 can submit a single consolidated expenses figure rather than itemised expense categories.

Income tax records must be kept for 5 years after the 31 January submission deadline for the relevant tax year.

Penalties for non-compliance

MTD uses a points-based penalty system for late submissions, replacing the old default surcharge for VAT. This applies to VAT (from January 2023) and will apply to MTD ITSA from April 2026.

Late submission penalties

Each late submission adds a penalty point. When you reach the threshold, you receive a £200 penalty — and £200 for each subsequent late submission while at the threshold.

• Annual submitters: threshold at 2 points
• Quarterly submitters: threshold at 4 points
• Monthly submitters: threshold at 5 points

Points expire after a period of compliance — 12 months of on-time submissions for quarterly submitters — provided you have no outstanding submissions more than one month overdue.

First-year grace period for MTD ITSA: HMRC will not apply penalty points for late quarterly updates during the first mandated tax year (2026/27 for the £50,000+ cohort). Penalties for late tax returns and late payment still apply.

Late payment penalties (from April 2025 rates)

• Up to 15 days late: no penalty (but interest accrues from the due date)
• 16–30 days late: 3% of tax outstanding at day 15
• 31+ days late: additional 3% of tax outstanding at day 30, plus 10% per annum on outstanding amounts accruing daily

Late payment interest: Bank of England base rate + 2.5%, charged from the due date in addition to penalties.

Time to Pay: If you agree a Time to Pay arrangement with HMRC before day 16, the first late payment penalty is not charged. The daily rate penalty does not accrue while a Time to Pay arrangement is in force.

Exemptions from MTD

You can apply for an exemption from MTD for either VAT or ITSA on the following grounds:

• Digital exclusion — no internet access, or unable to use digital tools due to age, disability, remoteness of location, or any other reason
• Religious objections — religious beliefs prevent the use of electronic communications
• Insolvency — in formal insolvency proceedings
• Other practical reasons — HMRC may grant exemptions where digital compliance is not reasonably practicable

If exempted from MTD ITSA, you must continue to submit Self Assessment tax returns as normal. If exempted from MTD for VAT, you can submit VAT returns through the old HMRC online service.

To apply: For ITSA exemption, contact HMRC on 0300 200 3310. For VAT exemption, contact the VAT helpline on 0300 200 3700.