VAT

Prepare for Making Tax Digital for VAT

What you need to do to comply with Making Tax Digital requirements for VAT, including digital record keeping, choosing software, and setting up digital links.

UK-wide
Guide summary

You must use approved software to keep digital VAT records and submit VAT returns to HMRC. This has been required since April 2022 for all VAT-registered businesses. Your software must connect to HMRC’s systems and keep specific records digitally. You can still keep paper invoices, but the core VAT data must be digital.

  • Use MTD-compatible software for VAT records and returns
  • Submit VAT returns through software, not manually
  • Keep digital records for at least 6 years
  • Include business name, address, VAT number, and transaction details
  • Record dates, values, and VAT rates for sales and purchases
  • Link software digitally - no manual copying or pasting
  • Check HMRC’s list of approved software providers
  • Paper returns no longer accepted (unless exempt)
  • Newly VAT-registered businesses are automatically signed up
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UK-wide

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Making Tax Digital (MTD) for VAT requires all VAT-registered businesses to keep digital records and submit VAT returns using compatible software. This has been mandatory for all VAT-registered businesses since April 2022.

If you are newly VAT-registered, HMRC will automatically sign you up for MTD. Existing VAT-registered businesses should already be using MTD-compatible software. This guide explains the requirements and how to prepare if you are not yet fully compliant.

What Making Tax Digital requires

MTD for VAT has three core requirements:

  • Keep digital records - Your VAT records must be stored digitally in functional compatible software
  • Submit returns through software - VAT returns must be submitted to HMRC via Application Programming Interface (API) using your software, not manually through the online account
  • Maintain digital links - Data must transfer digitally between any software programs you use, without manual re-keying or copy-and-paste

You cannot use HMRC's online VAT account to file returns unless you have an approved exemption.

Digital record keeping requirements

Under MTD, certain VAT information must be kept digitally within your software. This does not mean all your records must be electronic - supporting documents like invoices can still be paper-based - but the core VAT data must be in digital form.

What records you can keep outside software

You can still keep supplementary records on paper or in separate systems, provided:

  • The core VAT data (as listed above) is in your MTD-compatible software
  • You can provide the underlying records if HMRC requests them during a compliance check

For example, you might keep paper copies of supplier invoices filed in folders, as long as the VAT information from those invoices is recorded digitally in your software.

Choosing MTD-compatible software

You need software that meets HMRC's functional requirements and can connect to HMRC's API to submit your VAT returns. There are several options:

Types of software available

Full accounting software

Products like Xero, QuickBooks, Sage, or FreeAgent handle your full bookkeeping, generate VAT returns, and submit them directly to HMRC. This is the simplest option for most businesses.

Benefits:

  • All-in-one solution
  • Automatic VAT calculations from your transaction records
  • Built-in digital links
  • Often includes invoicing, bank reconciliation, and reporting

Bridging software

If you prefer to keep your VAT records in spreadsheets, bridging software connects your spreadsheet to HMRC without requiring you to change your record-keeping method.

Choosing between full software and bridging

Consider full accounting software if you:

  • Want an integrated solution for all your accounting
  • Have multiple transaction types and need automatic VAT calculations
  • Want to reduce manual data entry
  • Are comfortable moving away from spreadsheets

Consider bridging software if you:

  • Are happy with your current spreadsheet system
  • Have simple VAT requirements
  • Want to minimise disruption to existing processes
  • Have limited budget for software subscriptions

HMRC publishes a list of recognised MTD-compatible software, including both full accounting packages and bridging tools. Some providers offer free versions suitable for businesses with basic needs.

Digital links requirement

This is the most commonly misunderstood aspect of MTD. If you use more than one piece of software or spreadsheet to manage your VAT records, data must transfer between them digitally - not by copy-and-paste or manual re-keying.

Common digital links scenarios

Scenario 1 - Single accounting software: If you use one piece of software for everything (recording transactions and submitting returns), digital links are automatic - the software maintains them internally.

Scenario 2 - Spreadsheet plus bridging software: Your spreadsheet holds the transaction data. The bridging software reads the VAT return figures from designated cells. This is a digital link because the bridging software extracts the data electronically.

Scenario 3 - Multiple spreadsheets: If you have separate spreadsheets for sales and purchases, data must transfer between them using formulas, links, or exports/imports - not copy-and-paste. Use cell references that pull data from one spreadsheet to another.

Scenario 4 - Separate systems for different parts of your business: If you have separate point-of-sale, stock, and accounting systems, data flowing between them must be transferred digitally. Most modern business software supports CSV exports, API connections, or integration tools.

Copy-and-paste is not permitted

Selecting data in one application, copying it, and pasting it into another is not a digital link. This manual transfer breaks the audit trail that MTD requires.

Exception: Copy-and-paste is acceptable only when moving data into software purely for storage or backup purposes, not when transferring data that will be used to calculate or submit your VAT return.

Setting up your software

Once you have chosen your software, follow these steps to set it up for MTD:

  1. 1

    Sign up for MTD (if not automatic)

    New VAT registrations are automatically enrolled. If you were registered before MTD became mandatory and have not signed up, you may need to do so. Check your VAT online account or contact HMRC.

  2. 2

    Connect your software to HMRC

    You will need your Government Gateway user ID and password. Your software will guide you through authorising it to interact with HMRC on your behalf.

  3. 3

    Enter your business details

    Set up your VAT number, VAT accounting period dates, and VAT scheme (standard, flat rate, cash accounting, etc.) in the software.

  4. 4

    Set up your chart of accounts

    Configure categories for income and expenses, ensuring VAT rates are correctly assigned to each category.

  5. 5

    Import opening balances

    If moving from another system, import or enter your starting position for the current VAT period.

  6. 6

    Start recording transactions

    Enter all sales and purchases from the start of your current VAT period. Ensure you record the date, value, and VAT rate for each transaction.

Testing before your first submission

Before submitting your first VAT return through the software, test that everything is working correctly:

  • Run a test VAT return - Most software allows you to generate a preview without submitting. Check the figures match your expectations.
  • Verify the API connection - Some software offers a test connection to HMRC's systems. Use this to confirm the link works before your return is due.
  • Check digital links are working - If using multiple systems, verify that data flows correctly between them without manual intervention.
  • Compare with previous returns - If you have submitted returns before, compare the new software's calculations with your previous method to spot any discrepancies.

Allow time for setup: Start using MTD-compatible software well before your next return is due. A good rule is to allow at least one full VAT period to get comfortable with the new system before you must submit.

If you need an exemption

Some businesses can apply for exemption from MTD if they cannot use digital tools due to specific circumstances.

Exemption from Making Tax Digital

You can apply for exemption from MTD for VAT if it is not reasonably practicable for you to use digital tools due to age, disability, remoteness of location, religious beliefs, or other specific circumstances.

If you qualify for exemption: Apply to HMRC before your next VAT return is due. If approved, you can continue submitting returns through your VAT online account. Exemption is not automatic - HMRC must approve your application.

If you do not qualify for exemption: You must use MTD-compatible software. Consider getting help from an accountant or bookkeeper who can manage MTD on your behalf using their own software.

Even if you qualify for exemption, consider whether MTD-compatible software might actually make your VAT management easier in the long run.

Apply for MTD exemption (GOV.UK)

Getting help with MTD

If you find MTD requirements challenging, several options are available:

  • Use an accountant or bookkeeper - They can use their own MTD-compatible software to submit returns on your behalf. You provide them with your records (which can still be paper-based), and they handle the digital submission.
  • Software provider support - Most MTD software providers offer tutorials, guides, and customer support to help you get started.
  • HMRC webinars and guidance - HMRC runs free webinars explaining MTD requirements and provides detailed written guidance.
  • Professional training - Many accountancy bodies and software providers offer training courses on using MTD software.

Remember: MTD does not require you to be a technology expert. The software handles the complex parts - you just need to record your transactions and check the VAT return before submitting.

Common mistakes to avoid

  • Leaving setup too late - Start using MTD software well before your return is due. Last-minute setup leads to errors.
  • Using copy-and-paste between systems - This breaks digital link requirements. Use exports, imports, or formula-based links instead.
  • Not authorising software properly - Your software needs permission to access HMRC systems. Complete the authorisation process or submissions will fail.
  • Mixing VAT periods - Ensure transactions are recorded in the correct VAT period based on the tax point date, not when you happen to enter them.
  • Forgetting to submit - Unlike the old online account, software does not always remind you when returns are due. Set your own reminders.
  • Ignoring error messages - If HMRC's systems reject a submission, your software will show an error. Do not assume the return was filed - check and resolve errors immediately.
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