Making Tax Digital for VAT: what it is and how to register

Since April 2022, Making Tax Digital (MTD) for VAT has been mandatory for all VAT-registered businesses, unless HMRC grants an exemption. Instead of filing VAT returns through the HMRC online portal, businesses must now keep digital records and file their returns through compatible software. 

Key takeaways

• All VAT-registered businesses must now use Making Tax Digital for VAT

• If you’re a new VAT-registered business, HMRC automatically signs you up

• MTD for VAT rules mean you must keep digital records and file your VAT returns through MTD-compatible software

• Certain businesses may be exempt from MTD for VAT

• You could incur a penalty if you fail to comply with MTD for VAT, and your business is not exempt 

What is Making Tax Digital for VAT? 

Making Tax Digital for VAT is a government initiative aimed at modernising the tax system and making it easier to file accurate VAT returns.

It’s part of a wider MTD scheme, with MTD for Income Tax Self-Assessment (ITSA) starting to roll out for sole traders and landlords from 6 April 2026. You can read more about this in our guide to Making Tax Digital. 

For VAT-registered businesses, MTD requires that they:

• Keep VAT records digitally using MTD-compatible software

• Submit their VAT returns directly to HMRC through MTD-compatible software

• Maintain clear digital links between systems if using more than one tool, such as a spreadsheet and accountancy software

Who does Making Tax Digital for VAT apply to?

When MTD for VAT was first introduced in 2019, only businesses over the VAT threshold of £85,000 (now £90,000) had to register. However, as of April 2022, all VAT-registered businesses, regardless of turnover, must comply with the rules. 

This includes VAT-registered sole traders, limited companies, partnerships, landlords, charities and trusts.

Having said that, certain businesses may be exempt from MTD for VAT. These include businesses subject to an insolvency procedure or those that have cancelled their VAT registration but still need to send their final return. 

You may also be able to apply for an exemption if it’s not reasonable or practical to use computers, software or the internet to follow MTD for VAT rules, due to the following reasons:

• Your age, health condition, disability or where you live

• Religious beliefs that prevent you from using a computer

• Not having access to the internet

You can find out more about this on the GOV.UK website.

How do I register for MTD for VAT?

Businesses previously had to register for MTD for VAT using their Government Gateway account. However, all existing VAT-registered companies should now have signed up. HMRC automatically registers any new VAT-registered businesses unless they are exempt or have applied for an exemption.

You can apply for an exemption by calling or writing to HMRC and providing: 

• Your VAT registration number

• Business name and address

• Details of how you currently send your VAT return

• The reason why you think you’re exempt

• Authorisation from the business if you’re applying for someone else

What software do I need for MTD for VAT?

To submit your VAT return under MTD, you need software that connects directly to HMRC. You can either use a full accounting program or MTD bridging software.

Full accounting software packages, such as Xero, QuickBooks or Sage, handle your financial records, categorise transactions, calculate VAT and submit returns automatically. 

Bridging software can be useful if your business currently uses non-MTD-compliant software, because it acts as a link, converting your existing records into a format you can submit to HMRC.

How do I submit my VAT return? 

Follow this step-by-step guide to submitting your MTD VAT return: 

1. Record your transactions digitally

Enter all sales and purchase data, and your software should automatically calculate your output VAT (what you owe), your input VAT (what you can reclaim) and any adjustments.

2. Check your VAT account

Once your software produces a digital VAT account, check for any mistakes in how it calculated the return totals.  

3. Submit your VAT return

If everything is accurate, use your software to submit your VAT return and wait for your confirmation of sending.

4. Keep your digital records

It’s important to keep hold of all supporting documents and invoices in case HMRC asks to see them. 

What are the benefits of Making Tax Digital? 

Some of the key benefits of Making Tax Digital include:

• Fewer errors – Digital record-keeping reduces manual mistakes, such as miscalculating VAT or entering figures incorrectly

• Less admin – Using MTD-compatible software should reduce the amount of time you spend calculating and submitting your VAT return

• Improved record-keeping – Digital records also make it easier to track expenses and create an audit trail, which simplifies record checks if HMRC investigates 

• Better financial management – MTD-compatible software often includes built-in reporting features that generate real-time cash flow projections, so you can better understand your financial position

What happens if I don’t comply with MTD for VAT?

Failing to comply with MTD for VAT can have serious consequences.

For every late VAT return submission, or if you submit your VAT return without following the MTD rules, you receive a penalty point. Once you reach a certain threshold, which depends on how often you submit your returns (monthly, quarterly or annually), you pay a penalty fee. 

For quarterly VAT submissions, this penalty is £200. You receive a further £200 penalty for each subsequent late submission while at this threshold.

Points expire after 24 months, provided you have submitted all outstanding returns for the previous 24 months and completed a period of compliance without further issues.

Note that these penalty point rules don’t apply if it’s your first VAT return and you’re newly VAT-registered, or if it’s your final VAT return when you’ve cancelled your VAT registration.