# Making Tax Digital for VAT: How to Comply

Making Tax Digital (MTD) for VAT is mandatory for all VAT-registered UK businesses. Learn the core record-keeping rules, compatible software options, and how to avoid the newer points-based penalty system.

**Published:** 2026-07-14  
**Updated:** 2026-07-14  
**Source:** https://aztajournal.com/gb/making-tax-digital-vat-compliance

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> Making Tax Digital (MTD) for VAT is now a mandatory compliance scheme for all VAT-registered UK businesses. Under the Finance Act 2016 framework, businesses must keep digital records and submit returns using API-enabled software to avoid points-based penalties.

How does Making Tax Digital for VAT work now in the United Kingdom? It operates as a fully mandatory scheme where every VAT-registered business must record data digitally and submit returns via approved software. You can no longer use the old HMRC online portal to manually key in your periodic figures.

## At a Glance: Key Takeaways of MTD for VAT in 2026

- **Universal Mandation:** Every VAT-registered entity must comply, regardless of whether their taxable turnover is above or below the £90,000 registration threshold.
- **Digital Record Keeping:** You must store specified transactional data points digitally for at least six years.
- **Digital Links Required:** Manual copy-pasting or re-keying between different software programs is strictly prohibited.
- **Filing via API:** Returns must be submitted directly to HMRC's systems using functional compatible software.
- **New Penalty Regime:** A points-based system penalises late submissions, while late payments incur separate percentage-based charges.

## How does Making Tax Digital for VAT work now?

Making Tax Digital for VAT is a mandatory scheme that requires digital return submissions and record keeping for all VAT-registered entities. This policy applies to every registered business, including those that registered voluntarily despite having a taxable turnover below the £90,000 threshold.

Under the current HMRC administration process, new businesses are automatically enrolled into the MTD system when they register for VAT. You do not need to take separate steps to sign up for the initiative because enrolment is built directly into the primary online registration service.

## What are the three core requirements of MTD for VAT?

The scheme relies on three fundamental compliance pillars to ensure tax records are secure, accurate, and free of manual entry errors. You must implement all three elements to avoid compliance failures and potential regulatory penalties.

1. **Keep digital records:** You must store your business name, registration details, specific tax points, and net values digitally within your software assets.
2. **Establish digital links:** All data must transfer between software programs without any manual data entry, typing, or copy-pasting.
3. **Submit returns via API:** You must file your periodic return utilising software that communicates directly with HMRC through an Application Programming Interface.

### What counts as compatible MTD for VAT software?

Compatible software constitutes any digital program, spreadsheet, or bundle that can communicate with HMRC's API systems to submit VAT data securely. The chosen technology must be capable of recording, maintaining, and preserving digital files in line with government requirements.

| Software Type | How It Works | Best For |
| --- | --- | --- |
| Full Cloud Accounting Packages | All-in-one software (like Xero, Sage, or QuickBooks) that records transactions and files returns directly. | Businesses wanting integrated invoicing, bank feeds, and automated tax calculations. |
| API-Enabled Spreadsheets | Spreadsheets designed with built-in programming to connect directly to the HMRC gateway. | Micro-businesses comfortable with spreadsheets who prefer not to buy complex packages. |
| Bridging Software | A digital utility that extracts data from standard spreadsheets and transmits it via the API. | Businesses using complex, bespoke legacy systems or basic, non-connected spreadsheets. |

### What are the rules for digital record-keeping?

Digital record-keeping rules require you to store specific business details, purchase transactions, and sales metrics within MTD-compatible software profiles. You must log the business name, address, VAT number, and details of any specialized accounting schemes used.

For every taxable supply, you must digitally record the time of supply, the net value, and the specific rate of VAT applied. The legal framework outlined in VAT Notice 700/22 mandates that you retain these digital records for a minimum of six years.

## What are the deadlines for MTD VAT returns and payments?

The deadlines for submitting your returns and paying any outstanding liabilities remain unchanged under the rules of the mandatory scheme. For most entities, filing occurs on a quarterly basis, meaning you must submit and pay on time.

Your standard return submission and monetary payment are due online exactly one month and seven days after the end of each VAT period. For example, if your quarterly period ends on 31 March, your final filing and payment deadline is 7 May.

## What are the penalties for late MTD submissions and payments?

The penalty rules follow a reformed operational framework that HMRC introduced on 1 January 2023 to replace the older, rigid default surcharge model. Late submissions and late payments now generate separate, completely independent penalties.

| Filing Frequency | Penalty Point Threshold | Financial Penalty Charge |
| --- | --- | --- |
| Annual | 2 points | £200 per late submission at or above the threshold |
| Quarterly | 4 points | £200 per late submission at or above the threshold |
| Monthly | 5 points | £200 per late submission at or above the threshold |

Late payments are handled under a percentage-based system that grows progressively worse the longer the outstanding balance remains unpaid. Interest is charged separately on outstanding balances, calculated daily based on standard official HMRC rates.

| Days Late | Penalty Fee Applied |
| --- | --- |
| Up to 15 days | 0% penalty if you pay in full or arrange a Time to Pay agreement. |
| 16 to 30 days | 2% of the unpaid VAT total. |
| 31 or more days | 4% of unpaid VAT, plus a daily rate of 4% per annum on the outstanding balance. |

## Who is exempt from Making Tax Digital for VAT?

Exemptions from the scheme are granted to qualifying businesses that apply directly to HMRC and meet specific criteria for non-adoption. You may qualify if it is not reasonably practicable for you to use electronic tools because of age, disability, remote location, or your religious beliefs.

Additionally, businesses subject to active insolvency procedures are legally exempt from these standard digital filing processes. You must apply for an exemption in writing or by telephone line, as HMRC does not grant exemptions automatically.

## How does MTD VAT interact with MTD for Income Tax (ITSA) in 2026?

The interaction between the systems changes on 6 April 2026 with the official launch of Making Tax Digital for Income Tax Self Assessment (ITSA). This incoming regime affects self-employed individuals and landlords who exceed the designated income threshold.

The entry threshold for MTD ITSA is set at £50,000 for April 2026, dropping down to £30,000 in April 2027. If you fall into both categories, you should unify your software tools to manage both VAT and income tax reporting via a single dashboard.

### Do I have to use Making Tax Digital if my business is below the £90,000 threshold?

Yes. Every VAT-registered business, including those registered voluntarily with a taxable turnover below the £90,000 VAT threshold, must use the mandatory digital scheme.

### Can I copy and paste data from one spreadsheet to another under MTD rules?

No. Under the digital links rules established by HMRC, copying and pasting data manually between documents or software tools is not permitted.

### How do I apply for an exemption from MTD for VAT?

You can apply for a formal exemption by contacting HMRC directly by telephone or writing to them with details of your specific circumstances, such as religious objections, age, or lack of internet connectivity.

### Is Making Tax Digital for Corporation Tax coming into effect in 2026?

No. Making Tax Digital for Corporation Tax is currently under a consultation phase, and there is no mandatory start date confirmed for 2026.

### What happens to my late filing penalty points if I make a late nil VAT return?

You will still receive a penalty point. Under the points-based system, filing a nil return late or claiming a refund return late accrues points in the exact same manner as a payment return.