What is Making Tax Digital for VAT? It’s the question most VAT-registered business owners wish they’d asked sooner, and the honest answer is simpler than HMRC’s guidance makes it sound.

What Making Tax Digital for VAT actually is

Making Tax Digital for VAT (MTD for VAT) is HMRC’s rule that VAT-registered businesses must keep their records digitally and submit their VAT returns using compatible software. You can no longer log into HMRC’s old portal, type in a few numbers, and call it done. The records behind those numbers need to be held digitally and the submission needs to go through approved software that connects directly to HMRC’s systems.

According to HMRC’s final evaluation of Making Tax Digital for VAT, the scheme became mandatory in April 2019 for businesses above the VAT registration threshold, and was extended to cover all VAT-registered businesses from April 2022. That second date is the one that catches people out. There’s no lower threshold anymore. If you’re VAT registered, this applies to you.

Does MTD for VAT apply to you?

If you’re VAT registered and trading in the UK, yes. It doesn’t matter whether you’re a sole trader, a limited company, a contractor, or a landlord. The original April 2019 rollout covered businesses above the £85,000 VAT registration threshold, and from April 2022 the requirement was extended to every VAT-registered business, regardless of turnover.

Exemptions do exist, but they’re narrow. HMRC may grant an exemption if using a computer is not reasonably practicable due to age, disability, or a location without reliable internet. These are genuinely rare. If you run an active business and you’re VAT registered, the safest assumption is that MTD for VAT applies to you and has done for a while. The Association of Taxation Technicians references HMRC’s VAT Notice 700/22 as the definitive official guidance if you want to check your specific position.

What you actually need to do in practice

MTD for VAT requires three things: keep your VAT records in a digital format, use software that is approved for MTD submissions, and submit your return through that software rather than via HMRC’s manual portal. Approved software includes QuickBooks, FreeAgent, Xero and Sage, all of which connect directly to HMRC’s systems. There are also free bridging tools available if you want to continue using spreadsheets as your primary records.

A bridging tool acts as a link between your spreadsheet and HMRC’s submission system, pulling the figures across digitally. It’s a legal route, though it does add a step compared to using dedicated cloud accounting software. For most small businesses, switching to software like QuickBooks or FreeAgent tends to save time overall, since the VAT return is largely built automatically from your day-to-day records.

What happens if you’re not compliant

HMRC uses a penalty points system for late or missing MTD submissions. Each missed submission adds a point, and once you reach four points a £200 fine is issued. Points reduce over time if you start submitting on time consistently, but they don’t clear quickly. The system is designed to penalise persistent non-compliance rather than a single honest mistake.

The other thing worth knowing is that HMRC can tell whether a submission came through compatible software or not, because the digital route leaves a clear trail. Typing figures manually into the old portal is no longer a compliant submission method. If that’s still how you’ve been doing it, that’s the first thing to change. HMRC publishes a list of compatible software options, including free tools, so cost doesn’t need to be a barrier.