MTD for VAT isn't optional, it isn't new, and HMRC's penalty regime stopped being lenient in 2023. If you're still copy-pasting from a spreadsheet into the HMRC portal, you're already non-compliant.
What MTD for VAT actually is
Making Tax Digital (MTD) is HMRC's programme to require digital record-keeping and digital submission of tax returns. The VAT pillar was rolled out in two phases: April 2019 for businesses above the threshold, and April 2022 for every other VAT-registered business, voluntary or not.
In practice, MTD for VAT means three things: keep VAT records in functional compatible software (FCS), use "digital links" to move data, and submit your return through that software via HMRC's API. The old "log into HMRC and type in the boxes" route is gone for VAT.
Who must comply
If you are VAT-registered, you must comply. This includes:
- Businesses above the £90,000 compulsory threshold
- Businesses voluntarily VAT-registered below the threshold
- Sole traders, partnerships, limited companies, charities, trusts and unincorporated bodies
- Non-resident businesses with UK VAT registration
The very narrow exemptions left are religious objection, age/disability making digital record-keeping impractical, and being subject to insolvency procedures. These require an HMRC application and approval — they are not self-declared.
The three rules
| Rule | What it means | What it doesn't mean |
|---|---|---|
| Digital records | VAT-relevant data (sales, purchases, adjustments) lives in software, not on paper or in a spreadsheet detached from software | You don't have to scan paper invoices, but the figures must be entered digitally and stored in an FCS-compatible product |
| Digital links | Data flows electronically from records to your VAT return — no manual re-keying | You can still use spreadsheets, as long as bridging software pulls from them via API or formula link, not copy-paste |
| Digital submission | The return is filed via software using HMRC's MTD API | You no longer log into the HMRC VAT portal to type in boxes — that route is closed for MTD businesses |
"Digital links" — the bit that catches people
The digital-links requirement is where most of the residual non-compliance sits. HMRC's definition: a digital link is a transfer or exchange of data between software programs, products or applications without manual intervention.
Acceptable digital links
API transfers, CSV/XML imports, linked cells in a spreadsheet (e.g. =A1 referencing another cell), email of an electronic file that's then imported, automated download of a digital report.
NOT acceptable
Copy-paste between spreadsheets, retyping figures from one system to another, transcribing from a paper printout. These break the digital link chain even if the start and end are digital.
If your VAT data starts in one place (say, Stripe or a POS) and ends up in your accounting software, every step in between needs to be a digital link. The most common breach is exporting Stripe to CSV, opening it in Excel, pasting the totals into Xero. The first export is fine. The paste is not.
Software options
You need functional compatible software (FCS) — software that can record VAT-relevant data and submit returns via HMRC's API. There are three flavours:
- Full accounting packages — Xero, QuickBooks, Sage, FreeAgent, Zoho Books. Bookkeeping plus VAT submission in one tool.
- Spreadsheet + bridging software — keep your records in Excel/Google Sheets, then use a tool like Easy MTD VAT, VitalTax or 100PcVATFreeBridge to pull the figures into HMRC. Cheap if you already have a working spreadsheet.
- Bookkeeping spreadsheet templates — designed-for-MTD spreadsheets with built-in submission via macro or add-in.
HMRC publishes a current list of compatible products at gov.uk's Find software page. Anything not on that list, even if it claims to be MTD-compatible, isn't.
Deadlines and the cycle
MTD does not change the VAT deadlines themselves. For most businesses on quarterly returns:
- Submission deadline: 1 calendar month and 7 days after the end of the VAT period (e.g. period ending 31 March → due 7 May)
- Payment deadline: Same as submission, unless you pay by Direct Debit, in which case HMRC collects 3 working days after the submission deadline
- Annual accounting: Submission and balancing payment due 2 months after period end
Penalties for MTD non-compliance
There are two penalty regimes layered on each other:
1. The new VAT points-based penalty regime for late submission and late payment, in effect since 1 January 2023. We've covered this in detail in our VAT penalties guide — short version: 1 point per late submission, £200 fine once you hit the threshold (4 points for quarterly, 5 for monthly, 2 for annual).
2. MTD-specific penalties for failure to keep digital records or use functional compatible software:
- Up to £400 per return for failure to submit via FCS
- Between £5 and £15 per day for failure to keep records digitally
- Between £5 and £15 per day for failure to use digital links
HMRC has historically taken a "soft-landing" approach to digital-link breaches but ended that grace period in April 2021. Penalties are now actively assessed.
Five common mistakes we see in 2026
1. Spreadsheet-only with manual portal entry
If you're keeping VAT records in Excel and then logging into HMRC to type the boxes, you have not been MTD-compliant since April 2022. Either move to accounting software or buy bridging software (typically £30–60 per year).
2. Mid-process copy-paste
Even on Xero, if you export sales from Shopify, manipulate in Excel, then re-import to Xero, the manipulation step often breaks the digital link. Use Shopify-Xero connectors (Stocky, A2X, etc.) instead.
3. New VAT registrations not signed up to MTD
VAT registration since November 2022 enrols you in MTD automatically. But businesses who registered earlier and weren't above the old £85k threshold need to manually sign up at gov.uk before submitting their first MTD return. We still see this missed.
4. Multiple businesses, one piece of software
Each VAT-registered legal entity needs its own MTD enrolment. A holding company and its subsidiaries each have separate returns and separate MTD signup processes, even if they share an accountant.
5. Old "VAT MOSS" and group VAT confusion
VAT group registrations have specific MTD rules — only the representative member submits, but all members must keep MTD-compliant records. EU VAT MOSS arrangements ended for UK businesses on 1 January 2021; if you're still using something labelled "VAT MOSS", it's likely a non-MTD process and needs replacing.
FAQ
I'm under the £90k threshold and voluntarily registered. Do I really need MTD?
Yes. Since April 2022, MTD applies to all VAT-registered businesses regardless of turnover. Voluntary registration doesn't exempt you.
Can I still use a spreadsheet?
Yes, provided (a) it's the system of record for VAT and (b) you have bridging software to submit via API. The spreadsheet itself isn't FCS, but a spreadsheet + bridging combo is acceptable.
What about quarterly to monthly returns?
You can request to move from quarterly to monthly returns at any time via your HMRC online account. Common reason: you're now in a permanent VAT repayment position (e.g. mostly zero-rated sales) and want refunds faster.
Do I need to scan paper invoices?
No. You need to record the digital totals (date, supplier, net, VAT) in your software. The paper invoice itself can stay paper, though many businesses find scanning easier for retention.
Sources & further reading
All claims verified against the following primary sources on 6 May 2026.
- HMRC – Overview of Making Tax Digital
- VAT Notice 700/22: Making Tax Digital for VAT
- HMRC – Find compatible software
- HMRC – Penalties for not paying VAT
About the editorial team
Reverse VAT Calculator Editorial Team
Every article is written by a UK-qualified accountant (ACCA, FCCA, ACA or CTA) and reviewed by a second qualified team member before publication.
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