Making Tax Digital for VAT: UK rules explained

What Making Tax Digital for VAT is

Making Tax Digital (MTD) for VAT is HMRC's requirement that every VAT-registered business keeps its VAT records digitally in functional compatible software and files its VAT returns from that software through HMRC's application programming interface (API). It matters because a return typed into a web form, or figures copied and pasted between programs, does not meet the rules.

The rules sit in the VAT Regulations 1995, as amended by the Value Added Tax (Amendment) Regulations 2018, which took effect for VAT periods beginning on or after 1 April 2019, and the 2021 amendment, which removed the exemption for businesses below the registration threshold from periods beginning on or after 1 April 2022. HMRC's VAT Notice 700/22 explains them, and parts of it have the force of law.

MTD does not change how much VAT is due. It changes how the figures travel: from the transaction, through digital records, to HMRC, without anyone retyping them on the way.

Who must comply

All VAT-registered businesses are within MTD for VAT, including those that registered voluntarily. Being within MTD follows from VAT registration; it is not a scheme a business chooses to join. Registration itself is compulsory when taxable turnover for the last 12 months goes over £90,000, or is expected to go over £90,000 in the next 30 days. A business that crosses the threshold must register within 30 days of the end of the month in which it went over, and its registration takes effect from the first day of the second month after it went over.

HMRC's own example: a business whose 12-month taxable turnover first exceeds the threshold on 15 July, at £100,000, must register by 30 August and is registered from 1 September. Businesses based outside the UK that supply goods or services in the UK must register whatever their turnover.

Exemption from MTD is narrow. HMRC accepts it where it is not reasonably practicable for the business to use digital tools because of age, disability, location or similar reasons, where the business is subject to an insolvency procedure, or where it is run entirely by practising members of a religious society whose beliefs are incompatible with electronic records. Being small is not a ground.

The electronic account: records that must be digital

The regulations call the records that must be held in functional compatible software the electronic account. It does not have to be one program; it can be several pieces of software, provided they are joined by digital links. Invoices themselves do not have to be kept digitally, but the originals, or a scanned image containing all the VAT detail, must still be kept, and VAT records in general must be kept for at least 6 years.

Several supplies on one invoice that fall in the same VAT period at the same rate can be recorded as one entry. Adjustments such as partial exemption or capital goods scheme calculations may be worked out outside the software and entered as separate, described lines.

• Designatory data: business name, principal place of business, VAT registration number, VAT schemes used
• Each supply made: time of supply (tax point), value net of VAT, rate of VAT charged
• Output value for the period split into standard-rate, reduced-rate, zero-rate, exempt and outside-the-scope supplies
• Each supply received: time of supply, value, and the input tax to be claimed
• Adjustments to the return, each on its own line with a description
• The VAT account linking the records to the return

Digital links: what counts and what does not

Once data has entered the software that keeps the electronic account, any further transfer, recapture or modification must be by digital link. A digital link is a transfer or exchange of data between programs that is made, or can be made, electronically without manual intervention. Manually transferring data within or between programs is not acceptable, and HMRC states that cut and paste or copy and paste is not a digital link.

The digital journey starts where the electronic account starts. VAT data is often captured first in other software, such as an invoicing or sales system; if that software is not used to maintain the electronic account, HMRC does not require a digital link for the transfer into the software that does. From the moment data sits in the electronic account, every further transfer to the return must be digital. The practical questions to ask of any process are which programs make up the electronic account, and whether every hop between them is automatic or file-based.

• Accepted: linked cells in a spreadsheet
• Accepted: emailing a spreadsheet so its data can be imported into another program
• Accepted: XML or CSV import and export, and download and upload of files
• Accepted: automated data transfer and API transfer
• Accepted: moving files on a memory stick for import by someone else
• Not accepted: copy and paste, or retyping figures from one program into another

Bridging software and API-enabled spreadsheets

Bridging software is a digital tool that contains the MTD APIs needed to connect accounting records to HMRC. It takes figures that already exist digitally, for example in a spreadsheet or in a file exported from an accounting system, and submits the return; it also lets HMRC's messages flow back. An API-enabled spreadsheet builds the same capability into the spreadsheet itself.

A common pattern in mid-sized businesses looks like this. An online sales system produces weekly summaries; a spreadsheet that forms part of the electronic account holds those summaries and compiles the return; bridging software submits it. Whether the sales system itself must be digitally linked depends on whether it is used to maintain the electronic account; once the figures are in the spreadsheet, every step to HMRC must be digital.

A bridging route is lawful but fragile in practice. The common failures are a formula overwritten in the spreadsheet, a file exported from the wrong period, and a total typed in to make the return balance, which breaks the digital link. A return should be prepared from the ledger, reconciled to the VAT control account, and then passed on by file or API, never retyped.

The nine boxes of the VAT return

Every MTD return carries the same nine boxes as the paper form, calculated by the software from the digital records. Boxes 2, 8 and 9 now concern goods moving between Northern Ireland and EU member states; a business in Great Britain that does not move goods to or from Northern Ireland normally leaves them at zero.

Two rules are easy to miss. Box 6 includes zero-rated, reduced-rate and exempt supplies and exports, and box 7 includes imports; both exclude wages, PAYE, loans, dividends and insurance claims. For services received from abroad under the reverse charge, the customer fills in box 1 with the output VAT, box 4 with the same amount as input VAT, box 6 with the value of the deemed supply and box 7 with the purchase value.

• Box 1: VAT due on sales and other outputs
• Box 2: VAT due on acquisitions of goods made in Northern Ireland from EU member states
• Box 3: total VAT due (box 1 plus box 2)
• Box 4: VAT reclaimed on purchases and other inputs
• Box 5: net VAT to pay or reclaim (box 3 less box 4)
• Box 6: total value of sales and all other outputs, excluding VAT
• Box 7: total value of purchases and all other inputs, excluding VAT
• Boxes 8 and 9: supplies of goods to, and acquisitions of goods from, EU member states (Northern Ireland movements)

Worked example: one quarter in GBP

A company in Great Britain completes its quarter ended 30 June 2026. It made £120,000 of standard-rated sales, charging VAT at 20%, £24,000, and £10,000 of zero-rated exports. It bought £60,000 of standard-rated goods and services, paying £12,000 of input VAT, and received £5,000 of software services from an Irish supplier, on which it applies the reverse charge: £1,000 of output VAT and £1,000 of input VAT.

The VAT control account in the ledger shows output VAT of £25,000 credited and input VAT of £13,000 debited, leaving £12,000 payable, which must equal box 5 before the return is sent. The return and the payment are both due one calendar month and seven days after the quarter ends, by 7 August 2026. Paying it posts Dr VAT control 12,000 / Cr Bank 12,000 and clears the account to nil.

• Box 1: 24,000 + 1,000 = £25,000
• Box 2: £0
• Box 3: £25,000
• Box 4: 12,000 + 1,000 = £13,000
• Box 5: 25,000 - 13,000 = £12,000 payable
• Box 6: 120,000 + 10,000 + 5,000 = £135,000
• Box 7: 60,000 + 5,000 = £65,000
• Boxes 8 and 9: £0

Deadlines, penalties and interest

Returns and payments are normally due one calendar month and seven days after the end of the VAT period; under the Annual Accounting Scheme the return is due two months after the period ends. Businesses with an annual VAT liability of more than £2.3 million make payments on account in the second and third months of each quarter.

For VAT periods starting on or after 1 January 2023, late submission is penalised on a points basis. Each late return, including a nil or repayment return, earns a point until the threshold for the business's filing frequency is reached: 2 points for annual, 4 for quarterly and 5 for monthly filers. At the threshold a £200 penalty is charged, and a further £200 for each later late return while at the threshold. Late payment penalties and late payment interest apply separately to VAT paid late.

• Quarterly return for the period ending 30 June: due 7 August
• Annual filers: penalty threshold 2 points
• Quarterly filers: penalty threshold 4 points
• Monthly filers: penalty threshold 5 points
• At threshold: £200 per late return

MTD for Income Tax: the timeline as of September 2026

Making Tax Digital for Income Tax applies to sole traders and landlords registered for Self Assessment. As of September 2026, those with qualifying income from self-employment and property over £50,000 in the 2024 to 2025 tax year have had to use it from 6 April 2026. Those over £30,000 in 2025 to 2026 must use it from 6 April 2027, and those over £20,000 in 2026 to 2027 from 6 April 2028. HMRC has said partnerships will follow on a timetable to be set out later.

Participants keep digital records and send quarterly updates, which are cumulative summaries of income and expenses by category rather than tax returns. HMRC will not charge penalty points for late quarterly updates in the 2026 to 2027 tax year; after that, a late update earns a point and 4 points bring a £200 penalty. A tax return is still filed after the year ends.

• Update to 5 July (or 30 June): due 7 August
• Update to 5 October (or 30 September): due 7 November
• Update to 5 January (or 31 December): due 7 February
• Update to 5 April (or 31 March): due 7 May

What comes next: UK e-invoicing from 2029

MTD digitised the path from records to return. The next step is the invoice itself. As announced at Budget 2025, the UK will introduce mandatory e-invoicing for all VAT invoices from 2029, and the government has said it will publish a roadmap for the mandate at Budget 2026. As of September 2026 the format, delivery model and phasing have not been confirmed, so no business needs to buy an e-invoicing product today to comply.

What a business can do now is make its master data e-invoice ready: customers' VAT numbers and addresses held as structured fields, one tax code per rate and treatment, invoice numbering without gaps, and credit notes linked to the invoices they correct. Those are the same foundations MTD already rewards.

Doing this with Skyline Nexus ERP

Skyline Nexus ERP keeps the records MTD asks for in its ledger. With auto-posting switched on, final sales, purchases, expenses and payments post balanced journals in the background, with VAT computed per line, and the VAT Return screen prefills tax-exclusive sales and purchase bases and VAT for a date range and business location. The VAT Analysis report lists input and output VAT from the VAT ledger accounts and exports, so the return can be reconciled to the VAT control account before filing. Tax rates at 20%, 5% and 0% are set up as separate rates with a VAT category, exempt supplies can have their own rate, and sales returns are issued as credit notes that reverse revenue and VAT.

Once a return is filed the period can be closed and locked, posted journals are corrected by reversal rather than overwritten, and the Accounting Audit Trail records who changed what, with old and new values. Direct MTD submission from inside Skyline Nexus ERP is part of the UK roll-out; tell us you trade in the UK and we will confirm your go-live date. Until then, the route HMRC's guidance describes is bridging software fed by a file exported from the ledger, which HMRC lists as a digital link, never figures retyped from the screen.