Making Tax Digital (MTD) for VAT is now mandatory for all VAT-registered businesses in the UK. If you're registered for VAT, you must keep digital records and file your VAT returns using MTD-compatible software. This guide explains what you need to know and how to stay compliant.

What Making Tax Digital for VAT Requires

Under MTD for VAT, businesses must:

  • Keep digital records of all VAT transactions — purchases, sales, and the VAT charged
  • Use MTD-compatible software to submit VAT returns to HMRC
  • Maintain a digital link between records and the return — no manual re-typing of figures
  • Submit nine-box VAT returns through the software's API connection to HMRC

You can no longer file VAT returns through the HMRC online portal. All submissions must go through MTD-compatible software that connects to HMRC's API.

Which Businesses Are Affected?

Since April 2022, MTD for VAT applies to all VAT-registered businesses, regardless of turnover. This includes:

  • Businesses with taxable turnover above the £90,000 VAT registration threshold
  • Voluntarily registered businesses below the threshold
  • Sole traders, partnerships, limited companies, and LLPs
  • Charities and not-for-profit organisations that are VAT registered
  • Flat rate scheme businesses

The only exemptions are for businesses that are digitally excluded (e.g., due to age, disability, or remote location) and have applied for an exemption from HMRC.

Digital Record Keeping Requirements

Your digital records must include:

  • Your business name, address, and VAT registration number
  • Details of every supply made and received: date, value, and VAT rate
  • The VAT on each supply
  • The time of supply (tax point)
  • Any adjustments (e.g., for credit notes or bad debt relief)
  • Summary totals for each VAT period (the nine boxes of the VAT return)

Records can be kept in accounting software, spreadsheets, or a combination — but there must be a digital link between the record-keeping system and the software that submits the return. Copy-and-paste between spreadsheets is acceptable as a digital link, but manually re-keying figures is not.

How to Choose MTD-Compatible Software

When selecting MTD VAT software, consider:

HMRC Recognition

The software must be on HMRC's list of recognised MTD-compatible products. Check that the provider has completed HMRC's recognition process and can submit returns through the official API.

Integration with Your Accounts

Does the software connect to your existing accounting system? If you use Xero, Sage, QuickBooks, or FreeAgent, look for direct integration. If you work from spreadsheets, you need bridging software or a tool that can import CSV data.

Error Checking

Good MTD software doesn't just submit — it checks. Look for tools that verify your figures before submission, flag common errors, and compare against previous periods. AI-powered checking can catch issues that simple rule-based validation misses.

Multi-Client Support

If you're an accountant or bookkeeper filing for multiple clients, you need software that supports multiple VAT registrations, provides a dashboard view of all clients, and tracks deadlines across your practice.

Cost and Scalability

Some MTD software charges per VAT return filed, while others offer monthly subscriptions. Consider the total cost including any per-filing fees, and whether the price scales appropriately as your practice or business grows.

TaxStats AI's MTD VAT Capabilities

TaxStats AI is HMRC-recognised MTD-compatible software built for UK businesses and accounting practices. Here's what it offers:

  • Direct HMRC API filing — submit nine-box VAT returns directly to HMRC through the official MTD API
  • Xero integration — pull VAT data from Xero automatically, reconcile, and file
  • AI error checking — the AI reviews your return for inconsistencies, unusual movements, and common errors before submission
  • Digital record keeping — maintain compliant digital records with full audit trail
  • Multi-client support — manage VAT returns for all your clients from one platform
  • Partial exemption — handle complex partial exemption calculations including standard and special methods

The platform is free to start, with Practice plans from £29.99/month unlocking Xero integration and multi-client management. All plans include HMRC MTD VAT filing capabilities.

Penalties for Non-Compliance

HMRC's new points-based penalty system applies to late VAT returns. You receive one penalty point for each late return. Once you reach the threshold (4 points for quarterly filers), you receive a £200 penalty for each subsequent late return. Points expire after a period of compliance.

Late payment attracts separate penalties: 2% of the outstanding amount if payment is 15 days late, rising to 4% at 30 days, with additional daily interest charges thereafter.

Non-compliance with MTD digital record keeping requirements can also lead to penalties. HMRC conducts compliance checks and expects businesses to maintain proper digital records with appropriate digital links.