Making Tax Digital for VAT: Rules, Software, Penalties

Quick answer: Making Tax Digital for VAT is HMRC's rule that every VAT-registered business must keep its VAT records digitally and file VAT returns through MTD-compatible software, with digital links between any programs used. It has applied to all VAT-registered businesses, whatever their turnover, since April 2022.

For most UK businesses, Making Tax Digital (MTD) for VAT is now simply how VAT returns work. The old HMRC online return form has gone, and returns arrive through software. Yet many small businesses still run their VAT from spreadsheets, copy figures by hand or are unsure what HMRC counts as compliant. This guide covers who must comply, what records you need, how bridging software works, the filing steps, exemptions and the penalty points regime. It is general information, not tax advice; HMRC's own guidance is on GOV.UK under Making Tax Digital for VAT.

What is Making Tax Digital for VAT?

Making Tax Digital is HMRC's programme to move tax administration from paper and manual entry to software. VAT was the first tax to move:

Date	Who had to follow MTD for VAT
April 2019	VAT-registered businesses with taxable turnover above the VAT threshold (then £85,000)
April 2022	All VAT-registered businesses, including voluntary registrations below the threshold
November 2022 onward	HMRC's old VAT online return form closed for most businesses; returns must go through compatible software

The current VAT registration threshold is £90,000 of taxable turnover in a rolling 12-month period; see our UK VAT registration threshold guide. Once registered, you are within MTD for VAT. Sole traders and landlords should also note that Making Tax Digital for Income Tax started in April 2026 for those with qualifying income over £50,000; it is a separate requirement.

What digital records do you need to keep?

HMRC's VAT Notice 700/22 sets out the required digital records. In summary:

• Business details: your business name, principal place of business address, VAT registration number and any VAT accounting schemes you use (for example the flat rate or cash accounting scheme).
• Supplies you make (sales): the time of supply (tax point), the value of the supply excluding VAT and the rate of VAT charged, for each transaction.
• Supplies you receive (purchases): the time of supply, the value including VAT, and the amount of input VAT you will claim.
• Adjustments: any changes to the figures, such as partial exemption or bad debt relief.

Your invoices themselves still need the usual VAT invoice details: your VAT number, a unique sequential invoice number, the tax point, the customer's details, a description, and the net, VAT and gross amounts. Our VAT invoice guide lists every required field. Records generally need to be kept for six years.

What is bridging software and when do you need it?

Many small businesses keep VAT records in Excel or Google Sheets. That is allowed, but a spreadsheet cannot talk to HMRC on its own. Bridging software fills the gap: it reads the nine VAT return boxes from your spreadsheet and submits them through HMRC's MTD API.

The key requirement is the digital link. Once data is in your digital records, every transfer between programs must be electronic. Acceptable links include:

• Formulas linking cells or worksheets.
• Importing or exporting data files such as CSV or XML.
• Emailing a spreadsheet that is then imported into another program.
• Direct API connections between bookkeeping, invoicing and filing tools.

Copy and paste, or retyping figures from one program into another, is not a digital link. If your invoicing tool produces PDF invoices, record each invoice's figures in your digital records (for example in a spreadsheet row or bookkeeping entry) so the VAT return can be built from them.

How to file a VAT return under Making Tax Digital

1. Choose compatible software. Use HMRC's list of software compatible with MTD for VAT, filtering for features you need, such as bridging, cash accounting or free options.
2. Authorise the software with your Government Gateway credentials so it can connect to your VAT account. Agents use their agent services account.
3. Keep records digitally through the VAT period: every sale and purchase with date, net value, VAT rate and VAT amount.
4. Review the nine boxes the software calculates: output VAT, VAT on EU acquisitions where relevant to Northern Ireland, total VAT due, input VAT, net VAT, total sales, total purchases and the goods figures.
5. Check against your invoices. Output VAT should reconcile with the VAT on your sales invoices for the period.
6. Submit the return through the software by the deadline, normally one calendar month and seven days after the end of the VAT period.
7. Pay HMRC by the same deadline, allowing time for the payment method you use. Direct Debit is collected a few days after the deadline.

For a walkthrough of each box, read how to file a VAT return in the UK.

Worked example: a quarterly VAT return

A sole trader web designer is VAT registered and files quarterly. For the quarter ending 30 September 2026 her spreadsheet shows:

Item	Net	VAT
Sales invoices at 20%	£24,000.00	£4,800.00
Purchases: software subscriptions and equipment at 20%	£3,500.00	£700.00
Purchases with no VAT (insurance)	£400.00	£0.00
Net VAT payable (Box 5)		£4,100.00

Her bridging software reads the totals from linked cells and submits the return. Box 6 (total sales excluding VAT) is £24,000 and Box 7 (total purchases excluding VAT) is £3,900. The return and payment of £4,100 are due by 7 November 2026. If she had been on the VAT flat rate scheme, the software would instead apply her flat rate percentage to gross turnover.

Who is exempt from Making Tax Digital for VAT?

You can apply to HMRC for exemption if:

• It is not reasonably practicable for you to use computers, software or the internet because of age, disability, remoteness of location or another reason.
• You object to using computers on religious grounds.
• Your business is subject to an insolvency procedure.

Exemption is not automatic. You apply, explain your circumstances and keep filing as you currently do until HMRC confirms. Being small, busy or used to paper is not a ground for exemption.

What are the penalties under MTD for VAT?

For VAT periods starting on or after 1 January 2023, HMRC replaced the old default surcharge with a points-based system for late returns and separate penalties for late payment.

Filing frequency	Points threshold	Period of compliance to reset
Annual	2 points	24 months
Quarterly	4 points	12 months
Monthly	5 points	6 months

Each late return earns one point. When you reach the threshold, HMRC charges a £200 penalty, plus another £200 for each further late return while you stay at the threshold.

Late payment works differently. Nothing is charged if you pay within 15 days of the due date. For VAT periods starting on or after 1 April 2025, paying between day 16 and day 30 brings a first penalty of 3% of the VAT outstanding at day 15. If tax is still unpaid at day 30, the first penalty becomes 3% of what was outstanding at day 15 plus 3% of what was outstanding at day 30, and from day 31 a second penalty accrues daily at 10% a year until paid. Late payment interest (Bank of England base rate plus 4%) is charged on top. Agreeing a Time to Pay arrangement early can stop penalties growing. Full details are in our UK VAT penalties guide.

How do invoices fit into your MTD records?

MTD does not require you to issue invoices from your accounting software. You can create invoices in any tool, as long as the figures from each invoice end up in your digital records. Small businesses typically use one of three set-ups:

Set-up	How invoices reach the VAT return	Suits
All-in-one bookkeeping software	Invoices are created in the software, so records and return are automatic	Businesses happy to pay a monthly subscription
Separate invoicing tool plus spreadsheet and bridging software	Each invoice is entered once as a row (date, number, net, rate, VAT); formulas total the boxes; bridging software submits	Low-volume sellers who like spreadsheets
Separate invoicing tool plus bookkeeping software	Invoices are recorded or imported into the bookkeeping software, which files the return	Growing businesses with a bookkeeper or accountant

Entering the invoice once into your records is fine: the digital link rule applies from that point on. What matters is that the invoice and the record match, invoice numbers run in sequence and nothing is retyped between your records and the filing software. If you create invoices in our invoice generator, record each one in your MTD spreadsheet or bookkeeping tool the day you issue it. Keep the invoices themselves for the period set out in how long to keep invoices.

Looking further ahead, the UK government has announced plans for mandatory e-invoicing for VAT invoices from 2029, which would make the link between invoices and records fully digital; see the UK e-invoicing mandate guide.

Common Making Tax Digital for VAT mistakes

• Copying figures by hand from a spreadsheet into bridging software, breaking the digital link rule.
• Recording only monthly totals instead of each transaction's date, value and VAT rate.
• Software that does not support your scheme, such as cash accounting or the flat rate scheme.
• Not re-authorising software when the authorisation expires, then discovering the problem on the deadline day.
• Ignoring penalty points because each late return carries no immediate fine.
• Mixing up the tax point: under standard accounting, VAT is due by invoice date, not payment date. The cash accounting scheme changes that.

MTD for VAT checklist

• Compatible software or bridging tool chosen and authorised.
• Digital records include every sale and purchase with date, net value and VAT rate.
• All transfers between programs are digital links.
• VAT invoices show every required detail and use sequential numbers.
• Return and payment deadlines in the calendar.
• Penalty points monitored in your HMRC online account.
• Records kept for six years.

Making Tax Digital for VAT is mostly about discipline: digital records for every transaction, digital links between tools and a return filed through compatible software on time. Good invoices are the foundation. Our free invoice generator creates VAT invoices with the rate and amount shown separately, needs no sign-up and produces a PDF in your browser, ready to record in your MTD records. You can start from the invoice templates if you want a ready layout.