Making Tax Digital for VAT: A Practical Guide for Small Businesses
What Is Making Tax Digital for VAT?
Making Tax Digital (MTD) for VAT is HMRC's initiative requiring VAT-registered businesses to keep digital records and submit VAT returns using HMRC-recognised software. Since April 2022, MTD for VAT applies to all VAT-registered businesses in the UK, regardless of turnover — so if you're registered for VAT, you must comply.
Non-compliance can result in penalty points and fines under HMRC's newer points-based penalty system. The good news is that the right accounting software makes compliance straightforward and largely automatic.
Who Needs to Comply and When
If your business is registered for VAT — whether you've crossed the £90,000 threshold (as of 2024) or registered voluntarily — MTD for VAT applies to you. There are very limited exemptions, such as those with religious objections to technology or certain insolvency situations.
You must use MTD-compatible software to maintain digital VAT records and submit returns directly to HMRC. Manually entering figures into HMRC's online portal is no longer permitted.
What Digital Records Do You Need to Keep?
Under MTD, you must digitally record specific information for each sale and purchase, including the VAT amount, the time of supply, and the value of the supply. These records must be kept in a functional compatible software solution — a spreadsheet alone is not sufficient unless linked to bridging software.
- Business name, address, and VAT registration number
- VAT accounting scheme used (e.g. standard, flat rate, cash accounting)
- VAT on sales and purchases for each transaction
- Adjustments made to returns
- Time of supply (tax point) for each transaction
Most modern accounting software packages handle all of this automatically, pulling data from your invoices, receipts, and bank feeds.
Choosing the Right MTD-Compatible Software
Selecting the right software depends on your business type, budget, and how much automation you need. Below are three strong options that are fully MTD-compliant and well-suited to UK small businesses.
Xero
Xero (from £15/month) is one of the most popular accounting platforms among UK small businesses and accountants. It is fully MTD-compliant, supports direct VAT submission to HMRC, and offers excellent UK bank feed integrations with major high street and challenger banks. A 30-day free trial is available with no credit card required, making it low-risk to test.
FreeAgent
FreeAgent (from £19/month) is built with freelancers and small businesses firmly in mind, with HMRC VAT submission built directly into the platform. It offers real-time UK bank feed integrations and walks you through your VAT return in a clear, step-by-step format. A free trial is available with no credit card needed, and it's particularly popular with sole traders and limited companies.
Sage Accounting
Sage Accounting (from £15/month) is a long-established name in UK business software and is fully MTD-compliant for VAT submissions. It offers excellent UK bank integrations and is well-regarded by businesses in the trades and hospitality sectors. Sage also integrates with payment tools such as Zettle and SumUp, making it practical for businesses taking in-person payments.
Submitting Your VAT Return Under MTD
Once your software is connected to HMRC's systems via the MTD API, submitting your VAT return is typically a matter of reviewing the auto-populated figures and clicking submit. Your software will pull data from your digital records, calculate your VAT liability, and send the return directly to HMRC.
You should still review each return carefully before submission. Check that all sales and purchases have been recorded, that any adjustments are correct, and that your VAT scheme settings match what HMRC holds on file for your business.
Common Mistakes to Avoid
One of the most frequent errors is not linking all parts of your record-keeping digitally — for example, entering totals manually from a spreadsheet into your accounting software. HMRC requires a digital link at every stage of the process, from your original records through to submission.
- Forgetting to register for MTD with HMRC before your first MTD return is due
- Using software that isn't on HMRC's approved MTD software list
- Breaking the digital link by copying figures manually between systems
- Missing submission deadlines — typically one month and seven days after the end of each VAT period
If you use a bookkeeper or accountant, ensure they are also set up for MTD on your behalf through HMRC's Agent Services Account. Open communication with your adviser is essential to avoid duplicate submissions or missed deadlines.
Getting Started Today
The simplest first step is to choose an MTD-compatible accounting package, sign up for a free trial, and connect it to your HMRC account via the Government Gateway. All three platforms covered above — Xero, FreeAgent, and Sage Accounting — make this process straightforward with guided setup wizards.
MTD for VAT doesn't need to be daunting. With the right software in place, your VAT records stay up to date automatically, and submission becomes a quick, routine task rather than an end-of-quarter headache.