Making Tax Digital for VAT

Are you compliant?

Suman Budha, Assistant, VAT, Customs and International Trade

02/10/2026

Since April 2022, all VAT-registered businesses have been required to keep digital VAT records and submit VAT returns using compatible software, unless they qualify for one of the limited exemptions.

Under these rules, businesses must use software that can maintain the required digital records, prepare VAT returns using those records, and submit returns to HMRC via MTD-compatible software.

All VAT-registered businesses should be signed up for Making Tax Digital (MTD) by now, and newly registered businesses are normally opted in by HMRC, unless they are already exempt or have applied for exemption.

Does my business qualify for an exemption from Making Tax Digital?

There are a few exemptions to MTD for VAT:

businesses do not need to follow the MTD rules if HMRC considers it is not practical to use digital tools to keep business records or submit VAT returns, for example because of age, disability, or location
exemptions may also apply where a business is subject to insolvency procedures, is run entirely by practising members of a religious society or order whose beliefs are incompatible with electronic communications.
businesses who wish to apply for exemption must contact HMRC in writing and provide details including their VAT registration number, business name, principal place of business, reason for the exemption request, how they currently file VAT returns, and why they cannot file via software or keep digital records. HMRC will provide their decision in writing.

Keep the right digital records to remain compliant

HMRC requires the following information to be kept digitally:

Designatory data

Business name
Business address
VAT registration number
Any VAT accounting schemes that you use.

Supplies made

For each supply you must record the:

time of supply (tax point)
the value of the supply (the net value, excluding VAT)
the rate of VAT charged.

Supplies received

For each supply you must record the:

time of supply (tax point)
the value of the supply (the net value, excluding VAT)
amount of input tax you will claim.

Adjustments

Any adjustments required from calculations made outside of your functional compatible software for any VAT accounting schemes you use.

Any other adjustments you may make, for example input tax restriction, road fuel scale charges etc.

Reverse charge transactions

Where reverse charge applies and your software does not automatically record the transaction, businesses may need to record the transaction as both a supply made and a supply received.

This ensures the correct output tax and input tax are reflected in the VAT return.

Supporting documents

You will also need to keep copies of documents that cover multiple transactions made on behalf of your business.

For example, those made by employees for petty cash expenses.

Penalties for failure to comply with MTD

Businesses should note that MTD compliance forms part of their wider VAT obligations. HMRC have increased focus on digital record keeping and the use of compliant software, and businesses should therefore ensure their systems and processes meet, or continue to meet, the requirements.

HMRC has the power to charge penalties where businesses fail to meet its MTD requirements, although in practice HMRC has generally adopted a relatively light-touch approach to MTD compliance. Penalties can apply where a business does not maintain the required digital records, fails to use MTD-compatible software to meet its VAT obligations, or does not retain the historical digital records required under the MTD rules.

Failure to comply with MTD requirements may also increase the risk of errors in VAT returns and potentially lead to further penalties, interest or assessments if VAT is underdeclared or overclaimed as a result.

The MTD for VAT penalty regime can be summarised as follows:

Scenario	HMRC penalty
If you file your VAT returns but do not use functional-compatible software to do so	HMRC may charge up to £400 for each VAT return filed, depending on your annual taxable turnover (VAT exclusive): £100,000 and under: £100 penalty £100,001 - £5,600,000: £200 penalty £5,600,001 - £22,800,000: £300 penalty £22,800,001 and above: £400 penalty.
You do not keep the required records digitally within your functional- compatible software.	HMRC may charge a penalty of between £5 and £15 for each day this requirement is not met.
You do not use the required digital links to transfer data between different pieces of functional-compatible software.	HMRC may charge a penalty of between £5 and £15 for each day this requirement is not met.

What should businesses do to remain compliant?

Businesses should review their VAT compliance processes to ensure that:

VAT records are maintained digitally using compatible software.
VAT returns are submitted through MTD-compatible software.
Digital links are in place between all systems used to prepare and submit VAT returns.
Manual transfers, such as copy and paste, are not used where a digital link is required.
VAT adjustments are recorded in compatible software, with totals recorded separately for each adjustment type.
VAT filing and payment deadlines are monitored to avoid penalties and interest.

Need support with your MTD compliance

If you would like to discuss how the MTD for VAT requirements affect your business, or whether your current VAT return processes meet HMRC’s requirements, please contact Robert Marchant or your usual Crowe contact.