MTD for VAT: What is Making Tax Digital?

Making tax digital for VAT: Rules, compliance & using Xero to help

making tax digital

Published Wednesday 17 September 2025

Table of contents

Key takeaways

  • You need to use MTD-compatible software if you're VAT-registered – compliance has been mandatory for all businesses regardless of size since April 2022.
  • Keep digital records of all transactions showing when it happened, how much it was for, and the VAT rate used – HMRC may ask to see these records.
  • VAT exemptions are rare and only granted for specific reasons like disability or remote location and must be approved by HMRC before your first filing deadline.
  • Stay compliant by understanding how HMRC's points-based penalty system works – focus on maintaining consistent, on-time submissions rather than worrying about occasional mistakes.

What is Making Tax Digital for VAT?

Making Tax Digital for VAT (MTD for VAT) is a government initiative designed to simplify tax compliance and reduce errors through digital record-keeping. To comply, you need to:

MTD for VAT was first introduced in 2019 for businesses over the VAT threshold (previously £85,000 – now £90,000 as of 1 April 2024). The rules were extended to all VAT-registered businesses, regardless of turnover, from April 2022.

What records do businesses need to keep digitally?

Digital record-keeping means storing your VAT information electronically instead of on paper. The information you track stays the same, but it must be kept in digital format.

Records for each transaction must include:

  • time of supply – when the sale or purchase happened
  • value of supply – the amount before VAT
  • tax rate – the VAT percentage applied

Your software must be able to preserve these records digitally and produce them for HMRC if requested.

Who does Making Tax Digital for VAT apply to?

All VAT-registered businesses must comply with MTD rules, regardless of size or turnover. This includes:

  • Sole traders: Individual business owners who are VAT registered
  • Limited companies: Incorporated businesses
  • Partnerships: Business partnerships of any size
  • Landlords: Property owners with UK rental income
  • Charities and trusts: VAT-registered non-profits

Find out more about what Making Tax Digital means for your business.

Is Making Tax Digital for VAT compulsory?

Yes, Making Tax Digital for VAT is compulsory for all VAT-registered businesses from April 2022. All businesses must comply, regardless of size or turnover.

You may be VAT exempt if your business meets specific criteria, such as:

  • digital exclusion due to age, disability, or remote location
  • religious beliefs that prevent computer use
  • practical difficulties that make compliance unreasonable

Exemptions must be applied for directly through HMRC and approved before your first submission deadline. You'll need to provide evidence supporting your exemption claim based on your specific circumstances.

What happens if I don't comply with MTD?

Penalties for not complying with Making Tax Digital apply if you do not meet the requirements. HMRC uses a points-based system instead of fixed fines.

How VAT penalties work:

  • Points for non-compliance: HMRC gives you a penalty point when you submit your VAT return late or don't follow MTD rules. The number of points you can accumulate before facing financial penalties depends on how often you submit (monthly, quarterly, or annually).
  • Reasonable tolerance: The system won't immediately fine you for a one-off mistake or occasional late submission. This helps businesses manage unexpected situations without being penalised right away.
  • Escalating consequences: For quarterly filers, once you reach 4 points, you'll be charged a £200 penalty. If you continue to submit late while at this threshold, you'll face additional £200 penalties each time.
  • Clean slate opportunity: If you submit on time for 24 consecutive months, your penalty points will expire. This gives businesses a chance to recover from difficult periods and rebuild their good standing with HMRC.

The system is designed to address repeated non-compliance, not single errors. Points are calculated based on how regularly you submit. You can find more information about VAT penalties here.

How do I sign up for Making Tax Digital for VAT?

Previously, the Making Tax Digital for VAT sign-up process required VAT-registered businesses to register using their Government Gateway account and some key business information.

Now, VAT-registered businesses that have not registered for MTD for VAT will be automatically signed up by HMRC - you just need to register for VAT. This removes an extra step for businesses and helps speed up the registration process.

What software do I need for Making Tax Digital?

MTD-compatible software must connect directly to HMRC's systems to submit your VAT returns. You have two main options:

  • Full accounting software: Complete business management platforms like Xero that include MTD compliance plus invoicing, bank feeds, reporting features, and more.
  • MTD bridging software: Basic tools that connect spreadsheets or simple records to HMRC. While these work if you prefer manual record-keeping, they can require more steps and time to file VAT returns compared to using full accounting software, making them less efficient for most businesses.

What are the benefits of Making Tax Digital?

Research from HMRC on MTD for VAT shows participants feel more confident about filing their returns since the rules were introduced. Based on a survey run by Xero, 98% of those surveyed said they find it easier to prepare and calculate their VAT return*.

Benefits of MTD include:

  • Fewer reporting errors: Digital systems automatically calculate VAT amounts and validate entries, reducing the human errors common with manual calculations and data entry.
  • Less time spent on paperwork: Digital record-keeping eliminates the need to manually sort, file, and search through paper receipts and invoices, freeing up valuable time for running your business.
  • Reliable record-keeping: Making Tax Digital compatible software maintains a consistent digital audit trail of all transactions, making it easier to track business performance and prepare for tax inspections.
  • Faster returns filing: With all your VAT data already in your system, returns can be prepared and submitted in minutes rather than hours, with direct submission to HMRC eliminating postal delays.

Along with saving time, Making Tax Digital improves accuracy. Software automates manual processes, so transactions are imported correctly and errors are identified. This means you can spend less time on paperwork and more time running your business.

How to prepare for Making Tax Digital

The Making Tax Digital rules require that you:

  • keep and maintain your records digitally
  • send your returns to HMRC via MTD compliant software.

Under MTD rules, you need to use software with a Making Tax Digital for VAT feature to submit your VAT return. VAT returns submitted directly through the HMRC website portal are no longer accepted for businesses required to comply with MTD.

Only specific software meets the Making Tax Digital requirements. Double check you have MTD compatible software in place.

How Xero can help you get ready for Making Tax Digital for VAT

Xero accounting software is recognised by HMRC for Making Tax Digital for VAT. You can keep digital records and submit your VAT return directly to HMRC using Xero. In fact, based on a survey run by Xero, 88% of those surveyed agreed that Xero has made MTD for VAT easy for them**

Xero also helps you manage your business with features such as:

  • bank connections
  • bank reconciliation
  • invoicing
  • receipt capture

Take the first step towards easier financial management and compliance. Try Xero accounting software for free.

FAQ on Making Tax Digital for VAT

Here are answers to some common questions about MTD for VAT.

Can I opt out of Making Tax Digital for VAT?

Generally, no, it is not possible to opt out of Making Tax Digital for VAT. From April 2022, all VAT-registered businesses must comply, unless approved for a VAT exemption by HMRC.

If I am exempt, how do I file my VAT returns?

If you are exempt from Making Tax Digital rules, you need to use the existing gov.uk website to submit your return. If you’re digitally exempt, you might be able to submit a paper return. To request this, contact HMRC.

When did Making Tax Digital for VAT become mandatory?

MTD for VAT was introduced in April 2019 for businesses with a turnover above the VAT threshold. From April 2022, it became mandatory for all VAT-registered businesses, regardless of their turnover.

What does MTD mean in tax?

Making Tax Digital (MTD) is a UK government initiative designed to make it easier for businesses and individuals to get their tax right. It requires you to keep digital records and use compatible software to make tax submissions.

How do I register for Making Tax Digital for VAT?

You don't need to sign up for MTD for VAT separately anymore. When you register for VAT, HMRC automatically signs you up for MTD. Your main task is to get MTD-compatible software to keep digital records and submit your returns.

What happens if I miss the MTD deadline?

If you file or pay your VAT return late, you may get a penalty point. If you reach a certain number of points, you'll receive a financial penalty. The system is designed to penalise those who repeatedly miss deadlines, not those who make an occasional mistake.

Explore our MTD for VAT resource hub

Check out the Making Tax Digital for VAT resource hub to learn what it means for you. Explore expert guides, articles and FAQs covering everything you need to know about MTD for VAT. For more details about Making Tax Digital for VAT, read the MTD for VAT guide or watch the video series.

*based on a survey run by Xero in the UK in August 2021 of 321 Xero subscribers who agree/strongly agree that since using Xero, they find it easier to prepare their VAT return

**based on a survey run by Xero in the UK in August 2021 of 375 Xero subscribers.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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