A VAT return used to mean logging into HMRC's portal, typing numbers into nine boxes and hoping they matched the spreadsheet behind them. For the great majority of VAT-registered businesses, that route has closed. Making Tax Digital (MTD) for VAT requires records to be kept digitally and returns to be filed through compatible software, and there is no turnover test that lets a smaller business sit it out. The filing itself is the easy part. It is the tidying up behind it that takes the time — so start there.
Where MTD applies to your business
MTD for VAT applies to every UK business registered for VAT, whatever its size. The old threshold that exempted the smallest traders disappeared in April 2022, so if you are VAT-registered, the rules apply to you.
A small number of businesses can be exempt. HMRC will consider an application where digital record-keeping is not reasonably practicable — for example because of a disability, a remote location or firmly held religious beliefs. Exemption is not automatic; you have to apply and be accepted. Sole traders, partners and directors who are not VAT-registered are unaffected by MTD for VAT, though Making Tax Digital for Income Tax is a separate regime running to its own timetable, and worth watching if you file a self assessment return.
If you think an exemption might apply to you, speak to your accountant before assuming you are outside the rules.
Choosing software that actually fits
Every business on MTD needs software that can talk to HMRC. HMRC publishes a searchable list of approved products on GOV.UK — search for "find VAT software" — and that list is the only one worth trusting, because products are added and removed as they gain or lose approval.
There are broadly two shapes of product. Full accounting software lets you raise invoices, record purchases and file directly from one system. Bridging software takes the totals from a spreadsheet and submits them. Both are legitimate; the right answer depends on how much bookkeeping you want the software to do for you.
What to check before you commit
- Does it support your VAT scheme? Cash accounting, flat rate and partial exemption all need specific handling.
- Can your accountant get in? Ask about access, permissions and whether they charge extra for it.
- Does it pull in bank transactions automatically? Manual entry is fine for a handful of invoices and painful for hundreds.
- Can you export your data later? You want a clean, usable file if you ever switch products.
- Is filing included in the price? Some products charge per return.
Trial the software in a quiet month rather than the week a return is due. Most providers offer a free or low-cost trial, and testing it against a period you have already filed tells you far more than a demo will.
What digital records actually mean
Going digital does not mean paper vanishes overnight. It means the underlying figures your return is built from must be held in digital form. For VAT, that includes:
- your business name and VAT registration number;
- your VAT account, showing output tax due and input tax reclaimable;
- the time and value of each supply you make, and the VAT charged;
- the same detail for purchases and expenses where you reclaim VAT;
- any adjustments, such as those for bad debts or partial exemption.
In practice: raise invoices in the software, scan or photograph purchase receipts and attach them to the transaction, and let the system hold the running totals. HMRC accepts digital copies of invoices where they are legible and contain the required information, so a phone photo filed properly beats a shoebox every time. VAT records generally need to be kept for six years.
The digital links rule
This is where people come unstuck. Data must move between systems digitally. Retyping a figure, or copying and pasting it from a spreadsheet into filing software, is not a digital link — and HMRC's transitional soft landing on that point ended in 2021.
Spreadsheets are still permitted, but the transfer has to be automated. That might be a formula or macro that pulls the totals across, an import function built into the filing product, or bridging software that reads the spreadsheet directly. A workable middle ground for many small businesses is to keep the detail in a spreadsheet you understand and use bridging software to connect it to HMRC. You get compliant filing without rebuilding your whole system.
Filing the return
Once the software is connected, filing takes minutes. You authorise it to act for you through your Government Gateway account, choose the period, check the figures and submit. HMRC sends an acknowledgement — keep it.
Deadlines have not changed: the return and payment are due one calendar month and seven days after the end of your VAT period. What has changed is the penalty regime. Late submission penalties are now points-based. Each late return adds a point, and a financial penalty follows once you pass the threshold for your filing frequency. Points expire after a run of on-time returns, so one slip need not be costly — but a habit will be.
Compare the nine boxes against your own records before you press submit. Software is only as good as the coding behind it, and a mis-posted purchase is far cheaper to correct before the return goes in than after.
A sensible first month
Pick a quiet week and work through it in this order:
- Confirm your software choice, set it up and, if the product allows, run a test submission.
- Enter or import the current period's transactions and reconcile the bank.
- Check that the VAT scheme settings in the software match what HMRC holds for you.
- Run the return, compare it with the previous period and investigate anything that looks odd.
- Submit, save the acknowledgement and note the next deadline in your diary.
Most of the effort sits in step two, and it is a one-off. After that, MTD is mostly a monthly habit: code transactions as they happen, attach the paperwork, reconcile before month end.
If your records are behind, or your business has unusual VAT treatment — partial exemption, imports, property, multiple entities — take advice from a qualified accountant. Getting the setup right now costs far less than unpicking it during an inspection.
Photo: jarmoluk / Pixabay
