Making Tax Digital for VAT: Complete Compliance Guide for 2026

If your business is VAT registered, you have no choice about whether to keep digital records and file digitally: you must.

Making tax digital for VAT became mandatory for larger businesses on 1 April 2019 and was extended to all VAT registered businesses from April 2022. There is no minimum VAT threshold for MTD for VAT. If you hold a VAT registration number, you must keep digital records and file digitally.

This guide explains who is covered, which rules for VAT you must follow, how to choose software, how to submit VAT returns, what exemptions exist and what penalties apply in 2026.

Making Tax Digital for VAT: Whom It Applies to in 2026

The HMRC guidance on making tax digital for VAT covers almost every VAT registered business in the UK, regardless of taxable turnover.

The VAT registration threshold is currently £90,000 of taxable turnover, with a deregistration threshold of £88,000. Those figures decide when you must register. They do not decide whether you must follow the MTD rules once you are registered. A business that registers voluntarily at £40,000 of turnover is in scope from its first return. This government initiative designed to modernise the tax system therefore reaches small businesses as well as large ones.

The rules apply to:

• Sole traders: anyone selling VATable goods or services. Our guide to sole trader VAT registration and compliance covers how registration and ongoing duties fit together.

• Limited companies: from small owner-managed companies to businesses with complex VAT structures.

• Partnerships: which need linked digital records across all partners.

• Charities and non-profit clubs: where VAT is charged on certain income, such as some membership fees.

• Landlords: where VAT is charged on commercial property rents or short-term lets.

New VAT registered businesses are signed up to the digital service as part of registration and cannot file through the old online return form.

A few situations sit outside the normal rules:

• Businesses that cancel their VAT registration can be exempt from MTD for the final return, depending on how their previous returns were filed.

• Entities in a formal insolvency procedure, such as administration or liquidation, are handled under separate arrangements, usually through the appointed practitioner.

• Businesses that cannot use digital tools, including those without reliable internet access, may apply to HMRC for exemption.

If you are still deciding whether to register, our guide to VAT registration requirements for VAT registered businesses sets out the tests.

Making Tax Digital for VAT and Making Tax Digital for Income Tax

These are two separate regimes. MTD for VAT concerns your VAT returns. Making Tax Digital for Income Tax is a newer requirement for individuals, and it sits alongside other taxes such as corporation tax, which is not yet part of the programme.

From 6 April 2026, sole traders and landlords must use it if their total annual income from self-employment and property is over £50,000. The threshold then falls to £30,000 from April 2027 and £20,000 from April 2028.

Being VAT registered does not exempt you from the income tax rules, and the income tax test uses gross income, not profit. If you are a sole trader or landlord, check both. Our overview of the HMRC tax rule changes from April 2026 shows how they fit together.

Core Making Tax Digital for VAT Rules You Must Follow

Three obligations sit at the heart of MTD for VAT. Understanding them prevents costly errors and keeps your VAT records in order, whichever business taxes you deal with.

1. Keep VAT records digitally: from the point you create them, for the full retention period.

2. Use digital links: once data is in your software, any transfer or change must happen electronically, without retyping or copying by hand.

3. Submit VAT returns through MTD compliant software: the software must connect to HMRC’s system through the MTD VAT API.

The detailed rules are in VAT Notice 700/22 and VAT Notice 700/21 on gov.uk. Notice 700/22 deals with digital record keeping and returns. Notice 700/21 covers general VAT record keeping. Together they form the comprehensive list of what HMRC expects from VAT registered businesses.

What Your Digital Return Contains

• The standard nine-box VAT return summary, covering output VAT, input VAT, net VAT due and your totals.

• Your VAT account (the electronic account), which feeds the return.

• Any adjustments, such as errors found in earlier VAT periods, entered as separate lines with a clear description.

If you want a plain-English refresher on the two sides of the return, see our guide to input VAT and output VAT.

Registering and Enrolling for MTD for VAT

HMRC moved most existing VAT registered businesses into the digital service automatically during 2022 and 2023. A separate sign-up is rarely needed in 2026 unless you have just registered a new business or have not yet filed under the digital rules.

To check your status:

1. Log in to your Government Gateway account through HMRC’s online services, using your Government Gateway ID and password.

2. Open your VAT account and check that it shows you as signed up for MTD for VAT.

3. If it does not, follow the prompts to sign up. Allow up to 72 hours for the sign-up to take effect before you try to connect software.

Before you can send VAT returns, you need to connect your software to HMRC:

1. Use your Government Gateway user ID. It is linked to your business email address, and you should keep two-step verification switched on and your password private.

2. Choose MTD compatible software from HMRC’s list.

3. Authorise the software to submit returns and receive information from HMRC on your behalf.

4. The authorisation takes minutes. You can withdraw it at any time.

If you use an agent, the process differs. The agent needs an agent services account and must be linked to your VAT registration number with your consent. Once linked, your accountant can file your quarterly returns using their own software.

At The Taxcom, we help you manage MTD and save time with our VAT services, so you do not need to buy or operate software yourself unless you want to.

Choosing Your Making Tax Digital for VAT Software

Choosing the right software is the most important practical decision you will make. Our dedicated guide to choosing the right Making Tax Digital software goes into more detail. Two broad approaches dominate the market.

Full Accounting Software

• Cloud platforms such as Xero, QuickBooks Online and Sage Accounting handle records, calculations and filing in one place.

• They offer bank feeds, automated VAT coding and dashboards that show your financial position through the quarter.

• They cope with multiple VAT rates, partial exemption and integrated payroll.

• Subscriptions typically range from £20 to £100 a month, depending on the plan.

Spreadsheets With Bridging Software

• Bridging software connects a spreadsheet to HMRC’s system through the API, so you can keep using other software you already know.

• You keep your records in Excel or Google Sheets. The bridging tool sends the nine-box return to HMRC.

• Costs are usually lower, often £5 to £20 a month, although prices vary by provider.

• You must still keep your digital links unbroken. You cannot paste data into the bridging tool by hand, because that does not satisfy the rules.

Before you commit, check HMRC’s current list of compatible software. Your chosen product must connect to HMRC through the MTD VAT API. Check that your accounting software packages and any add-ons are MTD compliant before you rely on them.

How to Submit a VAT Return under Making Tax Digital

Most VAT registered businesses file quarterly. The deadline for filing VAT returns is one calendar month and seven days after the VAT period ends. Paying VAT follows the same date, although Direct Debit payments may leave your account a few days later.

A reliable routine for each VAT accounting period looks like this:

1. Record sales and purchases digitally throughout the period.

2. For each transaction, capture the date of supply, the value excluding VAT, the rate and the VAT amount.

3. Import or enter supplier invoice data into your software.

4. Reconcile bank transactions so your VAT account matches what actually happened.

5. Review the VAT account for miscoded items, such as input VAT on non-business spend or output VAT charged at the wrong rate.

6. Make any corrections or adjustments inside the software.

7. Submit the nine-box return through the API and keep the acknowledgement from HMRC.

Some adjustments need special care:

• Partial exemption: year-end calculations can be done in a separate spreadsheet, then entered in your VAT software as a labelled adjustment.

• Capital goods scheme: clawbacks and adjustments on property or high-value assets must be entered as digital adjustments.

• Fuel scale charges: these need separate calculation and entry.

• Margin schemes: second-hand goods dealers account for VAT on the margin, and the records must still be digital.

Digital Record Keeping Requirements

Keeping digital records correctly is fundamental to compliance. HMRC sets out the records you must keep, and the data must be held at transaction level, not just as summary totals.

For each supply, your digital record needs:

• The tax point (the time of supply).

• The value of the supply excluding VAT.

• The rate of VAT charged (20% standard, 5% reduced, 0% zero-rated, or exempt).

• The VAT due or recoverable.

You must also hold your business name, the address of your principal place of business, your VAT registration number and details of any VAT accounting scheme you use.

Digital Links and Bridging Software

Digital links are the part of MTD for VAT that catches most businesses out. HMRC’s VAT Notice 700/22 says a digital link is an electronic transfer of data between software products that needs no manual intervention. Once data is in the software that holds your electronic account, any further transfer or change must happen through digital links.

These count as valid digital links:

• Formulae linking cells or tabs in a spreadsheet.

• CSV or XML files exported from one system and imported into another.

• API connections between bank feeds, e-commerce platforms and accounting software.

• Direct integrations between point-of-sale systems and cloud accounting.

If you sell digital services to overseas customers, your place-of-supply rules may add further complexity in expenses.

Making Tax Digital for VAT: Exemptions and Special Cases

MTD for VAT applies to nearly everyone, but HMRC accepts exemption in narrow circumstances. Some exemptions are automatic, such as insolvency or a final return after cancelling your registration. For others you must apply, if it is not reasonable or practicable for you to use digital tools because of:

• Your age, disability or health, supported by evidence.

• Remote location or lack of reliable internet access, broadband or mobile coverage.

• Religious beliefs that prevent you from using electronic communications.

• Other circumstances that HMRC accepts as making digital compliance impractical.

Insolvency is a separate category. If you are subject to an insolvency procedure, special rules apply, and the practitioner handling the case usually deals with HMRC.

To apply for exemption:

1. Contact HMRC’s VAT helpline on 0300 200 3700 or write to the VAT MTD team with your reasons and your business details.

2. Explain what alternatives you have considered and why they do not work.

3. Provide supporting evidence, such as medical letters or broadband speed records.

4. Keep filing on time while you wait, unless HMRC tells you otherwise.

Do not assume exemption applies. HMRC decides, and it can refuse. An accountant or tax agent can help you present the case and gather evidence.

Penalties, Interest and Compliance Risks

The penalty regime for VAT changed for accounting periods starting on or after 1 January 2023. Late submission and late payment are now treated separately, so you can be penalised for one without the other.

Late Submission: The Penalty Points System

Under the points system, you receive one penalty point for each VAT return you submit late. Once you reach the threshold for your filing frequency, HMRC charges a £200 penalty, then a further £200 for each late return while you remain at the threshold. Nil returns and repayment returns count too.

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

Below the threshold, each point expires 24 months after the month in which the late return was due. At the threshold, points stop expiring on their own. To reset them, you must submit all returns on time for the compliance period (12 months for quarterly filers) and file every outstanding return from the previous 24 months.

For a quarterly filer who files four returns late, the fourth takes the business to the threshold and triggers the first £200. If a fifth return is also late, that is a second £200, so £400 in total. A subsequent late submission keeps adding to the bill until the points are cleared.

Late Payment and Interest

• Up to 15 days late: no penalty, but interest runs from the first day the VAT is overdue.

• 16 to 30 days late: a first penalty of 3% of the VAT outstanding at day 15.

• 31 days or more: a further 3% of the VAT outstanding at day 30, plus a second penalty at 10% a year on the balance, charged daily until it is paid.

• Interest: charged at the Bank of England base rate plus 4%, from the first day payment is overdue.

These late payment rates apply to periods under the current regime, following the increase from 1 April 2025. Interest rates move with the Bank of England base rate, so check the current figure on gov.uk before you calculate a bill.

Other Compliance Risks

• Filing through the old online return form when you are not exempt will be rejected.

• HMRC can charge a separate penalty of up to £400 if you file on paper without an approved exemption.

• Failing to keep digital records can bring a daily penalty of £5 to £15 after a written warning.

• Broken digital links can put your records in question during a VAT inspection, and HMRC may challenge input VAT claims that cannot be evidenced.

• Unreconciled adjustments and repeated errors can lead to assessments and penalties for inaccuracy.

Deliberate avoidance of VAT is a very different matter from honest error. Ask an accountant or tax agent to manage the VAT cycle if your records are complex.

Practical VAT Compliance Steps for Your Business in 2026

Taking action now helps you stay compliant. Work through this checklist:

1. Log in to your Government Gateway account and confirm your MTD for VAT status is active.

2. Check that your software remains on HMRC’s list and still connects to HMRC’s system.

3. Review your digital record keeping for gaps, especially where data moves between systems.

4. Schedule a monthly VAT account review to catch errors before the deadline.

5. Test your submission routine well before your next VAT period deadline.

If you are a sole trader or landlord, also check your income tax position, because self employment and property income feed into your Self Assessment tax returns:

• Add up your gross self-employment and property income to see whether you are over the £50,000 threshold now, or likely to pass £30,000 from April 2027.

• Ask whether your existing software can handle quarterly income tax updates as well as VAT.

• Consider software that covers both, so you only maintain one set of digital records for the accounting year.

Landlords should also look at how their rental records are kept.

Getting Your VAT Right With The Taxcom

At The Taxcom, we are a Manchester-based tax advisory and accountancy firm. These are the services most relevant to staying compliant with MTD for VAT.

• VAT Services: we help with VAT registration, returns and compliance, including choosing MTD compatible software and filing your quarterly returns.

• Bookkeeping: accurate, up-to-date digital records are the foundation of MTD for VAT, and we keep them in line with HMRC’s requirements.

• VAT Investigations: if HMRC questions your records or digital links, we help you respond and resolve the enquiry.

If you need assistance in your tax matters outside VAT, browse our full range of services.

Frequently Asked Questions

Is making tax digital for VAT compulsory for all businesses?

Yes. Every VAT registered business must follow the rules, whatever its turnover, unless HMRC has granted an exemption or the business is subject to an insolvency procedure.

How many penalty points before I get a £200 penalty?

It depends on how often you file: 4 points for quarterly returns, 5 for monthly and 2 for annual. At the threshold HMRC charges £200, then another £200 for each further late return.

Do I need to sign up separately for MTD for VAT?

Usually not. Most businesses were enrolled automatically, and new registrations are signed up at registration. Check your status through your Government Gateway account.

Does MTD for VAT apply if I am below the VAT registration threshold?

Yes, if you are VAT registered. The £90,000 registration threshold decides when you must register, but voluntary registrants must follow the same digital rules.

Can my accountant file my VAT returns for me?

Yes. A tax agent with an agent services account, linked to your VAT registration number, can file your returns using their own software with your consent.

Take the Next Step in Making Tax Digital for VAT

If you are unsure whether your records, software or digital links meet the rules, the sensible next step is a review before your next VAT period ends. Our VAT team can check your set-up, connect compatible software and file your quarterly VAT returns.

If HMRC has already raised questions about your records, our VAT investigation support can help you respond with confidence. Contact The Taxcom to arrange a personal consultation.

This is general guidance, not professional advice. Contact our tax advisors for personalised advice.