Making Tax Digital (MTD)

Making Tax Digital (MTD) is the United Kingdom government’s initiative to digitise the tax system and improve VAT compliance. Under MTD, VAT-registered businesses must keep digital VAT records and submit VAT returns to His Majesty’s Revenue & Customs (HMRC) using compatible software. The objective is to reduce errors and narrow the U.K. VAT gap by increasing accuracy and transparency in VAT reporting. 

MTD for VAT is mandatory for all VAT-registered businesses, regardless of turnover. Businesses must comply with MTD requirements for each VAT period unless they qualify for and have been granted an official exemption by HMRC.

HMRC publishes and maintains a list of MTD-compatible software, including full accounting packages and approved VAT-bridging solutions. 

Businesses must use MTD-compatible software that can: 

• Maintain digital VAT records 
• Calculate VAT totals for each return 
• Submit VAT returns directly to HMRC
• Receive confirmation and messages from HMRC 

Where multiple software products are used, VAT data must be transferred using digital links. Manual re-keying of VAT figures between systems is not permitted, except where HMRC allows specific transitional or limited exceptions. 

Tax agents acting on behalf of clients must use an Agent Services Account (ASA) to access and submit VAT returns under MTD. 

Businesses must store VAT records digitally within functional compatible software. Required digital records include:

• Business name and principal place of business address
• VAT registration number
• Details of any VAT accounting schemes used

For each taxable supply made:

• Time of supply (tax point)
• Value of the supply (net amount)
• VAT rate applied

For each VAT return period:

• Total output VAT due
• Total input VAT recoverable
• Adjustments, corrections, or error amendments
• VAT payable or reclaimable for the period

Digital records must be preserved and made available to HMRC in line with U.K. record-retention rules.

VAT returns must be submitted electronically using MTD-compatible software. Filing deadlines remain unchanged and are generally one month and seven days after the end of the VAT period. 

VAT payments must be made electronically using HMRC-approved payment methods.

Failure to comply with MTD requirements may result in penalties in addition to standard VAT obligations. HMRC operates a points-based penalty system for late VAT return submissions, alongside interest charges on late VAT payments.

Separate penalties may apply where VAT returns contain inaccuracies, depending on whether errors are deemed careless, deliberate, or concealed. Penalty reductions may be available where businesses make voluntary disclosures and cooperate with HMRC.