Making Tax Digital for VAT: Requirements, deadlines, and compliance steps

If you're preparing payables across an enterprise resource planning (ERP) system, a consolidation spreadsheet, and bridging software, you already know that Making Tax Digital (MTD) for VAT isn't really about whether your tools are compatible. Most of them are. It's about how data moves between them.

The three obligations are straightforward. Keep digital records, maintain digital links, and file through compatible software. Most finance teams get the first two right without much difficulty. It's the third that tends to break, specifically at the transfer points where a single copy-paste can turn an otherwise compliant chain into a non-compliant one.

The rules apply to every VAT-registered business in the UK, regardless of turnover. And your digital records, software, and transfer methods all need to meet the requirements in VAT Notice 700/22. VAT rules often depend on your specific circumstances, so this is a guide rather than tax advice. If in doubt, consult a professional accountant or HMRC directly.

Who must comply and what MTD requires

Since April 2022, every VAT-registered business in the UK must follow MTD rules. HMRC has auto-enrolled all existing VAT-registered businesses, and new registrations are automatically signed up through the VAT Registration Service. There's no separate sign-up step unless you need to claim an exemption on grounds of digital exclusion, insolvency, or religious beliefs incompatible with electronic communications.

The VAT registration threshold is £90,000 from 1 April 2024, with a deregistration threshold of £88,000. But the threshold is irrelevant to MTD scope. Even voluntarily registered businesses below it must comply.

The Association of Taxation Technicians (ATT) sets out the three obligations in its MTD guidance:

• Keep digital records of all required designatory and transaction data

• Use API, or application programming interface, enabled software to submit VAT returns to HMRC

• Maintain digital links between every piece of software used in the VAT return preparation process

All three must be met simultaneously. Meeting two out of three is not compliant, and HMRC can issue penalties for any individual failure. Most teams get the first two right without much difficulty. It's the third, digital links, that tends to be the weak point, especially when your VAT workflow spans multiple systems that were never designed to talk to each other.

If you use an accountant or tax agent, they'll need an Agent Services Account (ASA) to file on your behalf, which is separate from their existing HMRC Online Services credentials.

How digital records feed the link chain

MTD requires your functional, compatible software to hold per-transaction data digitally. Functional compatible software is HMRC's term for whichever combination of tools you use to keep your VAT records. That covers time of supply, net value, VAT rate, and input tax for each purchase. Your software then submits a 9-box summary to HMRC via the API. VAT Notice 700/22 sets out the full specification, including concessions for supplier statements, petty cash, retail schemes, and the Flat Rate Scheme.

The detail matters less than the principle. Every figure in your VAT return must be digitally traceable back to the underlying transaction record. If any part of that chain involves manual transfer, the return could be non-compliant even if the numbers are correct. That's the part that frustrates most finance teams. The numbers can be perfect and the process still fails the test.

What is a digital link under MTD for VAT?

This is the requirement that creates the most practical difficulty for finance teams running multiple systems. You may have perfectly compliant digital records and fully API-enabled software, but if the data moves between them via copy-paste at any point, that single transfer can make the entire chain non-compliant. So how do you know whether your existing workflow actually qualifies? If you've built it over years, adding tools as the business grew, the odds are good that at least one transfer point is manual.

VAT Notice 700/22 defines the requirement. Once data has been entered into software you use to keep and maintain your electronic account, any further transfer, recapture, or modification of that data must use digital links. HMRC penalty guidance explains that the digital link chain starts from the point where data is first held in functional compatible software, typically your sales or purchase ledger.

What qualifies as a digital link

The Institute of Chartered Accountants in England and Wales (ICAEW) and HMRC publish guidance on digital link requirements. Qualifying methods include:

• Linked cells in spreadsheets, where cell reference formulae mirror values between tabs or workbooks

• XML or CSV import and export between systems

• API transfers between software

• Automated data transfers between systems

What does not qualify as a digital link

HMRC penalty guidance explicitly prohibits three methods:

• Copy and paste or cut and paste between any systems

• Manual rekeying, where someone notes details from one system and enters them into another

• Screenshots of data from one system used to update another

If any single transfer in your chain uses one of these methods, the entire chain from that point forward could be non-compliant. The digital link requirement is cumulative. Every connection matters, from the first ledger entry through to the HMRC submission.

Where digital links typically break

The risk concentrates at transfer points between systems. If you use one platform for expense management, another for accounting, and a third for VAT filing, each handover needs a verifiable digital link.

Common failure points tend to look the same. Your ERP runs its monthly export, and instead of that file feeding directly into a consolidation workbook via formula link, someone opens it, copies the totals, and pastes them across. It takes ten seconds. This is how it was done before MTD existed. But that ten-second copy-paste is the point where the digital link chain breaks - and becomes a regulatory issue.

Most of these workflows made sense when they were set up because they got the job done. The issue is that MTD now requires every step to be automated, so retrofitting a digital link into a workflow built around a quick copy-paste takes deliberate effort. To ensure you’re compliant, mapping your transfer points and singling out these instances is the single most effective action you can take.

How to choose MTD-compatible software

Your choice of software determines whether your digital link chain holds together under scrutiny. HMRC's software finder recognises two compliance routes.

Full accounting software keeps your records and submits VAT returns directly via the HMRC API. Some accounting platforms handle digital links internally, which can simplify compliance for teams who consolidate their VAT workflow into a single system.

Bridging software connects non-API-capable software, such as spreadsheets or legacy systems, to HMRC. The MTD final evaluation defines this as software that takes data from other systems and submits it to HMRC via API. The Association of Chartered Certified Accountants (ACCA) confirms that bridging software is permanently permissible, provided you maintain digital links throughout.

Before assuming your current setup is compliant, it's worth asking a specific question for each system in your chain. Most software is MTD-compatible on its own, so "is this tool compliant?" isn't a useful question. "How does data get from the previous system into this one?" is. If the answer involves copy-paste from another tool, the chain is broken regardless.

One more thing worth adding to your month-end checklist: Your software's connection to HMRC requires periodic reauthorisation, and if the token expires without you noticing, your submission won't go through.

What penalties apply for MTD non-compliance?

If you've found a gap in your digital link chain, the natural next question is what happens if HMRC would have found it first. The penalty regime that replaced the old default surcharge system is materially harsher, and the costs add up faster than most teams expect.

Late submission penalties

The points-based system came into force for VAT periods starting on or after 1 January 2023. Each late submission earns you one penalty point. Financial penalties start once you hit the threshold:

At the threshold, you face a £200 penalty. Each subsequent late submission while at or above the threshold generates a further £200. For quarterly filers, hitting four penalty points triggers the first £200 penalty, with another £200 for each subsequent late submission while at or above that threshold. Four quarters is one year. Not a lot of runway.

Late payment penalties

From 1 April 2025, late payment rates increased:

Late payment interest runs from the first day payment is overdue at the Bank of England base rate plus 4%. As of 9 January 2026, this rate is 7.75%, calculated as the base rate of 3.75% plus 4%. As ICAEW noted, late payment interest and daily penalties can run simultaneously.

The combined cost of late payment

From day 31, if you have outstanding VAT, you could face late payment interest at 7.75% and daily penalties at 10% per annum running at the same time. That's a combined annual cost of 17.75% on the unpaid amount. To put that in perspective, £50,000 of outstanding VAT accumulating for 90 days past the day-31 mark would cost roughly £2,190 in combined interest and penalties, on top of the initial 3% charges at days 15 and 30. That's not a rounding error on a mid-market VAT bill.

The interest rate moves with the Bank of England base rate, so these figures will change when the rate next moves. The formula, base rate plus 4%, is the durable reference.

MTD-specific penalties for digital records and links

Failing to keep required digital records or maintain digital links can attract penalties of £5 to £15 per day, though ICAEW notes these require HMRC to have issued a written warning within the preceding two years. A specific record-keeping penalty of up to £500 exists under s69(2) of the VAT Act 1994, though the general regulatory penalty under s69(1) is more likely to be deployed.

The daily amounts may look small, but a digital link failure can also prompt HMRC to look more closely at your VAT records and processes as a whole. The penalty itself isn't the concern; it's what the review uncovers.

Next steps for your MTD compliance

The three MTD obligations are well documented. What's less obvious is where they break, and for most finance teams running multiple systems, that's the digital link chain. A spreadsheet feeding into bridging software via cell formulae is compliant. The same data copied and pasted into the same tool is not. The difference is invisible in your VAT return but visible in an HMRC compliance check.

Map every transfer point from source data through to HMRC submission, confirm nothing relies on copy-paste or manual rekeying, and verify your software authorisation hasn't lapsed. The cleaner your spend data is before it reaches your accounting workflow, the less you'll need to fix at the point of submission, and the less time you'll spend chasing missing receipts or correcting VAT fields during closing.

When cards, expenses, and invoices flow through a single spend management platform, you eliminate the transfer points where the chain can break. What Spendesk feeds into your accounting software is already verified and digitally linked.

HMRC's digitisation programme continues to expand, with MTD for Income Tax Self Assessment (ITSA), which applies to sole traders and landlords, launching from April 2026. Whilst MTD for Income Tax Self Assessment (ITSA) for sole traders and landlords won’t affect mid-market finance teams, it is worth being aware of how often MTD regulation is updated.

Frequently asked questions about Making Tax Digital for VAT

What is the difference between bridging software and full accounting software for MTD?

With full accounting software, you keep your digital records and submit VAT returns directly to HMRC via API. With bridging software, you take data from another source, typically a spreadsheet or legacy ERP, and submit it to HMRC via API without additional record-keeping functionality. Both routes are permanently permissible under VAT Notice 700/22, provided digital links are maintained throughout.

How long must you keep MTD digital records?

VAT records must be retained for six years, as set by the VAT Regulations 1995 and confirmed by VAT Notice 700/21. Under MTD, some VAT records must be kept digitally within functional compatible software, but digital records may be kept in alternative formats for the six-year retention period.

Can you use a spreadsheet for MTD for VAT?

Yes, but not on its own. A spreadsheet that isn't API-enabled and isn't connected to bridging software doesn't count as functional compatible software by itself. You can use a spreadsheet as part of your MTD workflow provided it's digitally linked, via cell formulae, CSV export, or API, to software that handles the HMRC API submission. Copy and paste between the spreadsheet and any other system is explicitly not a digital link.

What happens if you file your VAT return outside of MTD-compatible software?

VAT online account access for quarterly or monthly returns ended on 1 November 2022. ICAEW notes that if you pay by direct debit and don't file through compatible software, the payment won't be collected. You'd then face the full late submission and late payment penalty system.