What is Making Tax Digital for VAT?
Making tax digital for VAT is part of the government’s introduction of a more digitally based tax system.
VAT is HMRC’s first MTD phase and applies to all VAT registered businesses.
Fulfilling your VAT obligations under making tax digital is compulsory but in some cases your business can become exempt from MTD for VAT.
HMRC expects all VAT registered businesses to comply with their MTD for VAT regulations which are not optional and come with penalties for non compliance.
MTD for VAT is separate from making tax digital for ITSA which is specifically for sole traders and landlords who submit a self assessment tax return.
Our MTD for VAT guide covers necessary record keeping, how to file a MTD VAT return, penalties and scheme exemptions.
MTD for VAT record keeping
How you keep your accounting records is an important part of making tax digital for VAT.
Your business records must be kept digitally using functional compatible software which means an HMRC approved form of electronic record.
It’s important not to assume that your current digital record keeping fully complies with MTD for VAT rules.
An example of a common form of software which has been used by businesses for many years to keep accounting records is an excel spreadsheet.
To be compliant with MTD for VAT it is normal for an excel database to need bridging software which links your excel based VAT records to HMRC’s systems.
If you do not keep your records digitally HMRC reserves the right to charge a penalty of between £5 and £15 for every day you don’t meet the requirement.
How do I file a MTD VAT return?
MTD for VAT requires your VAT return to be sent to HMRC from your third party accounting software and not through the HMRC VAT online service.
If you file your VAT return and do not use MTD functional compatible software you may incur a penalty of up to £400 for every VAT returned filed.
MTD for VAT software
The software you use to submit your VAT return has to be compatible with the MTD for VAT system.
Unlike before MTD HMRC does not offer a software solution for submitting VAT returns online or for keeping MTD compliant records.
There are a number of accounting software providers offering MTD compatible products for both record keeping and VAT return submission.
There are free versions however paying for your MTD accounting software should be expected.
HMRC has a list of compatible MTD for VAT software providers and gives some basic facts about the capabilities of the software on offer.
MTD for VAT late penalties
From 1 January 2023 the MTD for VAT penalty system will be enforced which is different to the previous VAT return penalty regime.
MTD for VAT return penalties are not the same as MTD for ITSA late submission and payment penalties.
The late VAT return penalty system under MTD is based on points and the number of points you accrue determines the value of the penalty.
A threshold is in place meaning if your points total meets the threshold you will automatically be charged a late VAT return penalty.
For each VAT return submitted late one penalty point will be generated and when a penalty point threshold is reached a £200 penalty will be imposed.
An additional £200 late VAT return penalty will be issued for any further late VAT returns when your penalty points are at the threshold.
The penalty points threshold is different depending on if you submit VAT returns quarterly, monthly or annually:
| Accounting period | Penalty points threshold |
| Annually | 2 |
| Quarterly | 4 |
| Monthly | 5 |
If you have an arrangement in place with HMRC to use a non standard accounting period or there are changes to your business different rules can apply which can be found here on .GOV.
Can I appeal a VAT return penalty?
HMRC gives you the opportunity to appeal against a late VAT return penalty point or £200 fine.
You will need to follow the appeals process and then HMRC will send you a penalty decision letter to confirm if they will cancel or amend your penalty.
An appeal can be checked in your VAT online account and you can ask for a review of your appeal as well.
Can you be exempt from MTD for VAT?
In most cases a VAT registered business will have to comply with the MTD for VAT regulations. HMRC does allow some exemptions depending on your circumstances and gives you the opportunity to apply for MTD exemption.
An exemption is typically given by HMRC for one of the following reasons:
- Due to age, disability, or geographic location it is not reasonably practicable for you to use the necessary digital solutions to comply with MTD for VAT. For example the area you live in does not have internet access.
- You or your business is subject to an insolvency procedure.
- Religious grounds.
- Any other reason can be considered by HMRC and each case will be reviewed on its own merits.
You can apply for an exemption from MTD for VAT and HMRC will give you their decision in writing.
