What is Making Tax Digital for VAT and who must comply?

Making Tax Digital for VAT is HMRC’s requirement for VAT-registered businesses to keep digital records and submit their VAT returns using compatible software instead of manual processes. It aims to reduce errors and make tax administration more efficient.

If your business is VAT-registered and meets certain conditions, you must follow these rules. The transition has been phased, so it is important to know where your business stands and what practical steps are needed to comply without disrupting daily operations.

Who must comply with Making Tax Digital for VAT

All VAT-registered businesses in the UK are now required to follow Making Tax Digital rules, subject to limited exceptions. The main determining factor is whether your business is registered for VAT. Once registered, you must keep digital records and file returns through approved software.

Some businesses with specific circumstances, such as those that are insolvent or have religious objections to digital record-keeping, may qualify for exemptions. Because thresholds and exact conditions can change, always check the latest guidance on GOV.UK to confirm whether your business falls into an exempt category.

For early-stage founders and e-commerce sellers, the key point is that once your taxable turnover requires VAT registration, the digital obligations usually apply. Planning ahead avoids last-minute pressure when crossing the registration threshold.

Software requirements explained

You must use VAT-compatible software that can:

record and store your sales and purchase data digitally
produce accurate VAT calculations
send your VAT return directly to HMRC through an Application Programming Interface (API)

Compatible software ranges from simple cloud accounting packages aimed at small businesses to more advanced platforms that integrate with e-commerce marketplaces and inventory systems. The software must be listed on HMRC’s approved software page.

Practical step: list your current tools (for example, your e-commerce platform, payment processor and spreadsheet records). Then identify a single compatible package that can replace or integrate with them. Many providers offer free trials; test how the software handles your typical transactions such as Amazon or Shopify sales, VAT on imports, or standard-rated versus zero-rated supplies.

Do not assume that any accounting program works. It must support the Making Tax Digital API. Check the current list on GOV.UK before committing time or money.

Quarterly submission process

Under Making Tax Digital you submit a VAT return every quarter using your chosen software. The return must be filed electronically by the usual deadlines, normally one calendar month and seven days after the end of the VAT period.

Each submission includes:

total VAT due on sales
VAT reclaimable on purchases
net VAT payable or reclaimable
total value of sales and purchases (boxes 6 and 9)

Additionally, you must maintain digital links between your records and the final figures sent to HMRC. This means the data should flow automatically or through verified processes rather than manual re-keying.

Practical example: an e-commerce seller who receives monthly statements from their fulfilment centre should import those directly into the accounting software rather than copying totals from a PDF. This reduces transposition errors and satisfies the digital link requirement.

Keep a separate digital record of any adjustments, such as bad debt relief or partial exemption calculations, so you can explain them if HMRC enquires.

Transition timeline for VAT-registered businesses

Making Tax Digital for VAT was introduced in phases. The first group, businesses with taxable turnover above a certain level, had to comply from April 2019. A second group followed in April 2020. Since then, the obligation has expanded so that virtually all VAT-registered traders must now use compatible software.

If your business became VAT-registered more recently, you must adopt Making Tax Digital from the start of your first full VAT period after registration. There is no longer a general delay for new registrations.

Check your current VAT registration date and the start of your next VAT quarter. Set a reminder to have software selected and tested at least one month before that period begins. This gives time to migrate opening balances and run parallel records during the first quarter if needed.

Because exact dates and thresholds can change, verify the current timeline directly on GOV.UK rather than relying on older articles.

Practical steps to implement Making Tax Digital

Follow these steps in sequence:

Confirm your VAT registration status and next return date on your HMRC online account.
Review your existing record-keeping. Identify every place where sales, purchases or VAT are currently recorded outside a digital system.
Select and sign up for compatible software. Import or enter three months of historic data to test accuracy.
Train yourself or your team on the new process. Run a test submission for a previous quarter (without actually filing it twice).
Set up automatic feeds where possible, for example linking your e-commerce platform or bank account to the accounting software.
Establish a quarterly routine: reconcile accounts by the 7th of the month after the quarter ends, review any adjustments, then submit through the software.

Keep evidence of your digital records for at least six years. This includes the audit trail inside the software and any supporting digital documents.

For cash-flow management, note that the software will show your VAT liability early in the following month. Factor this figure into your working capital forecast so you are not surprised by the payment due date.

Common pitfalls and how to avoid them

One frequent issue is breaking the digital link by exporting data to a spreadsheet, making changes, then re-importing. HMRC expects the figures submitted to come directly from the compliant software with minimal manual intervention.

Another pitfall is choosing software that cannot handle your specific transaction types, such as EU distance sales, margin schemes or multiple VAT rates on different product lines. Test these scenarios during your trial period.

E-commerce sellers should pay particular attention to how the software treats platform fees, refunds, and overseas sales. Reconcile monthly statements from each sales channel against the VAT return totals.

If you use an accountant, agree who is responsible for the software submission. Some accountants operate the software on your behalf; others expect you to submit and simply review the figures.

How Loomworks can help

Loomworks provides free desks, a registered address and mentoring to selected early-stage founders. For VAT-registered e-commerce startups, this support can free up time to focus on implementing Making Tax Digital correctly rather than worrying about office costs while you set up compliant systems and processes.

Frequently asked questions

Do I need special software if I only sell on Etsy or eBay?

Yes. Any VAT-registered business must use HMRC-approved software that supports the Making Tax Digital API. Check whether your chosen accounting package integrates directly with your marketplace or allows secure import of transaction reports. Manual copying from spreadsheets will not meet the digital link rules.

What happens if I miss the deadline for my first MTD VAT return?

The usual late filing and late payment penalties apply. Because the return must be submitted through software, you cannot file a paper return. Set calendar reminders for both the end of your VAT quarter and the filing deadline to avoid unnecessary charges.

Can I still use my existing accountant under Making Tax Digital?

Yes. Many accountants are familiar with compliant software and can either operate it for you or review figures you produce. Clarify responsibilities and ensure the software used carries HMRC approval so the digital submission is accepted.

Does Making Tax Digital apply to my first VAT return after registration?

You must follow the rules from the start of your first full VAT accounting period after registration. Prepare by choosing and testing software before that period begins so you can record transactions digitally from day one.

How do I know if my accounting package is compatible?

Visit the GOV.UK list of Making Tax Digital for VAT software. Only packages shown there can submit returns directly. If your current provider is not listed, you will need to switch or add a bridging solution that meets the API requirements.