Making Tax Digital for VAT: A Simple Guide for Small Business Owners
Making Tax Digital (MTD) is HMRC’s plan to move tax filing online. If you’re a small business owner registered for VAT, you need to understand what Making Tax Digital VAT means for you—and what steps to take to stay compliant. Here’s a simple guide to help.
What is Making Tax Digital (MTD)?
MTD is a government initiative designed to enhance tax reporting efficiency by requiring businesses to maintain digital records and file returns online using approved software. It’s designed to reduce mistakes and streamline the VAT process.
MTD began with VAT and will eventually expand to other taxes, such as Income Tax and Corporation Tax.
Who Needs to Follow Making Tax Digital VAT?
If your VAT taxable turnover is above £90,000 (the current VAT threshold), MTD is mandatory for you.
If you’re under the threshold, you can still sign up voluntarily—which can help you reclaim VAT on expenses, improve your professional image, and simplify your processes as your business grows.
Some businesses may be exempt due to age, disability, or remote location, but these exemptions are rare and require approval from HMRC.
What You Need to Do
To follow MTD for VAT, you must:
- Keep digital records of your VAT transactions (you can use software or spreadsheets).
- Use MTD-compatible software to send VAT returns to HMRC.
- Submit returns directly from that software, not through the HMRC website.
Example: How This Works in Real Life
Emma runs a small online shop selling eco-friendly stationery. Her turnover is £110,000, so she must comply with MTD for VAT.
Here’s what she does:
- She uses QuickBooks, which is MTD-compatible.
- Every sale and expense is recorded automatically through her sales platform and bank feed.
- Each quarter, QuickBooks generates a VAT return and submits it directly to HMRC.
Emma no longer needs to log in to HMRC’s site to type in figures manually, and her returns are quicker and more accurate.
Choosing the Right Software
To comply with MTD for VAT, you’ll need to use MTD-compatible software that connects directly to HMRC.
There are two main options:
- Cloud accounting software – e.g., QuickBooks, Xero, FreeAgent, Sage
- Bridging software – used to link Excel spreadsheets to HMRC for those who still prefer manual record-keeping
What to Look For in MTD Software:
- HMRC-recognised: Make sure it’s listed as compatible on HMRC’s website.
- User-friendly interface: You shouldn’t need to be an accountant to use it.
- Time-saving features: Look for automation—such as bank feeds, invoice creation, and expense tracking.
- Support and training: Access to help articles, live chat, or phone support can be a big plus.
- Affordability: Many tools offer low-cost plans or free trials for small businesses.
How the Right Software Saves You Time
Using the right software doesn’t just tick the compliance box—it can streamline your entire bookkeeping process:
- Automatic bank feeds pull in transactions daily, so you don’t have to enter them manually.
- Invoice tracking helps you stay on top of who owes what.
- Real-time VAT calculations eliminate guesswork and reduce errors.
- One-click VAT submission saves time each quarter—you won’t need to log in to HMRC and fill in forms.
Instead of juggling spreadsheets and receipts, you can run reports, reconcile accounts, and submit your VAT return in just a few clicks. Over time, this means less paperwork, fewer errors, and more time to focus on your business.
Deadlines and Penalties
MTD for VAT applies to all VAT periods starting on or after 1 April 2022 (for most businesses). By now, all affected businesses should be fully compliant.
If you miss deadlines or fail to use approved software, you could face penalties under HMRC’s points-based system for late filing and payments.
Tips for a Smooth Transition
- Start early: Don’t wait until the last minute to set things up.
- Get help: Ask your bookkeeper or accountant to guide you through setup and filing.
- Do a dry run: Practice entering and submitting a return if your software allows it.
Summary & Next Steps
MTD for VAT is here to stay. If you’re a small business above the VAT threshold, you must:
- Use MTD-compliant software
- Keep digital records
- File VAT returns through that software
Even if you’re currently under the threshold, adopting digital solutions now could make life easier in the long run.
👉 Visit HMRC’s MTD page for more details or ask your accountant for help getting started.
Making Tax Digital VAT – FAQ
Who needs to follow MTD for VAT?
All businesses with a taxable turnover over £90,000 must comply. Businesses under the threshold can sign up voluntarily.
What records do I need to keep digitally?
You must keep digital records of:
Sales and purchase invoices
VAT charged and paid
VAT account summaries
Can I still use spreadsheets?
Yes, but only if you use bridging software that links your spreadsheet to HMRC’s system.
Can I complete Making Tax Digital VAT myself?
Yes, you can complete MTD for VAT yourself if you feel confident using MTD-compatible software. Many small business owners handle their VAT returns using tools like Xero, QuickBooks, or bridging software.
