VAT

Making Tax Digital for VAT: What Businesses Need to Know

Making Tax Digital changed how VAT-registered businesses keep records and file returns. The rules themselves are not difficult, but they are unforgiving about process, and most penalties arise from how records are kept rather than from the VAT calculations themselves.

12 June 2026 · 7 min read

What Making Tax Digital actually requires

MTD for VAT applies to all VAT-registered businesses, regardless of turnover. It imposes two core obligations: keep specified records digitally, and submit VAT returns to HMRC through compatible software using a digital link from those records.

The second part is where businesses trip up. It is not enough to keep digital records and then type the nine box figures into a portal by hand. The data must flow from your records to HMRC without manual re-keying, whether through accounting software directly or through bridging software connected to a spreadsheet.

The records you must keep digitally

HMRC specifies a minimum dataset. Beyond that, the level of detail you keep is your choice, but the minimum is non-negotiable.

Business name, principal address and VAT registration number
Any VAT accounting schemes you use
For each supply made: time of supply, value excluding VAT, and rate charged
For each supply received: time of supply, value and input VAT to be reclaimed
Adjustments and totals for each VAT return

Choosing software that works for you

Any MTD-compatible package will meet the legal requirement, so choose on how well it fits your operation rather than on the compliance box alone. Bank feeds, receipt capture, invoicing, stock and payroll integration all matter far more day to day than the filing function.

If your records genuinely live in a spreadsheet, common in property businesses and some partnerships, bridging software remains a legitimate route. The spreadsheet must still contain the required digital records, and the link to the bridging tool must not involve copying and pasting figures.

Digital links in practice

A digital link is any electronic transfer of data between systems without manual intervention: formulas between spreadsheet cells, linked workbooks, API connections, or importing and exporting XML and CSV files. Retyping a figure, or copying and pasting it, is not a digital link.

Registration thresholds and timing

You must register for VAT once taxable turnover exceeds the registration threshold on a rolling twelve-month basis, or if you expect to exceed it within the next thirty days alone. The rolling test catches people out. It is not measured against your accounting year.

Voluntary registration can make commercial sense before you reach the threshold, particularly where most of your customers are VAT registered and can recover the VAT you charge, or where you incur significant input VAT on stock and equipment. Where you sell mainly to consumers, registering early usually just makes you more expensive.

Getting the scheme right

The scheme you choose affects both your cash flow and your admin burden, and the right answer changes as a business grows.

Standard accounting

VAT is accounted for on invoice dates. Straightforward, but it means paying over VAT on sales before your customer has paid you, which is painful if your debtor days are long.

Cash accounting

VAT follows the money rather than the invoice, so you only pay over VAT once you have been paid. Available below a turnover limit, and generally a strong choice for businesses that offer credit terms.

Flat rate scheme

You pay a fixed percentage of gross turnover and generally cannot reclaim input VAT. Simple to run, but the limited cost trader rules removed most of the benefit for service businesses with low costs. Always model it against standard accounting before opting in.

Annual accounting

One return a year with interim payments on account. Reduces admin, but delays any refund position and requires reasonably predictable turnover.

Where businesses go wrong

Most VAT errors trace back to messy underlying records rather than the rules themselves. The penalty regime is points-based for late submissions and separately charges interest and penalties on late payment, so process discipline pays.

Reclaiming VAT on business entertainment or genuinely non-business costs
Missing the domestic reverse charge on construction services
Treating zero-rated, exempt and outside-the-scope supplies as interchangeable
Reclaiming input VAT without a valid VAT invoice
Getting partial exemption calculations wrong where there is exempt income
Filing from bank data that has never been reconciled

Support for Derby businesses

Our VAT accountants in Derby handle registration, scheme selection, quarterly returns and digital compliance for businesses across Derbyshire, from construction firms navigating the reverse charge to retailers and property landlords with partial exemption to manage.

The practical benefit of local support is speed. When HMRC queries a return or a large one-off transaction needs a decision before you invoice, being able to pick up the phone to someone who already knows your business beats waiting in a call queue.

A simple quarterly routine

Reconcile the bank weekly, capture receipts at the point of spend, review the VAT return before submission rather than after, and set the VAT aside in a separate account as it accrues. Businesses that follow that routine almost never face a VAT problem, and never face a surprise about what they owe.