Making Tax Digital for VAT requires most VAT-registered businesses to keep digital records and submit VAT returns using compatible software, rather than manually typing figures into HMRC’s online portal. This guide explains the requirements for 2026/27.
The Core Requirement
Making Tax Digital (MTD) for VAT requires most VAT-registered businesses to keep their VAT records digitally, rather than on paper, and to submit VAT returns to HMRC using MTD-compatible software rather than typing figures directly into an online form, with very limited exceptions.
The underlying accounting data — invoices, purchases and adjustments — must be kept digitally from the point the transaction is first recorded, not simply summarised digitally at the end of the VAT period from a paper-based system.
Why "Digital Links" Matter
Where data moves between different pieces of software before reaching the final VAT return — for example from a bookkeeping system into a separate spreadsheet used for adjustments — that transfer generally needs to happen through a "digital link" (an automated or electronic transfer) rather than manually retyping figures, to preserve an unbroken digital trail.
Manually retyping numbers between systems, even if the final figures are correct, can breach the digital link requirement, so businesses using a combination of software and spreadsheets need to check how data actually moves between them, not just that the final VAT return figure is accurate.
Penalties for Non-Compliance
HMRC can charge penalties for failing to keep the required digital records, failing to use compatible software, or failing to maintain proper digital links between systems, separate from any penalty for a late or incorrect VAT return itself.
In practice, HMRC has generally taken a supportive approach to businesses making genuine efforts to comply, particularly around digital links, but this should not be relied upon indefinitely, and businesses should aim for full digital compliance rather than treating it as optional.
Frequently Asked Questions
Do all VAT-registered businesses have to follow Making Tax Digital rules?
The vast majority do, since MTD for VAT applies broadly across VAT-registered businesses with very limited specific exemptions, such as for certain religious objections to using computers or genuine reasons why it is not reasonably practicable to comply digitally.
Can I still use a spreadsheet for my VAT records under MTD?
Yes, provided the spreadsheet is linked to MTD-compatible bridging software through a proper digital link to submit the return, rather than manually retyping the final figures into a separate submission tool, which would break the required digital trail.
What counts as a "digital link" between systems?
A digital link is an electronic or automated transfer of data between software (such as an export/import, a linked cell reference, or an API connection), as opposed to manually retyping or copying figures by hand from one system into another.
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What happens if I do not use MTD-compatible software?
HMRC can charge a penalty for failing to keep digital records or submit through compatible software, separate from any penalty that might apply for a late or inaccurate VAT return itself, so non-compliance carries its own specific risk.
Does Making Tax Digital change how much VAT I owe?
No — MTD changes how records are kept and how the return is submitted, not the underlying VAT calculation or how much VAT is actually due, provided the same figures are reported correctly either way.
Is there any support for businesses struggling to comply with digital links?
HMRC has historically taken a supportive, softer-touch approach to businesses making genuine efforts to comply, particularly around digital links, but this should be treated as transitional support rather than a permanent exemption, and full compliance should still be the goal.
Do I still need to submit quarterly VAT returns under MTD?
MTD does not change your VAT return frequency — most businesses still file quarterly (or monthly/annually if already on those schemes) — it changes how the underlying records are kept and how the return itself is submitted, using compatible software rather than the old online form.
What VAT accounting schemes work alongside MTD?
Standard VAT accounting, the Flat Rate Scheme, Cash Accounting Scheme and Annual Accounting Scheme can all be used alongside MTD, provided the business still keeps its records digitally and submits through compatible software rather than manually.
Can I request an exemption from Making Tax Digital for VAT?
HMRC can grant an exemption where it is not reasonably practicable to comply digitally due to age, disability, remoteness of location, or genuine religious objection to using computers, but this is assessed case by case rather than granted automatically.
Does MTD apply if my taxable turnover is below the VAT registration threshold?
If you are voluntarily VAT-registered with turnover below the compulsory registration threshold, MTD for VAT still generally applies to you in the same way as to businesses registered because they exceeded the threshold, since the requirement is tied to VAT registration rather than turnover level.
Disclaimer: This guide reflects UK rules as they generally apply in 2026/27. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.
