Making Tax Digital for VAT

What is Making Tax Digital?

Making Tax Digital is HMRC's plan to move the UK tax system online. Instead of keeping paper records and typing figures into HMRC's website, you keep records digitally and submit through compatible software.

For VAT it has been fully in force since April 2022. If you are VAT-registered, compulsorily or voluntarily, you must comply, and there are no exemptions based on how small the business is.

In practice it means two things. Digital record keeping: your sales, purchases and VAT rates have to live in software, not a shoebox. And digital submission: the quarterly return goes to HMRC through MTD-compatible software talking to HMRC's API, not typed into a website. The goal is fewer errors and a more efficient system, which for freelancers means some setup and generally less manual work afterwards.

Who must comply, and the timeline

Every VAT-registered freelancer in the UK. It makes no difference whether you registered because you crossed the threshold or chose to register voluntarily: if you have a VAT number, you use MTD. That covers sole traders, freelancers, partnerships and limited companies, on any VAT scheme, standard, flat rate, cash accounting or annual.

The rollout runs in phases. MTD for VAT launched in April 2019 for larger VAT-registered businesses and was extended in April 2022 to all of them regardless of turnover. MTD for Income Tax Self Assessment begins in April 2026 for self-employed people and landlords above the first qualifying income band, with the band lowered in April 2027 and again in April 2028.

If you are not VAT-registered, MTD for VAT does not apply to you yet, but MTD for Income Tax from 6 April 2026 may. The page states that Taxmo supports MTD for VAT and is preparing for MTD for ITSA.

What digital records must you keep?

HMRC does not dictate which software you use, but it does specify what the records must contain: your business name, address and VAT registration number; the date, net value and VAT rate for each supply you make; the same for each supply you receive; any adjustments you make to a return, such as corrections or bad debt relief; the time of supply (tax point) for each transaction; the rate of VAT charged on each supply; and the total output tax and input tax for each return period.

If you use more than one piece of software, the data has to move between them digitally. HMRC calls this a digital link. Importing or exporting CSV or XML files, API connections between packages, and automated transfers or linked cells all count. Copying figures by hand, retyping from one screen to another, and copy-paste between applications do not, and if HMRC audits your process and finds manual transfer you are not compliant.

The page states that recording income and expenses in Taxmo maintains your digital records in the correct format, and that submitting your VAT return sends the data straight to HMRC via their API without manual transfers or bridging software.

How to get compliant, step by step

Sign up for MTD for VAT in your HMRC Government Gateway account using your VAT registration number and business email address, allowing up to seventy-two hours for activation. Choose software HMRC recognises for MTD; HMRC publishes a list on GOV.UK, and the page names Taxmo as one option that handles record keeping and submission together.

Authorise your software to talk to HMRC through HMRC's secure OAuth process, which is a one-time setup. Then keep digital records from the start of your first MTD return period, storing every transaction with its date, amount and VAT rate.

When the quarterly return is due, review the figures in your software and submit the nine-box return directly, and HMRC confirms acceptance. Retain your digital VAT records for at least the minimum period HMRC requires, which is longer for VAT than for Self Assessment, and keep your own backups.

Common myths

That you can still file on the HMRC website: you cannot, since April 2022 the portal is no longer a VAT return submission route. That a spreadsheet is enough: only if it has a digital link to MTD-compatible software, since manual copy-paste into a filing tool does not meet the requirement.

That MTD is only for big businesses: every VAT-registered business has to comply, including voluntary registrations well below the threshold. That compatible software is expensive: the page notes affordable options exist, including Taxmo, and that HMRC lists free software for straightforward needs.

That you have to submit more often: MTD does not change filing frequency at all. You still file quarterly on the same schedule. What changed is how you keep records and how you submit.

Penalties for non-compliance

HMRC replaced the old default surcharge with a new penalty system in January 2023. Late submission works on points: one point per late return, and once you reach the threshold for your filing frequency a fixed penalty applies for that return and every subsequent late one.

Late payment escalates in stages. Pay in full or agree a Time to Pay arrangement early enough and no late-payment penalty applies, though late-payment interest still runs from the due date at a margin over the Bank of England base rate. Leave it longer and a first percentage penalty applies on what is outstanding, then a further percentage charge, then an annualised penalty accruing on the daily outstanding balance until it is cleared.

There are also two MTD-specific penalties: filing a return without functional compatible software, and failing to keep the required digital records, which is charged on a daily basis with a cap for a single occurrence. Late submission points can be reset to zero by filing every return on time for a qualifying period and being up to date with outstanding returns, though financial penalties already charged still stand.

Common questions