Value Added Tax (VAT) is a tax added to goods and services at each stage of their production or distribution. It’s the end customer who ultimately pays it, but it’s collected and paid by businesses at each step of the supply chain.

Businesses registered for VAT must charge it on their sales and submit a VAT return to report what they collect, along with the details of any VAT they pay on their purchases.

What is a VAT return?

A VAT return is a report which VAT registered businesses must submit to HMRC to show how much VAT they’ve charged on their sales, as well as the amount of VAT they have paid buying goods and services. Your business must register for VAT if its taxable turnover reaches the £90,000 VAT registration threshold in a 12-month period – you might be fined if you don’t register on time!

Your business is a bit like a tax-collector in that respect, charging the right rate of VAT on its sales, and then passing what it collects on to HMRC when you pay your VAT bill. If you pay more VAT on your purchases than you collect on sales, submitting your VAT return allows you to reclaim the difference.

How often do I need to make a VAT submission?

This depends on what type of VAT accounting scheme you use. Most businesses use the standard accounting scheme and will need to make a submission every three months (each quarter) based on the effective date of registration.

Some VAT schemes use a different schedule (a good example being the Annual Accounting Scheme), so make sure you know the key tax dates which apply to you!

There are strict rules around how VAT information is stored and submitted to HMRC, requiring VAT-registered businesses to comply with Making Tax Digital rules.
 

What is Making Tax Digital for VAT?

Making Tax Digital (MTD) for VAT aims to make the VAT system more straightforward and easier to manage. The rules mean that any business registered for VAT is obliged to keep their tax records digitally and use special software to submit this information to HMRC.

Is Making Tax Digital for VAT compulsory?

The MTD rules for VAT apply to all VAT registered businesses, no matter what their turnover is. It used to be that you could keep your own records offline (think notes in filing cabinets!)

In a bid to make everything digital and uniform, all VAT registered businesses must now comply with MTD rules. Having said that, there are some exceptions, such as a business which is subject to an insolvency order.

MTD for VAT does have several advantages though, such as:

• Fewer chances to make a mistake in reporting your VAT
• Faster returns filing
• More reliable record-keeping
• Less time spent on paperwork

The key thing is that anything you used to do manually is now automated by the MTD software you’re using. This makes it more likely that transactions are imported correctly first time, and any mistakes that do pop up can be identified faster. So, in theory at least, the time you save on filing your VAT return is time you can better spend on growing your business.

Can I still use spreadsheets?

Yes, you can use a spreadsheet to record your VAT transactions because this still counts as digital record-keeping. If the way you keep records doesn’t allow you to submit information directly to HMRC (although most accounting software will include this feature), you’ll need to use bridging software to make your submissions.

Does Making Tax Digital apply to other types of tax?

At the moment it only applies to VAT, although from April 2026, MTD for Income Tax Self Assessment (known as MTD for ITSA) is expected to roll out. Businesses and landlords that have a yearly turnover of more than £50,000 will need to register for MTD for ITSA from this date. Then from April 2027, any businesses and landlords with a turnover of more than £30,000 will follow suit.

MTD for ITSA for general partnerships, as well as businesses and landlords with turnover that’s under £30,000 has not yet been given a launch date. We also still don’t know when MTD for Corporation Tax will be launched, but as soon as we know more we’ll update our website.

How do I choose MTD compatible software?

Whatever MTD software you go for, it must be able to store records digitally and use those records to submit your VAT return. It should also be able to communicate with HMRC via a digital link.

HMRC won’t provide you with any MTD software, so you’ll need to check through the list of MTD-friendly software providers and be proactive yourself. Alternatively, you might need to upgrade any software you have already.

What happens if I don’t meet the rules around MTD?

Failure to comply with Making Tax Digital and VAT rules is likely to result in a penalty.

HMRC use a points-based system to calculate MTD VAT fines, so the system targets those who miss deadlines and make mistakes regularly. Points are given based on how regularly you submit.

This new system means that, in theory, taxpayers who make the odd innocent mistake shouldn’t be heavily penalised but as with all things tax-related – accuracy is key!

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.