How to comply with Making Tax Digital

A version of this article was first published in October 2022. 

What is Making Tax Digital?

Making Tax Digital (MTD) aims to make it easier and more efficient for businesses and individuals to record and declare tax to HMRC. Under these rules, HMRC legally requires all VAT registered businesses to record transactions digitally and submit returns to HMRC using Making Tax Digital compatible software, unless they have specifically been granted exemption from these requirements by HMRC.

The new rules don't change your normal VAT return deadlines or the information you need to send. You can check when your next return is due on your online VAT account.  

A very small number of businesses can request exemption from MTD requirements on the grounds of age, disability, religious grounds or certain other practical reasons. If HMRC grants exemption to a business, it can continue to keep paper records and submit paper returns.

What information must be kept digitally? 

MTD may affect your bookkeeping processes and the way your business stores information. You must keep electronic records and digital copies of transactions. You can find further guidance on what records you must keep digitally on HMRC’s website.

I already keep digital records. What’s different about Making Tax Digital for VAT? 

All VAT-registered businesses must maintain records and accounts, and most are already keeping these digitally. With MTD, the more significant change was the need to use Making Tax Digital software to submit your VAT return to HMRC.  

Here is what you need to do to comply with the MTD legislation so you're not caught out by fines. 

Are my VAT returns MTD compliant?  

If you have an accountant who looks after your bookkeeping, speak to them to check whether you are already compliant, or understand what needs to change to make you so. For example, you may need to set up a process for sharing digital records and information with the accountant in order for them to submit your VAT returns via their own MTD compatible software.  

If you do your own accounts using spreadsheets, manual records, or paper-based bookkeeping - or if you’re already keeping your accounts digitally - you must use MTD compatible software to submit your information to HMRC via the MTD portal.

Here are the four simple steps that you need to take to comply with MTD VAT return requirements in just 10 minutes.

1. Register for Making Tax Digital

Any VAT registered businesses should have been enrolled for MTD

HMRC will sign up all new VAT registered businesses to Making Tax Digital for VAT automatically unless they are already exempt or have applied for exemption.

All other VAT registered businesses should already be using MTD compatible software to submit their VAT returns (unless granted MTD exemption) as the old VAT return portal was switched of in 2022.

2. Sign up for an MTD compatible app

The FSB Making Tax Digital app will ask you to select if you wish to use the easy-to-use bridging feature to load your existing VAT spreadsheet. Alternatively, you can use our record-keeping features to create invoices and track your expenses. This is a one-off process and takes approximately 3 minutes to complete.

3. Connect the app to your MTD account

The FSB Making Tax Digital App will prompt you to enter your VAT details and it will guide you through the process of connecting the app to your HMRC MTD account. This is a one-off process and takes approximately 2 minutes to complete. This step can only be completed after you have registered for Making Tax Digital and HMRC has copied your VAT account across to the new MTD system.

4. Submit your MTD VAT return

The FSB Making Tax Digital App will download and display your latest VAT information including your quarterly submissions. You can make a submission by loading your VAT spreadsheet to populate the 9-box VAT form. Alternatively, the app will populate the 9-box VAT form if you have entered invoices and expenses into our app. This takes approximately 2 minutes to complete.

What is compatible software? 

You’ll need to keep your digital records using compatible VAT record-keeping software that connects to HMRC systems and allows you to store and update records like receipts and VAT invoices digitally.  

It must be able to: 

• keep and maintain digital records specified in the regulations 
• prepare VAT returns using these records 
• communicate with HMRC through a digital link  

Some MTD solutions contain a bridging feature that lets you digitally link data in a spreadsheet to HMRC’s system.

Selecting MTD compatible software 

You need to get compatible software in place before you register for the MTD service. It won’t be provided by HMRC, so you’ll need to upgrade existing software or source new software.  

The FSB Making Tax Digital app is recognised by HMRC and it's a cost-effective solution for small businesses. Users can submit their business accounts directly from the app to the online MTD portal. It allows you to: 

• Upload your VAT spreadsheet using the simple bridging feature.
• Or you can use the record-keeping features to create customer invoices and track your expenses.

Can I still use spreadsheets?

Yes. If you currently use spreadsheets to calculate your VAT submission, you can use the simple bridging feature that lets you upload and submit your VAT spreadsheet to complete your MTD VAT submission.  - This is the simplest and most cost-effective way to tick the MTD VAT compliance box.

Alternatively, you can use the record-keeping features to create invoices and track your expenses.  - This will require a little more effort to set up but is very easy to use thereafter. 

Is Making Tax Digital only for VAT?

No. From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. 

HMRC has useful resources, videos, and webinars aimed at business owners so you can learn more about how you’ll be affected and the steps you need to take, including how you can sign up for the Making Tax Digital for Income Tax Self-Assessment pilot.