All VAT registered businesses, regardless of their turnover level, are now required to use Making Tax Digital (MTD) for their VAT reporting and record keeping obligations.

As part of MTD, businesses must keep certain records digitally and file their VAT returns using functional compatible software.

Penalties may be issued if VAT returns are not filed using the appropriate software or records are not kept digitally.

What is functional compatible software?

This is a software programme, or set of programmes, products or applications that can

  • Record and store digital records;
  • Provide HMRC with information and VAT returns from the data held in those digital records; and
  • Receive information from HMRC.

Click here to find software that’s compatible with MTD for VAT.

Penalties for non-compliance

There is a new penalty of £400 for every return filed for businesses that file their VAT returns but do not use functional compatible software.

Keeping records digitally

Records must also be kept digitally within your compatible software. Details that need to be maintained include

  • Business name, address and VAT registration number;
  • Any adjustments from calculations made outside the compatible software for any VAT accounting schemes that are used;
  • VAT on goods and services supplied;
  • VAT on goods and services received;
  • Any adjustments made to a return;
  • The ‘time of supply’ and ‘value of supply’ for everything bought and sold;
  • Rate of VAT you charged on goods and services;
  • Reverse charge transactions; and
  • Copies of documents that cover multiple transactions made on behalf of your business.

Penalties for non-compliance

A penalty of between £5 to £15 for every day on which you do not meet the digital record keeping requirements may be levied by HMRC.

Using digital links

A digital link is when data is transferred between software, apps or products. Within MTD, the transfer or exchange of data must be done using digital links and cannot be transferred manually.

Some examples of digital links include

  • Linked cells in spreadsheets;
  • Emailing a spreadsheet containing digital records so the information can be imported into another software product;
  • XML, CSV import and export and download and upload of files; and
  • Automated data transfer.

Penalties for non-compliance

A penalty of between £5 to £15 for every day on which you do not meet the digital link requirements may be levied by HMRC.

Remembering to use the checking function

Prior to making your return, you must make sure to use the checking functions within your compatible software. It is also advisable to download a copy of the return before it is filed.

Penalties for non-compliance

If you do not use the checking functions built into your software, this could be an indication that you did not take reasonable care, and may result in a greater error penalty.

Sign up for MTD for VAT

Once you have the functional compatible software in place, you can sign up for MTD for VAT here.

For any queries on complying with Making Tax Digital for VAT, please get in touch with your usual M+A Partners contact or email me at

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