What Is Making Tax Digital for VAT?
Making Tax Digital (MTD) for VAT is HMRC's initiative requiring VAT-registered businesses to keep digital records and submit VAT returns using compatible software. Since April 2022, all VAT-registered businesses — regardless of turnover — must comply with MTD rules.
For accountants, this means ensuring every client's VAT workflow meets HMRC's digital requirements from record-keeping through to submission.
Key Requirements
Digital Record Keeping
Under MTD, businesses must maintain digital records of:
- Business name, address, and VAT registration number
- VAT scheme used (standard, flat rate, cash accounting, etc.)
- Date, net value, and VAT rate for each supply made and received
- Total output tax and input tax for each return period
Important: Digital records don't mean paperless. The underlying source documents (invoices, receipts) can still be physical — but the VAT accounting data must be held digitally.
Compatible Software
HMRC requires that VAT returns are filed through MTD-compatible software. The software must:
- Keep the required digital records
- Provide digital links between records (no manual re-keying)
- Submit VAT returns directly to HMRC via their API
Filing Deadlines
VAT return deadlines remain unchanged under MTD:
| Return Period | Deadline |
|---|---|
| Quarterly (standard) | 1 month + 7 days after period end |
| Monthly | 1 month + 7 days after period end |
| Annual accounting | 2 months after period end |
Late filing triggers a points-based penalty system introduced in January 2023. Each late submission adds a penalty point; reaching the threshold (varies by filing frequency) results in a £200 penalty.
Common Pitfalls
1. Broken Digital Links
The most common MTD compliance issue is broken digital links — where data is manually copied between spreadsheets or systems. HMRC expects an unbroken digital chain from source record to submitted return.
Solution: Use software that integrates directly with your accounting records. Tools like ac-co.ai automate the entire chain from transaction data through to HMRC submission.
2. Incorrect VAT Scheme Application
Flat rate scheme users sometimes miscalculate their flat rate percentage, especially after the first-year discount expires.
3. Missing Reverse Charge Entries
Services received from overseas suppliers often require a reverse charge entry. This is frequently missed in digital records, leading to both under-declared output tax and missed input tax recovery.
How ac-co.ai Helps
ac-co.ai simplifies MTD compliance by:
- Automating VAT return preparation directly from your accounting data
- Maintaining full digital links from transaction to submission
- Validating returns before filing to catch common errors
- Filing directly to HMRC through their official MTD API
- Tracking deadlines and sending reminders before due dates
Getting Started
If you're an accountant looking to streamline MTD compliance for your practice, ac-co.ai integrates with your existing workflow. No migration required — connect your data sources and start filing.
Have questions about MTD compliance? Get in touch — we're here to help.