Do You Need to Sign Up for MTD for VAT?

Making Tax Digital (MTD) for VAT requires VAT-registered businesses to keep prescribed VAT records digitally and to file VAT Returns through compatible software. You don’t usually need to sign up yourself. HM Revenue and Customs (HMRC) automatically signs up newly VAT-registered businesses unless they’re exempt or awaiting an exemption decision.

This article covers the main MTD for VAT rules for UK businesses. Different rules can apply to businesses in Northern Ireland, overseas businesses, VAT groups, insolvency cases, and special VAT schemes, so check HMRC’s MTD for VAT guidance if any of these apply to you.

Here’s what this article discusses:

What is Making Tax Digital for VAT?

Making Tax Digital for VAT started in April 2019 for VAT-registered businesses over the VAT threshold.

Since April 2022, MTD for VAT has applied to all VAT-registered businesses, including businesses that are voluntarily registered and under the threshold.

They must store their VAT accounting records digitally and use compatible software for their VAT accounting.

Compatible software may help streamline some VAT record-keeping and submission processes, depending on your existing systems and how the software is configured.

Do I need to sign up for Making Tax Digital for VAT?

Usually not, because all VAT-registered businesses should now be signed up for MTD for VAT unless they’re exempt or awaiting an exemption decision, and HMRC automatically signs up newly VAT-registered businesses.

You can no longer use your HMRC online VAT account to send monthly or quarterly VAT Returns—you need to file through compatible software. You may still use your online account for other VAT tasks, and the final VAT Return after you cancel your registration is normally submitted there.

Penalties depend on the specific failure and your circumstances. Late VAT Returns earn penalty points, as the FAQs below explain. It’s your responsibility to make sure your records and returns meet the MTD rules.

How do I get ready for Making Tax Digital for VAT?

Here’s how to get your business ready for MTD for VAT:

1. Confirm your VAT registration: check your VAT registration number and the effective date of registration shown by HMRC.
2. Choose compatible software: choose compatible record-keeping or bridging software before your next VAT Return is due. This can be a single accounting package, or bridging software that connects suitable digital records, such as spreadsheets, to HMRC. See Find software that’s compatible with Making Tax Digital for VAT.
3. Authorise your software: follow your software provider’s instructions to authorise it to interact with HMRC. You’ll usually need your Government Gateway user ID and password.
4. Keep your records digitally: keep the prescribed VAT records digitally. If you use more than one software product, transfers of data between them generally need to be made through digital links. VAT Notice 700/22 sets out the rules.
5. File your VAT Returns through your software: submit each VAT Return through your compatible software by its deadline. You can use accounting software to submit your VAT Return to HMRC.

Should I register for VAT voluntarily?

There are two separate tests for compulsory VAT registration. You have to register if your taxable turnover for the previous 12 months is more than £90,000 (threshold accurate as of 1 April 2024), checked at the end of each month on a rolling basis. You also have to register if you expect your taxable turnover in the next 30 days alone to be more than £90,000. Taxable turnover includes zero-rated sales as well as standard-rated and reduced-rated ones, but not exempt sales or sales outside the scope of VAT. See VAT thresholds.

Below that, registering is your choice.

The main reason businesses register voluntarily is to reclaim VAT on their costs. You can usually reclaim VAT on things you buy for your business, as long as you have valid VAT invoices. Some costs can’t be reclaimed—business entertainment is a common example—and there are extra rules if you make both taxable and exempt sales. You may also be able to reclaim VAT on some costs from before you registered, but only within time limits. HMRC’s VAT Input Tax manual has the detail.

The trade-off is that you’ll need to charge VAT on your taxable sales, file VAT Returns, and follow the MTD for VAT rules, which can affect your prices and cash flow. It’s worth talking it through with an accountant or tax adviser before you decide.

You can register for VAT online, or your accountant can do it for you. If you’re doing it yourself, you’ll need a Government Gateway account for your business.

Once you’re registered, HMRC sends your VAT number and confirms your effective date of registration. You account for VAT from that date, which depends on why you registered (or the date you agreed for a voluntary registration) and can be earlier than the day your number arrives. See Register for VAT. Quote your VAT number on your VAT invoices.

Can my accountant handle MTD for VAT for me?

Yes, your accountant can handle MTD for VAT if they’re authorised to act for you. An authorised agent can handle tasks such as setting up software and filing VAT Returns on your behalf.

Handing over the admin doesn’t hand over responsibility, though. It’s still down to you to keep accurate digital records and to make sure the returns submitted for you are right.

Your accountant may ask that you link your accounting software with theirs.

Can I be exempt from Making Tax Digital for VAT?

Most VAT-registered businesses must follow MTD for VAT. Some are automatically exempt, while others may apply where using computers, software, or the internet is not reasonable or practical.

Some businesses have genuine reasons why they’re unable to comply with Making Tax Digital. These include the following:

• Reasons of age, disability, remoteness of location or, in HMRC’s words, “any other reason” that means it’s not “reasonably practicable” for the business owner to use digital tools to keep business records or submit returns. For example, a business without an internet connection because it’s on an island that’s off the grid might be considered exempt.
• Religious beliefs are incompatible with the requirements of MTD for VAT. This is typically that the individuals running the business are unable to use computers because of their beliefs.

Apply by calling or writing to HMRC. Continue to send returns in your usual way until HMRC issues its decision. See Apply for an exemption from Making Tax Digital for VAT.

It’s important to note that if HMRC believes exemption isn’t appropriate, it may offer digital assistance to help your business get online support.

Can I cancel my VAT registration to avoid MTD for VAT?

You may be able to ask HMRC to cancel your registration if HMRC is satisfied that your taxable turnover in the relevant future period will not exceed £88,000 (threshold accurate as of 1 April 2024). Separate rules can apply, including to businesses based outside the UK.

VAT registration can be cancelled online, or you can fill in and then post a VAT7 form to HMRC.

HMRC says it will usually contact you within 40 working days, although it may take longer during busy periods.

HMRC will confirm the effective cancellation date. The date depends on why the registration is being cancelled and may not be the date of the request.

Up to that date, you should continue to observe VAT requirements.

You’ll need to submit a final VAT Return for the period up to the cancellation date. This final return is normally submitted through your VAT online account, not through MTD software. Different routes can apply if your business is exempt from MTD or is in insolvency, so check HMRC’s guidance.

You may have to account for VAT on stock and assets you still have at the cancellation date, depending on how you acquired them and how VAT was treated at the time (for example, whether you reclaimed VAT when you bought them). You don’t have to pay this VAT if the total due is £1,000 or less.

The rules can be technical, and special cases such as assets transferred with a business, land, and capital items have their own rules, so check VAT Notice 700/11 or speak to your accountant.

What if my software won’t connect to HMRC?

Software usually fails to connect because your details don’t match HMRC’s records, its authorisation has lapsed, or your accountant isn’t authorised to act for you.

• Your details don’t match HMRC’s records: this can happen if your business name or address has changed since you registered. Double-check your VAT number, business name, and address exactly as HMRC holds them.
• Your software isn’t authorised for MTD: authorisation can lapse, for example if you’ve switched software or it’s been a while since you connected. Follow your provider’s instructions to reconnect it to HMRC.
• Your accountant can’t see your VAT account: check they’re authorised to act for you for MTD for VAT in their Agent Services Account.

MTD for VAT readiness checklist

Work through this before your next VAT Return is due. If you’re already filing through software, you’ve probably ticked off most of it.

• Confirm you’re VAT-registered, and check your VAT number and effective date of registration
• Choose compatible accounting or bridging software
• Have your Government Gateway user ID and password to hand
• Authorise your software to interact with HMRC
• Keep your VAT records digitally, using digital links between any software products
• If you use an accountant, make sure they’re authorised to act for you
• File each VAT Return through your software by its deadline

Final thoughts on MTD for VAT

Now you know how MTD for VAT works and what you need to do, you can get your business ready.

If you’re not sure where to start, work through the readiness checklist above, then fill in any gaps.

Need more help with MTD for VAT?

Speak to your accountant about the requirements—they can help you examine processes in your business to see what needs to be adapted. Alternatively, visit the dedicated MTD hub for more information.

Editor’s note: This article was first published in September 2021 and has been updated for relevance.