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Making Tax Digital for VAT: What UK Businesses Need to Know in 2025

What is Making Tax Digital (MTD)?

Making Tax Digital is HMRC's initiative to move the UK tax system fully online. For VAT, MTD has been mandatory since April 2022 for all VAT-registered businesses regardless of turnover. If you are VAT-registered and still submitting returns manually, you may already be non-compliant.

What MTD for VAT requires

• Keeping digital VAT records using MTD-compatible software
• Submitting VAT returns directly from that software to HMRC
• A digital link between all your accounting records with no manual re-keying

Which software is MTD-compatible?

HMRC maintains a list of approved software. The most popular options are:

• Xero fully MTD-compatible, excellent for small businesses
• QuickBooks Online widely used and MTD-ready
• Sage Business Cloud good for growing businesses
• FreeAgent popular with sole traders and freelancers

What about MTD for Income Tax?

MTD for Income Tax Self Assessment (MTD ITSA) is coming for sole traders and landlords earning over £50,000 from April 2026, and those earning over £30,000 from April 2027. This will require quarterly digital submissions to HMRC, a significant change from the current annual return process.

Penalties for non-compliance

HMRC introduced a new penalty points system for MTD non-compliance. Late submissions accumulate points, and once a threshold is reached, a £200 penalty is charged. Multiple breaches can result in significantly higher fines.