Making Tax Digital for Self Employed (mTD): how to stay compliant with HMRC

Making Tax Digital (MTD) for VAT is transforming the way UK businesses manage tax compliance. HMRC’s initiative requires all VAT-registered businesses to keep digital records and submit VAT returns using approved software. This move aims to reduce errors, improve efficiency, and make tax reporting seamless.

At Horizon&Co, we help businesses navigate these changes with expert VAT and MTD compliance services—so you can focus on growth while we handle the complexity. Whether you’re a small business, freelancer, or large enterprise, understanding MTD is essential to avoid penalties and stay compliant.

What is Making Tax Digital for VAT?

Making Tax Digital (MTD) is HMRC’s program to modernize the UK tax system. Under MTD for VAT:

  • Businesses must keep VAT records digitally.
  • VAT returns must be submitted through MTD-compatible software.
  • Digital links between systems are mandatory—manual copy-paste is no longer allowed.

This applies to all VAT-registered businesses, including those registered voluntarily. If you’re VAT-registered, you cannot file returns manually through HMRC’s old portal.

Text Why HMRC Introduced MTD

HMRC introduced MTD to:

  • Reduce VAT errors and fraud caused by manual processes.
  • Close the UK tax gap, which costs billions annually.
  • Improve accuracy and efficiency for businesses and HMRC alike.

According to HMRC, MTD has already saved businesses millions in administrative time and reduced common filing mistakes.

Who Must Comply?

Every VAT-registered business, whether above the £90,000 threshold or registered voluntarily, must comply with MTD rules. There are no exemptions based on business size. Even sole traders and freelancers who voluntarily register for VAT must follow MTD requirements.

MTD Compliance Checklist

To remain compliant with HMRC’s Making Tax Digital (MTD) rules, businesses must follow several key steps:

1. Use MTD-Compatible Software

Start by adopting approved accounting software such as Xero, QuickBooks, Sage, or FreeAgent. These platforms are HMRC-recognized and allow direct submission of VAT returns through secure API connections.

2. Keep Digital VAT Records

All VAT-related transactions—sales, purchases, and adjustments—must be recorded digitally. This ensures accuracy and simplifies reporting during audits.

3. Maintain Digital Links

If you use spreadsheets, they must be connected to your accounting software via digital links. Manual copy-paste or retyping figures is not permitted under MTD rules.

4. Submit Quarterly VAT Returns

Businesses are required to file VAT returns every quarter using MTD-compatible software. This replaces manual submissions through HMRC’s old portal.

5. Store Records for Six Years

HMRC mandates that VAT records be retained digitally for at least six years. This helps maintain compliance and provides a clear audit trail.

How MTD Differs from Traditional VAT Filing

Making Tax Digital (MTD) has introduced significant changes compared to the old VAT filing system. Here’s a breakdown of the key differences:

1. From Paper Records to Digital Records

Previously, businesses could maintain paper-based VAT records. Under MTD, all VAT records must be stored digitally to ensure accuracy and compliance.

2. Manual Submissions vs API-Enabled Filing

Before MTD, VAT returns were submitted manually through HMRC’s online portal. Now, businesses must use MTD-compatible software that connects directly to HMRC via secure APIs.

3. Copy-Paste vs Digital Links

Old processes often relied on copy-pasting figures between spreadsheets and systems. MTD requires digital links, meaning data must flow automatically between systems without manual intervention.

4. Limited Scope vs Universal Compliance

Traditional VAT rules applied mainly to larger businesses. MTD now applies to all VAT-registered businesses, including those registered voluntarily, making compliance universal.

Practical Tips for Smooth Compliance

Choose the Right Software Early

Don’t wait until the deadline, select an HMRC-approved solution now.

Train Your Team

Ensure staff understand how to use the software and maintain digital records.

Automate Where Possible

Use automation for invoice entry and VAT calculations to reduce errors.

Schedule VAT Deadlines

Set reminders or use accounting software alerts to avoid penalties

Review Digital Links Regularly

Check that spreadsheets and systems remain properly connected to avoid compliance gaps

Deadlines & Penalties

  • VAT returns are due one month and seven days after the end of each VAT period.
  • Points-based penalty system:
    • Each missed return = 1 point.
    • 4 points = £200 fine for quarterly filers.
  • Late payments attract interest from the next day.

Benefits of MTD

  • Fewer errors in VAT returns thanks to automation.
  • Faster filing and easier audits.
  • Better financial visibility for your business.
  • Improved compliance reduces risk of HMRC investigations.

Upcoming Changes in 2025

HMRC plans to expand MTD requirements further:

  • Real-time reporting for most taxpayers.
  • Stricter enforcement of digital links—manual adjustments will be phased out.
  • Bridging software phase-out, fully integrated systems required.

Businesses should prepare now to avoid last-minute compliance issues.

Conclusion:

Making Tax Digital for VAT isn’t just a compliance requirement—it’s a smarter way to manage your finances. By adopting MTD-compatible software and following HMRC rules, you’ll avoid penalties and stay ahead of tax changes.

At Horizon&Co, we provide expert VAT and MTD compliance services to keep your business HMRC-ready. Contact us today to simplify your VAT process and ensure full compliance.

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