Making Tax Digital for VAT: a 10-step checklist for small businesses

Making Tax Digital for VAT has applied to all VAT-registered businesses since April 2022. If you are registered, whether you turned over £100,000 or £10 million, you are in. The rules are not difficult, but they are specific, and small mistakes in how you handle your data can leave you non-compliant even when your numbers are right. This checklist walks through what you need, step by step.

Step 1: Confirm you are in scope

If you are VAT registered, you are in. There are limited exemptions for people who cannot use digital tools for reasons such as disability or religious belief, or who are subject to insolvency procedures. You must apply to HMRC for an exemption, you cannot simply assume one. If you are close to the registration threshold, read our post on when to register for VAT.

Step 2: Choose compatible software

You need software that keeps your records digitally and can submit your return to HMRC through its API. Xero, QuickBooks, FreeAgent and Sage all offer compatible products, and there are specialist bridging tools. Check HMRC's published list of compatible software. Our guide to choosing accounting software compares the main options.

Step 3: Sign up for Making Tax Digital

Before your first digital return, you sign up for MTD for VAT through the government website, using your Government Gateway credentials. HMRC then authorises your software. If you use an agent, they also need authorisation. Allow a few days, and do not sign up too close to a filing deadline. If you pay by direct debit, set it up in advance.

Step 4: Keep the required digital records

The digital records you must keep include, for each transaction, the date, the value excluding VAT, the rate of VAT and the type of supply. You must also keep your business name, address and VAT number, VAT accounting schemes used, and adjustments made. These records must be kept in digital form, either within accounting software or in a spreadsheet linked to bridging software.

Step 5: Set up digital links

This is the rule people misunderstand. Digital links mean that data passes between your records and your final return by electronic transfer, not by retyping figures by hand. If you keep sales in one system and costs in another, the totals must flow into your VAT software automatically or by file import. Re-keying figures anywhere in the chain breaks the link. Copying and pasting data between programs, by contrast, still counts as a digital link, and so does importing a file. If you are unsure, use a single software package so the chain is simple.

Step 6: Code VAT correctly all year

Software cannot fix wrong VAT codes. Set the correct code on each customer and supplier, and review unusual items. Common problems include zero-rated sales coded as standard, exempt items treated as zero-rated, and capital purchases coded wrongly. Our VAT-ready bookkeeping reviews codes every month so returns are right first time.

Step 7: Reconcile before you file

Before every return, reconcile your bank and check:

• All sales and purchase invoices for the period are entered
• Credit notes and adjustments are recorded
• The VAT account reconciles to the return
• Unusual or large items are explained
• Any flat rate or cash accounting scheme is applied correctly

A ten-minute review catches most errors. Read our monthly bookkeeping checklist.

Step 8: Know your deadlines

For standard quarterly returns, the return and payment are due one calendar month and seven days after the end of the VAT period. For example, a quarter ending 31 December has a deadline of 7 February. If you pay by direct debit, HMRC collects payment a few working days after the deadline. If you use the Annual Accounting Scheme, the timings differ. Put every deadline in your calendar and aim to file a week early.

Step 9: Submit the return

Your software calculates the nine boxes: VAT due on sales, VAT due on acquisitions, total VAT due, VAT reclaimed, net VAT, and the totals of sales, purchases and supplies. Review the figures, approve the return and submit it. HMRC acknowledges receipt immediately. Keep a copy, and make sure the payment reaches HMRC on time.

Step 10: Keep and review

After filing, keep the records and the submitted return for 6 years. Review the quarter: were there errors, missing receipts or unusual numbers? Use what you learn to improve the next one. Many businesses find a short monthly VAT review far easier than a quarterly scramble.

Penalties and interest

HMRC applies a points-based system for late submissions: each late return earns a penalty point, and when you reach a threshold you receive a financial penalty, with further penalties for continued lateness. Late payments incur interest from the due date and penalties that increase the longer the payment is outstanding. Rates and thresholds can change, so check the current GOV.UK guidance. Filing early and paying on time avoids all of it.

Common mistakes

• Retyping figures between systems. It breaks the digital link.
• Entering figures directly on the HMRC website. This is no longer possible for most businesses.
• Signing up too late. Allow time for authorisation.
• Wrong VAT codes. Software cannot catch these.
• Missing the direct debit setup. Payment fails.
• Forgetting adjustments. Bad debt relief, errors and credit notes must be reflected.
• Leaving everything to the last day. Problems become emergencies.

Special situations

Flat Rate Scheme. You still keep digital records and file through software. See the VAT Flat Rate Scheme explained.

Cash accounting. Software must be configured to account on payment dates.

Overseas sales and imports. Postponed VAT accounting and EU sales have additional boxes and records. See bookkeeping for e-commerce sellers.

Construction. The domestic reverse charge changes how VAT appears on invoices and returns. See CIS bookkeeping.

How we can help

We keep your books VAT-clean through the quarter, prepare your return figures for sign-off and make sure your digital links are intact. A typical VAT-registered business adds about half an hour a month to its bookkeeping, at £15 an hour. Use our instant quote to see the cost, and read our full VAT guide.

Preparing for your first digital return

If you are about to file your first return under Making Tax Digital, give yourself a week of margin. Sign up and authorise your software at least a few days before the deadline. Set up the direct debit in advance so the payment is collected on time. Run the VAT report a week early and review it for obvious errors, such as a zero-rated item coded as standard. If anything looks odd, you will have time to fix it. Then submit a few days ahead of the deadline and keep the confirmation. A calm first filing makes every later one routine.

Frequently asked questions

Do all VAT-registered businesses have to follow MTD for VAT?

Yes, with very limited exemptions that you must apply for.

Can I use a spreadsheet?

Only with compatible bridging software that submits data to HMRC and maintains digital links. Typing figures into the HMRC website is not allowed.

When is my VAT return due?

One calendar month and seven days after the end of your VAT period, such as 7 February for a quarter ending 31 December.

What counts as a digital link?

An electronic transfer or exchange of data between software, products or apps without manual retyping.

Can you submit my VAT return for me?

We prepare your figures and make sure the records are right. Submission can be done by you in your software or arranged through our parent firm Accotax.