Businesses who are mandated into Making Tax Digital for VAT must use 'functional compatible software'.

This is a freeview 'At a glance' guide.

Subscribers see Making Tax Digital for VAT 

At a glance

Key requirements

1. To keep records in electronic form (digitally).

2. To use functional compatible software.

3. To submit VAT returns via your software to HMRC.

If you are computer literate, and not excluded from MVD on grounds such as being digitally 'inept', then you must now use software that can directly file your VAT returns with HMRC. 

Under MVD you will not be allowed to use HMRC's current online VAT service and key your return figures in directly. 

In terms of software issues:

For the initial phase of MVD your software is required to submit the 9 figures that make up the VAT return to HMRC.

  • You need to review your bookkeeping systems to ensure that you are recording your data digitally.
  • If you use different types of software or apps, you need to ensure that you have a digital link connecting the packages.
  • If you use a spreadsheet to calculate your VAT returns, you need to use bridging software to transmit your spreadsheet VAT entries to HMRC.
  • If you use a spreadsheet to record raw data you will need a digital link from that to your accounting software.

What are digital links?

  • HMRC does not want you to re-key any entries, or 'cut and paste' data 
  • A link is digital if it links software electronically in such a way that it remains possible to drill down into the data, for example, importing a CSV file allows you to drill down into the original file and review its data, whereas taking a spreadsheet total and adding just that total to another software package does not allow you to drill down into the original spreadsheet because it is not digitally linked.
  • There is a 'soft landing' on digital links between bookkeeping, accounting or spreadsheet software: linking is not required for the first year. Businesses with particularly complex or legacy IT systems may apply for an extension (of up to another year) for digital linking but HMRC will only grant this in exceptional circumstances. The soft landing was extended by a year due to the Coronavirus pandemic and came to an end on 31 March 2021.

Practical concerns and examples

The needs of the business and the potential issues for MVD depend on the type of business and the tools it is using to record its VAT transactions, see Making VAT Digital (subscriber guide)

Useful guides on this topic

Making VAT Digital (subscriber guide)
What is Making Tax Digital for VAT? What is VAT 'functional compatible' software? What do you need to do to report your VAT? Are there penalties for making mistakes?  

VAT Notice 700/22: Making Tax Digital for VAT
HMRC has published VAT Notice, 700/22: Making Tax Digital for VAT, which sets out who needs to follow the MTD rules, what records need to be kept, and what agents need to do.

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