If you run your own business and you're registered for VAT, Making Tax Digital — known almost universally as MTD — is not something you can afford to ignore in 2026. HMRC's digital transformation of the UK tax system has been rolling out for several years now, and while the early phases caused considerable confusion, the rules today are clear and the enforcement is real. Whether you're a self-employed plumber in Leeds, a freelance graphic designer in Bristol, or a sole-trader florist in Edinburgh, this guide cuts through the jargon and tells you precisely what you need to do, and why it matters.
What Is Making Tax Digital for VAT, and Who Does It Apply To?
Making Tax Digital for VAT (MTD for VAT) is HMRC's requirement that VAT-registered businesses keep digital VAT records and submit their VAT returns using HMRC-compatible software. It is not optional. Since April 2022, the rules have applied to all VAT-registered businesses — including those that registered voluntarily and trade below the current £90,000 VAT registration threshold.
In practice, this means that if you have a VAT registration number, you must be using MTD-compatible software right now. If you are still logging into the old HMRC VAT portal and manually keying in figures, you are already non-compliant. HMRC has been issuing penalty points to businesses caught doing exactly that, so the time to act is immediately — not at your next filing deadline.
It is also worth noting what MTD for VAT is not. It is separate from MTD for Income Tax Self Assessment (ITSA), which is being phased in for sole traders and landlords from April 2026 onwards. The two programmes share the same digital philosophy, but they have different timelines, different thresholds, and different technical requirements. This guide focuses solely on VAT.
The Digital Records Requirement: What You Actually Need to Keep
One of the most misunderstood aspects of MTD is the digital records obligation. It is not enough to simply file your VAT return through a piece of software. HMRC requires that the underlying VAT records themselves are held and maintained digitally, with digital links connecting each piece of data all the way through to your final submission.
At a minimum, your digital records must include:
- Your business name, address, and VAT registration number
- The VAT accounting scheme you use (standard, flat rate, cash accounting, etc.)
- The VAT on each supply made and received, along with the time of supply
- The net value of each supply
- The rate of VAT charged
The digital link requirement is where many sole traders inadvertently fall foul of the rules. If you export data from your accounting software into a spreadsheet, manually adjust it, and then import it into a different tool to submit — that manual step breaks the digital link and renders you non-compliant. HMRC's own guidance is explicit on this point. Every transfer of data within your record-keeping system must happen automatically, without human re-keying.
The cleanest solution is to use a single platform that handles everything from recording transactions to submitting the return, eliminating the risk of broken links entirely.
How the New Penalty Points System Works
Since January 2023, HMRC replaced the old default surcharge regime with a points-based penalty system for late VAT submissions. Understanding it is important because it catches people out who assume a first offence carries no consequence.
Here is how it works in plain terms. Every time you miss a VAT filing deadline, you receive one penalty point. Once your points total reaches a threshold — which varies depending on how frequently you file — you receive a £200 financial penalty. You then receive a further £200 penalty for every subsequent late submission while you remain at or above the threshold.
For quarterly filers (the most common arrangement for sole traders), the penalty threshold is four points. That means four missed deadlines results in a £200 charge, with more to follow. Points expire after two years of on-time submissions, but the system is designed to penalise persistent lateness rather than the occasional one-off. There are also separate penalties for late payment of VAT itself, calculated as a percentage of the outstanding amount.
The practical lesson here is simple: consistent, on-time filing matters far more under the new regime than it did before.
Choosing the Right MTD-Compatible Software
HMRC maintains a list of MTD-compatible software products on its website, and the options range from full accounting suites to lightweight bridging tools that sit on top of a spreadsheet. For most sole traders, the choice comes down to how much of your financial admin you want to centralise.
Bridging software can work, but it adds a step to your process and requires you to maintain a separate, correctly formatted spreadsheet at all times. One formatting error or a manually keyed figure and you are back to a broken digital link. For that reason, most accountants now recommend that their sole-trader clients use a dedicated accounting platform that handles VAT natively.
BizHub365, for example, is built specifically for UK sole traders and small businesses and connects directly to HMRC via the official MTD API — meaning your VAT returns are submitted straight from within the platform, with no bridging software required. It also handles the digital record-keeping obligation automatically as you raise invoices and log expenses throughout the quarter, so there is nothing to reconstruct at filing time. Features like AI-powered receipt scanning mean that even paper receipts can be captured and stored digitally in seconds.
Whatever software you choose, verify that it appears on HMRC's recognised list before committing, and check that it supports your specific VAT accounting scheme — not all tools support the flat rate scheme or cash accounting out of the box.
Practical Steps to Get MTD-Ready Today
If you are not yet fully compliant, here is a straightforward action plan:
- Check your VAT registration status. Log into your HMRC business tax account and confirm whether your VAT account has been migrated to MTD. If it has not, you can sign up for MTD for VAT directly through HMRC's portal.
- Audit your current record-keeping process. Are you using software, a spreadsheet, or paper? Identify any manual steps in your process — these are your compliance risks.
- Choose and set up MTD-compatible software. Select a platform that suits your business size and accounting needs, and import or enter your opening balances and business details.
- Establish a habit of real-time record-keeping. The biggest cause of VAT filing stress is leaving everything to the last week of the quarter. Record income and expenses as they happen — even a few minutes per day is enough to stay on top of it.
- Set calendar reminders for your VAT deadlines. Your VAT return and payment are typically due one calendar month and seven days after the end of each VAT period. Missing this date is what starts the penalty points clock ticking.
Conclusion: Compliance Is Straightforward — If You Use the Right Tools
Making Tax Digital for VAT is genuinely not as complicated as it can first appear. The core requirement is simple: keep your VAT records digitally, maintain digital links throughout your data chain, and file through HMRC-approved software. The businesses that struggle are almost always those trying to cobble together a semi-manual process that half-meets the rules — and those are exactly the businesses HMRC is looking at.
For sole traders especially, the most efficient approach is to use one platform that handles your invoicing, expenses, and VAT submission in a single, joined-up workflow. That way, compliance is not a quarterly scramble — it is simply what happens as part of running your business day to day. Get the foundations right now, and you will also be in a much stronger position when MTD for Income Tax Self Assessment begins to roll out from April 2026.