MTD for VAT in 2026: The Compliance Errors HMRC Is Finding — and How to Fix Them

Making Tax Digital for VAT has been mandatory for virtually all VAT-registered businesses since April 2022. Four years in, most businesses are filing returns through compatible software — but compliance with the full MTD VAT rules goes beyond simply using approved software to submit. HMRC’s compliance activity in 2026 is revealing that a significant proportion of businesses are technically non-compliant despite filing returns on time, because the digital link requirement — which governs how data moves between records and the return — is not being met.

The timing matters. With MTD for Income Tax now live for the first cohort of mandated businesses, HMRC is beginning to cross-reference the quarterly and annual data submitted under MTD ITSA against the VAT data held for the same businesses. Inconsistencies between self-assessed income and VAT turnover are one of the patterns HMRC is known to flag for further review. Practices that have not audited their clients’ MTD VAT digital link chain are carrying compliance risk they may not be aware of.

What Digital Links Actually Require

The digital links requirement is the aspect of MTD VAT that generates the most compliance failures. A digital link means that the transfer of data from one piece of software or file to another must be done digitally — not by re-keying figures from one system into another. Manual data entry between two systems in the process of preparing the VAT return breaks the digital link chain.

The digital link must be maintained from the point of source data capture through every system or file the data passes through until it reaches the VAT return submission. This means the chain covers not just the final submission to HMRC, but every step in between: from the accounting system to any consolidation spreadsheet to the return preparation tool to the bridging software.

Common examples of broken digital links in practice include: copying figures from an accounting system into a spreadsheet by typing them in rather than importing or linking them; emailing invoice data to a bookkeeper who re-enters the figures into a different system; manually transcribing totals from a cloud accounting platform into a separate VAT return template; and using copy-and-paste within a spreadsheet in a way that is not recognised as a digital link by HMRC’s interpretation.

HMRC has clarified that cut-and-paste functions within a single spreadsheet can constitute a digital link where the paste creates a formula-based link, but that typing values into a cell that could have been populated by a formula does not. The distinction sounds technical; in practice, it requires that clients and their bookkeepers understand exactly how data moves through every step of their process.

What HMRC Is Finding — and How It Is Finding It

HMRC’s compliance activity on MTD VAT in 2026 is using data analytics to identify patterns rather than relying primarily on manual enquiry selection. The patterns being flagged include: VAT returns filed using bridging software where the underlying records suggest manual data transfer in the chain; turnover figures on VAT returns that are inconsistent with income on self-assessment or ITSA submissions for the same period; and significant quarter-to-quarter fluctuations without a corresponding explanation in other data.

For practices managing both the VAT compliance and the income tax compliance for the same clients, ensuring consistency between the VAT return figures and the income and expenses reported on the tax return is not just a compliance best practice — it is a data integrity requirement. HMRC’s cross-referencing capability means that an inconsistency between a £250,000 VAT turnover figure and a £180,000 self-employed income figure for the same quarter will generate a flag, even if both figures are individually correct (for example, because some turnover relates to exempt supplies not included in taxable income).

The Most Common MTD VAT Errors to Check in Your Client Base

1. Copy-typing rather than linking. Ask clients how their bookkeeper or accountant transfers figures from the accounting system to the VAT return. If the answer involves typing any numbers by hand, a digital link is likely broken.

2. Spreadsheet-based VAT calculation with manual inputs. Many clients — particularly those who were initially exempt from MTD and joined in 2022 — are using spreadsheets to calculate their VAT return, with figures typed in from bank statements or sales ledgers rather than imported. This is a digital link failure.

3. Out-of-date bridging software. Some bridging software providers have updated their products in response to HMRC guidance, while others have not. Clients using older bridging software may be submitting through a compliant gateway while their underlying data preparation remains non-compliant.

4. Reconciliation adjustments made outside the digital system. Where an accountant identifies a reconciling item and adjusts the VAT return by entering a manual figure rather than correcting the underlying records and recalculating through the digital system, this breaks the digital link.

5. Multi-entity consolidation. For clients with multiple VAT registration entities that consolidate into a group return, the consolidation step must also use digital links. Manually combining figures from subsidiary accounts into a group total is a common failure point.

BrightBooks is Bright’s cloud bookkeeping platform, which maintains the digital link between transaction recording and VAT return generation — with the return figures drawn directly from the underlying records without manual transfer at any point. For clients whose current setup involves manual steps in the chain, migrating to an integrated platform resolves the digital link issue structurally rather than requiring ongoing procedural discipline.

BrightTax supports the VAT return filing workflow for accountants and bureau clients, integrating with BrightBooks and other bookkeeping systems to maintain the compliant digital submission chain.

Auditing Your Client Base

For practices that have not recently reviewed the end-to-end digital link chain for each VAT client, a process audit is worth undertaking — not least because HMRC’s cross-referencing activity means that a compliance issue that was not previously scrutinised is now more likely to be identified.

The audit should cover: how source transaction data is captured; how it moves from the point of capture to the bookkeeping system; how it moves from the bookkeeping system to the VAT calculation; and how the final figures reach the MTD-compatible submission. Any manual data entry step in that chain — however minor — is potentially a digital link failure.

For clients where errors are identified, the appropriate action depends on whether the returns are materially correct (the figures are right, but the process was not compliant) or whether the digital link failures have produced incorrect figures. Where returns are materially correct, HMRC’s approach to process-only compliance failures has generally focused on requiring correction going forward rather than penalising retrospectively — but this cannot be assumed in the context of increased compliance activity.

Frequently Asked Questions

This content may have been developed with the assistance of AI tools. Content is reviewed by a member of the Bright team before publication. Guidance on legislation can be obtained from your industry body.