Making Tax Digital for VAT: What Every Accountant Needs to Know in 2026 — and How BrightBooks Keeps Clients Compliant

Making Tax Digital for VAT is no longer new legislation. The first wave of VAT-registered businesses above the £85,000 registration threshold joined the regime in April 2019, and since April 2022 it has applied to every VAT-registered business in the UK — voluntary registrations included. Yet HMRC enquiries and accountancy practice monitoring visits continue to surface the same compliance gaps: businesses that are technically within MTD but maintaining records in ways that do not meet the digital link requirement, or making adjustments to VAT return figures outside their digital records.

Understanding the full scope of the MTD VAT obligations, and the specific requirements that catch practices out, is still essential knowledge for any accountant managing VAT-registered clients.

What MTD for VAT Requires

MTD for VAT imposes three distinct obligations on every VAT-registered business.

Keep digital records. Businesses must maintain certain VAT records in a functional compatible software system — not in paper or non-digital form. The records that must be kept digitally include: the business name, address and VAT registration number; the VAT accounting scheme in use; details of VAT supply (the time and value of supplies made and received); the VAT on each supply; and the total output and input tax figures used to compile the VAT return.

Maintain a digital link. From the digital records through to the final submitted VAT return, the data must flow via a digital link at every step. A digital link means any electronic transfer or exchange of data — including automated data transfer, cut and paste, or the use of a formula that imports data from another cell within the same spreadsheet. What is not permitted is manually copying a figure from one system or document into another: for example, typing a total from a bookkeeping system into a separate VAT calculation spreadsheet breaks the digital link.

Submit via MTD-compatible software. The VAT return must be submitted to HMRC using software that is listed as MTD-compatible. HMRC does not accept returns filed manually through the old Government Gateway route for businesses within MTD.

Where Compliance Gaps Most Commonly Arise

Despite the clarity of the rules, several common failure points appear regularly in HMRC correspondence and practice monitoring:

Adjustments made outside the digital record. A business that calculates its VAT return within their software correctly, but then adjusts the output tax figure in a separate spreadsheet before submitting, has broken the digital link. The adjustment must be made within the digital records system and flow through digitally to the return.

Spreadsheet bridging arrangements that lack proper digital links. Many smaller clients use spreadsheets to maintain their VAT records and then use a separate piece of bridging software to submit. This is permissible — but only if the link between the spreadsheet and the bridging software is a digital one (typically a formula or automated import), not a manual retype. Practices that set up these arrangements for clients need to verify the link is genuinely digital.

Voluntary VAT registrations that were overlooked at the April 2022 mandation. Many accountants correctly enrolled their mandatory registrants in 2019 but missed voluntarily registered clients when the mandate extended in 2022. HMRC’s compliance programme is progressively working through businesses that are registered but not filing through MTD-compatible software.

Partial exemption and capital goods scheme calculations. Businesses that apply partial exemption or the capital goods scheme need to make adjustments to their input tax recovery. These adjustments must also be maintained digitally and flow into the return via a digital link. A manual partial exemption calculation applied outside the records system is non-compliant.

The Penalty Regime for Non-Compliance

HMRC introduced a new VAT penalty regime from 1 January 2023. Under the points-based system, late submissions attract a penalty point, and a financial penalty is charged when the threshold of accumulated points is reached (four points for quarterly filers). Late payment penalties operate on a separate basis, with a 2% charge on unpaid VAT after 15 days and escalating charges thereafter.

For MTD-specific failures — failing to use MTD-compatible software or failing to maintain digital records — HMRC can issue a penalty of up to £400 per return. In practice, HMRC has initially focused on encouraging compliance rather than immediate penalties, but the compliance programme is maturing and deliberate non-compliance is increasingly attracting penalty notices.

How BrightBooks Supports the Full MTD VAT Workflow

BrightBooks is Bright’s cloud bookkeeping platform for SME clients managed by accounting practices. It is built to meet the full MTD VAT specification.

Digital records from transaction entry. All transactions entered in BrightBooks — sales invoices, purchase invoices, bank transactions reconciled via the bank feed — are stored in digital form within the system. The VAT information associated with each transaction (rate, amount, supply category) is recorded at entry point and flows forward to the VAT return without any manual transfer.

Bank feeds to maintain real-time reconciliation. BrightBooks supports bank feeds that automatically import transactions from the client’s bank account, reducing the risk of gaps in the records and supporting the timeliness of the VAT return data.

VAT return compilation within the software. The VAT return in BrightBooks is compiled directly from the transaction data. Adjustments — for bad debt relief, partial exemption, or corrections within the de minimis threshold — can be made within BrightBooks as part of the return preparation, maintaining the digital link throughout.

Direct MTD submission to HMRC. BrightBooks submits the completed VAT return directly to HMRC via the MTD API. There is no bridging step, no export of figures, and no manual re-entry — the return data flows from the bookkeeping records through to the HMRC submission without any break in the digital link.

Accountant review before submission. For practices reviewing client VAT returns before submission, BrightBooks supports a review workflow where the accountant can view and verify the return within the software before the submission is confirmed. This provides the oversight most practices want without requiring a separate system.

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.