The UK tax system is undergoing a fundamental change. With the introduction of Making Tax Digital, the government aims to digitise the entire tax reporting process, starting with VAT. This initiative is intended to make tax administration more effective, efficient, and easier for taxpayers to get their tax right.
The first rollout in this scheme is Making Tax Digital for VAT, which will affect how businesses maintain records and submit VAT returns. It will take effect in April 2019, giving affected businesses a year to make necessary preparations. The objective is to eliminate human error, streamline the tax process, and ensure that businesses meet their tax obligations with fewer mistakes and delays.
For businesses that fall within the scope of this phase, adapting to the new digital requirements is not optional. Those that delay the switch may face operational challenges and potential penalties.
A closer look at Making Tax Digital
Making Tax Digital is not merely an administrative update but a significant transformation in the UK’s tax infrastructure. At its core, the initiative mandates the use of digital tools for keeping financial records and submitting tax information to HMRC. It represents a shift from paper-based and manually entered online submissions to a more automated, software-driven approach.
The government intends to assign every taxpayer a unique digital identifier. This will allow both individuals and businesses to manage their tax affairs through a centralised online account. By standardising and digitising the process, HMRC aims to increase transparency, reduce costs associated with tax collection, and improve overall compliance.
Who will be affected first
The initial stage of Making Tax Digital focuses on VAT. Specifically, it applies to businesses that are registered for VAT and have a taxable turnover above the VAT threshold, currently set at £85,000 per year. These businesses will be required to keep digital records and file their VAT returns through HMRC’s new digital platform starting in April 2019.
This group covers a wide range of organisations, including sole traders, partnerships, and limited companies. Businesses that are voluntarily registered for VAT but fall below the threshold are not yet mandated to follow the new rules, though they may choose to participate early.
It’s important for eligible businesses to take action well in advance of the deadline. Transitioning to digital systems is not something that can be done overnight. It involves choosing the right software, training staff, and adapting business processes to comply with the new requirements.
What changes under the new system
Although Making Tax Digital brings about procedural changes, the core structure of VAT reporting remains the same. Businesses will still submit VAT returns on a quarterly basis, and the data submitted will not change substantially. What will change, however, is the method of recordkeeping and submission.
Under the new rules, businesses must keep digital records of their VAT transactions. This includes details of sales, purchases, VAT charged on sales, and VAT paid on purchases. These records must be maintained using compatible software that can communicate directly with HMRC.
The use of spreadsheets alone will no longer be sufficient unless they are integrated with bridging software that connects them to HMRC’s systems. Over time, even the use of bridging software may be phased out in favour of fully integrated digital solutions.
Why digital tax submission is being introduced
There are several compelling reasons behind the push for Making Tax Digital. One of the most important is the reduction of avoidable errors. HMRC estimates that errors in tax returns cost the Exchequer billions each year. By mandating the use of digital records and compatible software, the government aims to minimise these mistakes.
Another benefit is increased efficiency. Submitting tax returns through a digital platform is faster and more reliable than traditional methods. It provides real-time confirmation of receipt and reduces the likelihood of missing submission deadlines.
For businesses, the move to digital recordkeeping offers operational advantages. It provides better visibility of their financial position throughout the year, not just at the time of filing. This can lead to improved cash flow management and more informed decision-making.
The long-term vision of Making Tax Digital
While the current focus is on VAT, Making Tax Digital is intended to expand over time to include other types of tax. The next major phase will target income tax, particularly for the self-employed and landlords. Eventually, corporation tax will also fall under the scope of this initiative.
This means that even businesses and individuals not currently affected by the VAT changes should start considering their digital readiness. Those who embrace digital recordkeeping early will be better positioned to adapt when future phases are introduced.
In preparation for these broader changes, it makes sense for all taxpayers—especially the self-employed, freelancers, and landlords—to begin exploring compatible software and transitioning away from manual systems.
Practical steps to prepare for MTD for VAT
The transition to Making Tax Digital for VAT is best approached in phases. One of the first and most important steps is reviewing how your business currently maintains its financial records. If you are using paper records or basic spreadsheets, now is the time to upgrade to a digital solution.
The next step is selecting accounting software that is compatible with HMRC’s MTD requirements. The software must be able to maintain digital records and submit VAT returns directly to HMRC. This is referred to as having application programming interface (API) capability. A wide range of software options are available, with different features, user interfaces, and pricing structures.
Once you have selected suitable software, you’ll need to ensure that it is set up correctly. This may involve migrating historical data, setting up VAT schemes, and configuring digital links if you use more than one software product. Staff should be trained on how to use the new system, particularly those responsible for managing accounts and filing returns.
Choosing the right software for compliance
There is no one-size-fits-all solution when it comes to accounting software. Businesses vary in size, complexity, and industry, so it’s important to choose a product that suits your needs. When evaluating software, consider the following:
- Whether it is officially recognised by HMRC as MTD-compatible
- How easy it is to use, especially for non-accountants
- Whether it integrates with your existing systems and workflows
- What support and training resources are available
- How flexible and scalable it is for future needs
Free trials and demos can help you explore different platforms before committing. Some providers offer cloud-based solutions, which are ideal for businesses that need access from multiple locations or devices.
Integrating software with your existing systems
For many businesses, switching to new software is only part of the challenge. The real work lies in integrating that software with existing tools and processes. Whether it’s payroll, inventory management, or e-commerce platforms, your accounting system should be able to communicate seamlessly with other parts of your operation.
Digital links between systems are a critical requirement under Making Tax Digital. HMRC has made it clear that copying and pasting data manually between systems will not be accepted after the initial soft landing period. Businesses must ensure that data flows automatically between different software packages without manual intervention. If your business currently relies on multiple systems that do not integrate, it may be worth consolidating them or consulting a professional to establish digital links.
The benefits of early adoption
With a year left before the mandatory rollout, businesses have a valuable window of opportunity to test and refine their systems. Early adopters will be able to identify potential issues, adjust their processes, and become familiar with the new submission requirements well before the deadline.
Starting early also allows time for training, both for staff and external accountants. Familiarity with the software and confidence in the process will reduce stress during filing periods and minimise the risk of penalties.
Early compliance can also lead to better financial oversight. By maintaining up-to-date digital records throughout the year, businesses can run reports, analyse trends, and make more accurate forecasts.
Potential challenges and how to address them
Adopting new technology always comes with challenges. Some businesses may find it difficult to move away from familiar systems. Others may be concerned about costs, particularly small businesses with tight budgets.
Technical challenges can include data migration, learning curves, and software compatibility. It’s important to anticipate these issues and address them proactively. Many software providers offer customer support, onboarding services, and knowledge bases to help users through the transition.
For businesses with unique requirements, such as complex VAT schemes or industry-specific workflows, professional advice may be necessary. Accountants and bookkeepers who understand the MTD framework can help ensure compliance while optimising your processes.
What happens if you don’t comply
Once MTD for VAT becomes mandatory, businesses that do not comply with the rules may face penalties. HMRC has introduced a new points-based system for late submission and late payment. While there will be a grace period for some aspects, such as digital links, failure to use MTD-compliant software or submit returns through the correct channels can result in fines.
Even if you currently file your VAT returns accurately and on time, using the wrong method will be considered non-compliant. That’s why it’s essential to move to digital systems now, rather than waiting until the last moment.
The importance of early preparation
With Making Tax Digital for VAT fast approaching, businesses must begin laying the groundwork to ensure they meet all requirements before the April 2019 deadline. While the transition to digital tax management may seem straightforward, implementing new systems, training staff, and changing longstanding processes can take considerable time and effort. Acting early allows businesses to adapt gradually, solve issues as they arise, and ensure compliance without last-minute complications.
Early preparation also helps create a smoother workflow throughout the financial year. Businesses that embrace digital tax systems ahead of time will be better positioned to manage their financial data accurately, avoid compliance penalties, and benefit from the efficiency gains digital systems provide.
Reviewing your current VAT processes
The first step in preparing for MTD for VAT is to conduct a thorough review of how your business currently manages VAT records. Many businesses still rely on paper-based methods or basic spreadsheets to track transactions and calculate VAT returns. While this may have worked in the past, these approaches do not meet the digital recordkeeping standards required under the new rules.
Review the tools and methods used to track sales, purchases, input VAT, and output VAT. Identify where data is manually entered, duplicated, or stored in isolated systems. Highlight any areas where errors frequently occur or where delays in data entry create inconsistencies in reporting.
This internal assessment will serve as the foundation for making necessary upgrades to your recordkeeping process. It will also inform your choice of software by revealing gaps and inefficiencies that need to be addressed.
Selecting the right accounting software
Choosing the right software is one of the most crucial decisions in the MTD preparation process. The software must meet specific requirements to be recognised as compatible with HMRC’s Making Tax Digital framework. It should allow businesses to keep digital records, calculate VAT, and submit VAT returns directly to HMRC through a secure interface.
When selecting software, businesses should evaluate their size, complexity, and existing systems. A small sole trader may benefit from a simple platform with essential functions, while larger companies with multiple departments or branches may need advanced features such as multi-user access, automated invoicing, or integration with other business tools.
Other important factors to consider include:
- Cloud versus desktop-based systems
- Scalability for future growth
- Security and data protection features
- Customer support and user training availability
- Cost of subscriptions and updates
Many providers offer trial versions or demonstrations. Take advantage of these options to test user interfaces, explore functionality, and assess whether the software suits your operational needs.
Migrating your data to a digital format
Once a suitable software solution has been chosen, the next step is migrating your existing VAT records to the digital platform. This can be a complex process, especially if your business has several years’ worth of historical data stored in various formats.
Begin by exporting or compiling key financial records, including VAT invoices, purchase receipts, VAT calculations, and VAT return submissions. These documents should then be reviewed for completeness and accuracy before importing them into your new software system.
Depending on the platform, data migration may involve manual input, file imports, or direct integration with spreadsheets. Some software includes automated tools that streamline this process, while others require more extensive user involvement.
It’s important to check how historical VAT data is treated by the new software. Some systems only store data from the date of onboarding, while others allow retrospective entry for a complete financial picture. Where possible, importing past VAT returns can provide helpful context for tracking performance and forecasting obligations.
Setting up digital links and automation
Under the Making Tax Digital rules, businesses must ensure that their software and data systems are digitally linked. This means that once data is entered into one part of the system, it must flow automatically to all other relevant areas without the need for manual copying or rekeying.
For example, sales recorded through your point-of-sale system should automatically feed into your accounting software and be factored into your VAT calculation. Likewise, purchase data entered into an expense-tracking tool should integrate seamlessly with your VAT return.
This level of automation reduces the chance of errors and speeds up the preparation of quarterly VAT submissions. It also ensures your business remains compliant with HMRC’s requirement for digital links between systems.
If your business currently uses disconnected systems or spreadsheets, now is the time to establish integrations or move to a more unified platform. Bridging software may serve as a temporary solution, but it is not a long-term substitute for fully integrated systems.
Training your team for digital VAT compliance
Implementing new software and workflows requires not only technical changes but also a shift in mindset across the organisation. Staff members responsible for finance, bookkeeping, and administration must be trained to understand the new requirements, navigate the chosen software, and identify potential issues before they become problems.
Training should cover the basics of Making Tax Digital, the specific requirements for VAT compliance, and hands-on instruction for using the new tools. It’s also essential to train team members on best practices for recordkeeping, data entry, and software maintenance.
Assign clear roles and responsibilities to staff members involved in the VAT process. Make sure they know how to generate reports, reconcile transactions, and submit returns on time. Encouraging regular internal audits can help identify inconsistencies or gaps in knowledge early on.
Providing ongoing access to training materials, support forums, or helplines can ease the transition and ensure that your team remains confident and competent as digital reporting becomes a routine part of business operations.
Establishing a workflow for quarterly submissions
VAT-registered businesses must submit their VAT returns every quarter, and this frequency will continue under the Making Tax Digital initiative. However, the new process places more emphasis on continuous, real-time recordkeeping rather than preparing everything at the end of the quarter.
Establish a clear workflow that supports timely and accurate VAT submissions. This might include weekly reconciliation of accounts, monthly internal reporting, and periodic reviews of your software’s VAT reports to identify anomalies or missing entries.
By treating VAT recordkeeping as an ongoing process rather than a quarterly event, businesses can reduce pressure at the end of each period and ensure a higher level of accuracy. This approach also improves financial planning, as real-time data allows for more responsive decision-making.
Use calendar reminders or task management tools to keep track of important submission deadlines. Late filing penalties under the new system may be triggered more easily, so a consistent workflow will help your business stay compliant.
Dealing with errors and corrections
Despite best efforts, mistakes in VAT reporting can still occur. Under the digital system, errors should be corrected using the tools provided by your software. Most accounting platforms allow for adjustments to be made in future returns, but it’s important to understand the threshold for reporting errors separately to HMRC.
Review your software’s guidance on error correction, and train staff to flag discrepancies as soon as they are identified. Keeping a clear audit trail of all adjustments is essential for transparency and in case of future inquiries from HMRC.
If you identify an error after submission, the process for making corrections may vary depending on the nature and value of the mistake. Ensure your records reflect the correction, and maintain communication with HMRC if a separate disclosure is required.
Develop a routine for reviewing returns before submission, including a checklist of common error points such as VAT rates, duplicate entries, and missing documentation. Preventing errors at the source will save time and resources in the long run.
Staying compliant with updates and changes
The digital tax landscape is still evolving. While the April 2019 deadline applies to the current phase of MTD for VAT, future phases will extend the digital requirements to other taxes. Moreover, changes in legislation, thresholds, or reporting requirements may occur as HMRC fine-tunes the programme.
To stay compliant, businesses must remain informed about updates to the MTD framework. Subscribe to HMRC’s updates, participate in webinars, and consult regularly with accountants or advisers. Your software provider may also release updates or new features to accommodate changes, so keeping your system up to date is crucial.
Monitor the performance of your software and internal processes regularly. Periodic evaluations allow you to identify what’s working, where inefficiencies exist, and how you can continue to improve your digital tax workflow.
Compliance is not a one-time event but an ongoing responsibility. As digital tax reporting becomes the norm, businesses must adapt continuously to remain ahead of requirements and maintain accurate financial records.
Exploring additional digital tools for VAT management
Beyond basic accounting software, there are additional tools that can enhance your VAT management process. Optical character recognition (OCR) apps can scan and digitise receipts automatically, reducing manual data entry. Integrated payment solutions can track invoices and reconcile payments in real time. Reporting dashboards provide visual summaries of your VAT position, helping you plan ahead.
Consider adopting tools that offer automation, insights, and analytics. These features not only improve compliance but also contribute to broader business performance. A well-integrated ecosystem of tools enables greater control over operations and frees up time to focus on strategic planning.
Ensure that any additional tools you choose are compatible with your accounting system and adhere to HMRC’s standards for digital recordkeeping. Simplicity and integration should be top priorities when expanding your digital toolkit.
The growing digitalisation of tax
As the UK government continues to implement its Making Tax Digital initiative, businesses must begin thinking beyond initial compliance. What started as a requirement for VAT-registered businesses will soon extend to income tax and corporation tax. The shift to digital taxation is not a one-off adjustment but a long-term transformation of how taxes are administered, tracked, and submitted.
This ongoing transition means businesses should treat digital compliance not as a short-term task, but as an evolving part of their core operations. Keeping pace with technological advancements, regulatory updates, and best practices will ensure your business stays compliant, competitive, and resilient.
Understanding how MTD fits into the broader digital economy is essential. From cloud-based accounting platforms to real-time financial data access, businesses that integrate these tools effectively will benefit from greater efficiency and strategic clarity over the long haul.
Expanding MTD beyond VAT
While the current focus of MTD is VAT for businesses above the £85,000 turnover threshold, HMRC plans to expand the scope of the programme in the coming years. The next phase will apply to self-employed individuals and landlords with income over £10,000 who will need to comply with digital income tax reporting requirements.
This expansion, known as MTD for Income Tax Self Assessment (MTD for ITSA), will require quarterly updates to HMRC through compatible software, along with an end-of-year finalisation process. Eventually, corporation tax will also be brought into the MTD framework, affecting limited companies with more complex reporting obligations.
By understanding the roadmap of MTD, businesses and individuals can start preparing for broader compliance. Even if your business is not currently mandated to comply with MTD for ITSA or corporation tax, making proactive changes now will make the transition much smoother when it becomes necessary.
Aligning your financial operations with digital workflows
Long-term MTD readiness requires full alignment between your financial operations and digital workflows. This involves more than software adoption—it includes rethinking how data is captured, processed, and reported within your business.
Start by mapping out all key financial activities, from invoicing and purchase orders to payroll and expense management. Evaluate where manual processes still exist and identify opportunities for automation. Integrating digital workflows at every stage of your financial cycle ensures consistent and accurate recordkeeping.
For example, a digitally integrated sales process will automatically capture invoice data, apply the correct VAT rates, and update your accounting system in real time. This reduces duplication, minimises errors, and prepares your business for efficient VAT return submission. Similar benefits can be realised in procurement, expense tracking, and bank reconciliation. Digital workflows also support better internal controls, improve audit readiness, and reduce the risk of compliance breaches.
Leveraging data analytics for financial decision-making
With MTD encouraging real-time data capture, businesses now have access to more accurate and up-to-date financial information than ever before. Rather than relying solely on quarterly or annual reports, businesses can use live data to inform day-to-day decisions.
Accounting software equipped with analytics tools allows businesses to track revenue trends, monitor expenses, and project tax liabilities. Dashboards and visual reports provide clear insight into VAT positions, making it easier to forecast cash flow needs and plan for future tax payments.
Data-driven decision-making goes beyond compliance. It enables businesses to identify growth opportunities, optimise operations, and manage financial risk more effectively. As tax data becomes increasingly integrated with wider business systems, financial insights will become even more actionable. Training your team to use these analytical tools and interpret their outputs will enhance strategic planning and provide a clearer picture of the company’s financial health.
Developing internal policies for digital compliance
To ensure long-term compliance with Making Tax Digital, businesses should create internal policies and procedures that reflect digital requirements. This includes defining who is responsible for maintaining records, submitting returns, and managing software updates.
Establishing clear roles and responsibilities ensures accountability and prevents gaps in compliance. It also helps your team understand the importance of accurate data entry, consistent recordkeeping, and timely submissions.
Documented policies should cover:
- Record retention practices
- VAT reconciliation procedures
- Data backup protocols
- Error correction and resubmission guidelines
- Software maintenance schedules
Having written procedures in place also supports business continuity. In the event of staff turnover, illness, or technical disruptions, others can quickly understand and carry out essential financial processes. Regularly review and update these policies to reflect changes in MTD regulations or business operations. Compliance is not a one-time setup but a dynamic process that evolves over time.
Managing compliance across multiple entities or locations
For businesses operating across multiple entities, departments, or locations, digital tax compliance becomes more complex. Each business unit must maintain accurate records, use compatible systems, and adhere to central compliance policies.
Centralised accounting platforms with multi-user access and consolidated reporting features can help streamline compliance across different units. Cloud-based solutions are particularly effective, as they allow remote access, real-time collaboration, and secure data sharing between teams.
Assign local users the responsibility for data entry and financial tracking, while maintaining oversight at the central level for reporting and submission. Implementing a robust system of checks and balances will ensure consistency and accuracy across the organisation.
For larger businesses, internal audits can serve as an additional layer of protection. Periodically reviewing VAT calculations, data flows, and software integrations will uncover discrepancies before they affect your returns or attract HMRC scrutiny.
Staying informed on regulatory updates
As MTD continues to evolve, it is essential to stay informed about changes to the rules, timelines, and technical requirements. Subscribing to HMRC updates, industry newsletters, and professional forums can help you keep track of developments that may affect your compliance strategy.
Software providers also play a key role in helping users stay compliant. Reputable vendors regularly update their platforms to reflect changes in legislation, enhance features, and improve user experience. Ensure your subscription includes access to these updates, and take advantage of training sessions, support materials, and user webinars when available.
Working closely with a qualified accountant or tax adviser can also help your business stay ahead of changes. Professionals familiar with the MTD framework can interpret new guidance, recommend software adjustments, and advise on complex compliance scenarios. Remaining proactive rather than reactive will reduce your exposure to non-compliance risks and keep your business prepared for the next phase of digital tax reporting.
Planning for scalability and future growth
Compliance solutions implemented today should be scalable to support your business’s future growth. As turnover increases, new revenue streams emerge, or additional reporting obligations arise, your systems and processes must be able to adapt.
Look for software and workflows that can accommodate greater transaction volumes, multiple users, and new reporting categories. This might include managing VAT across different regions, tracking international sales, or generating specialised financial reports.
Building a scalable digital infrastructure also involves planning for data storage, integration with other platforms, and automated workflows. The more your system can grow with your business, the less likely you are to face costly overhauls or system migrations down the line.
Scalability is not limited to software. It also applies to staff training, support services, and internal procedures. Invest in ongoing professional development for your team to ensure they remain capable of managing digital tax responsibilities as your business evolves.
Handling common compliance risks
Digital tax compliance brings with it a new set of potential risks. While the technology reduces the likelihood of human error, it also introduces new challenges such as software failures, data breaches, and incorrect system configurations.
To mitigate these risks, establish controls such as user access restrictions, regular system audits, and automated error checks. Backup data routinely, and store copies in secure, encrypted environments. Ensure that your software provider meets modern security standards and is capable of recovering data in case of outages or cyberattacks.
Human error still plays a role in digital systems. Incorrect VAT rates, misclassified expenses, and missing transactions can all lead to inaccurate returns. Implement review processes, such as cross-checking reports before submission and reconciling accounts monthly, to detect issues early.
Consider running mock VAT submissions to test your system and staff readiness. Simulated reporting exercises help identify process flaws and ensure everyone is familiar with the digital workflow before real submissions are due.
Creating a feedback loop for continuous improvement
Effective digital tax compliance should include mechanisms for feedback and improvement. Collect input from staff using the system, review error logs or submission delays, and identify areas where the process can be refined.
This feedback loop can be formalised through regular performance reviews, software evaluations, or user experience surveys. Use this information to make iterative improvements to your digital setup, whether by streamlining tasks, updating training materials, or changing how data is entered.
Engaging with your software provider can also help resolve usability issues or feature gaps. Many vendors actively develop new features based on user feedback, and participating in these conversations ensures your needs are represented. A continuous improvement mindset helps your business not only stay compliant but also increase efficiency, accuracy, and adaptability in the face of future tax changes.
Collaborating with external professionals
While many businesses are capable of managing MTD compliance internally, there are benefits to working with external professionals such as accountants, bookkeepers, and tax advisers. These experts bring industry knowledge, technical skills, and an understanding of HMRC expectations.
Accountants can support initial software setup, review your financial workflows, and offer strategic advice for digital compliance. They can also act as your agent for submitting VAT returns, ensuring that all filings are accurate and timely.
Outsourcing certain tasks may also make sense for businesses with limited internal resources or complex VAT requirements. External professionals can bridge gaps in technical knowledge and help resolve challenges quickly, reducing the risk of compliance failures. Establishing a strong relationship with a trusted adviser is a valuable investment as the tax landscape becomes more digitised and more complex.
Conclusion
Making Tax Digital for VAT is more than just a policy change, it marks a fundamental shift in the way businesses interact with HMRC and manage their tax responsibilities. As the April 2019 deadline approached, VAT-registered businesses with turnover above the threshold were faced with a clear mandate: adapt to digital recordkeeping and submission or risk falling behind.
The transition to digital tax may have initially seemed daunting, especially for those accustomed to manual or spreadsheet-based systems. However, as we explored throughout this series, adopting the right digital tools early can lead to substantial long-term benefits. These include greater accuracy in reporting, reduced risk of penalties, faster turnaround for submissions, and better overall financial visibility.
Preparing for MTD for VAT is not simply about compliance, it’s about building a more efficient and resilient business. By understanding the core requirements, choosing compatible accounting software, and integrating digital processes into daily operations, businesses can not only meet HMRC’s obligations but also streamline financial workflows and focus more on growth.
For those who are self-employed, run limited companies, or manage property portfolios, now is also the time to begin future-proofing your systems. With MTD expected to extend to income tax and other areas of compliance, early adoption of digital tools will place you in a stronger position to handle future changes.
Ultimately, MTD is a step toward modernisation that benefits everyone. While it may require some upfront adjustment, those who prepare early will enjoy a smoother, more manageable transition with fewer errors, less stress, and more time to focus on running a successful business.