VAT
Spreadsheets and manual submissions are no longer compliant on their own. Here’s exactly what needs to be in place before your next VAT return is due — and what happens if it isn’t.
Making Tax Digital (MTD) is HMRC’s requirement that VAT-registered businesses keep their records digitally and submit VAT returns using MTD-compatible software — not by typing figures directly into HMRC’s online portal. It’s been mandatory for the large majority of VAT-registered businesses for several years now, and the rules have tightened rather than relaxed since introduction, most notably around how data moves between systems.
The requirement has two distinct parts, and businesses often comply with one while missing the other: digital record-keeping (your underlying transaction records must be kept digitally, not on paper or re-typed from paper), and digital submission through compatible software (the VAT return itself must be filed via software that can communicate with HMRC’s systems directly).
Any business registered for VAT is required to comply with MTD for VAT, regardless of turnover — the exemption for businesses below the VAT threshold was withdrawn some time ago. If you’re VAT-registered, MTD applies to you. Very limited exemptions exist — broadly, for businesses where it isn’t reasonably practical for them to use software due to age, disability, remoteness of location, or religious grounds — and these require an application to HMRC, not a self-assessment that you qualify.
The most commonly missed requirement isn’t the software itself — it’s the concept of a “digital link.” Once a transaction is first entered into a digital record, every subsequent transfer or exchange of that data — between spreadsheets, between systems, into the final return — must happen digitally, without manual re-typing or copy-paste-as-values in between.
In practice, this catches businesses that keep clean digital records but then manually re-key a summary figure from one spreadsheet into another, or from a spreadsheet into their accounting software, before submission. That manual re-entry breaks the digital link and technically falls outside MTD compliance, even though the underlying numbers are accurate and the records are, on the surface, digital.
Compliant software needs to be able to keep the required digital records, and to communicate directly with HMRC’s systems via API to submit the return — not through manual copy-paste into the government gateway. Xero, which Meridian’s UK practice is built on, is MTD-compatible out of the box, meaning VAT returns are pulled directly from your digital ledger and submitted through the software with the underlying digital link preserved end-to-end.
Businesses using a mix of spreadsheets and “bridging software” (lightweight tools that exist specifically to link a spreadsheet to HMRC without full accounting functionality) can also be compliant, provided the digital link into the bridging software is maintained — but this route tends to be more fragile in practice, because it depends on the spreadsheet itself being fed correctly every period.
Before your next VAT return is due, it’s worth confirming:
Every sales and purchase transaction is entered into MTD-compatible software at the point of recording — not batched up and typed in at quarter-end.
Any spreadsheet still in use anywhere in the process is connected via a genuine digital link, not manual re-entry.
Your software is registered with HMRC for MTD and the connection is active — this can lapse and needs periodic re-authorisation.
VAT on business expenses, imports, and reverse-charge transactions is being captured correctly within the digital records, not adjusted manually after the fact.
Someone is actually reviewing the return before submission — MTD compliance is about how the return is produced, not a substitute for reviewing whether the figures are right.
HMRC’s penalty regime for VAT is points-based: late submissions accrue points, and once you cross a threshold (which varies by how frequently you file), a financial penalty applies, alongside daily interest on VAT paid late. Persistent non-compliance with the digital record-keeping and digital-link requirements specifically can also be treated separately from simple late filing, and HMRC has signalled increasing willingness to check the underlying process, not just whether a return arrived on time.
In our experience, the businesses that get caught out aren’t usually ignoring MTD altogether — they’re the ones who set it up correctly once, and then quietly drifted back into a manual workaround for one part of the process without realising the digital link had been broken.
MTD is expanding beyond VAT. MTD for Income Tax Self Assessment will bring similar digital record-keeping and quarterly digital reporting requirements to self-employed individuals and landlords above set income thresholds, on a phased timeline. If you’re a sole trader or landlord who has treated MTD as “a VAT thing that doesn’t apply to me,” it’s worth getting ahead of this before it becomes mandatory for your own filing.
This article is provided for general information only and does not constitute tax, legal, or financial advice specific to your circumstances. Rules referenced are current as of publication and are subject to change. Please talk to a Meridian partner before acting on anything above.
Tell us about your business and we'll show you how Meridian can move it forward — in the US, the UK, or across borders.
Get in touch