Making Tax Digital Phase 2: Enhanced VAT Requirements for 2025

Making Tax Digital (MTD) Phase 2 introduces enhanced requirements for VAT-registered businesses, mandating digital links throughout the accounting process and API integration with HMRC systems. Finance directors must understand these requirements and ensure their systems and processes are compliant to avoid penalties and maintain efficient tax administration.

Digital Links Requirement

Phase 2 of MTD requires digital links throughout the entire VAT return preparation process, eliminating the ability to manually transfer data between systems. All transactions must flow digitally from source documents through to the VAT return submission, with no manual intervention permitted except in specific limited circumstances.

Finance directors must review their accounting processes and systems to ensure digital links are established and maintained. This may require system upgrades, process redesign, or integration of additional software solutions to create seamless digital workflows.

API Integration Requirements

VAT returns must be submitted directly to HMRC through API integration, requiring compatible accounting software or bridging software. Finance directors should verify that their current systems support API submission and consider whether upgrades or additional software are necessary.

Compliance Considerations

Non-compliance with MTD Phase 2 requirements can result in penalties, making it essential for finance directors to ensure their organisations are fully prepared. Early planning and system testing are critical to successful implementation and ongoing compliance.