Every VAT-registered business must keep its VAT records and file its VAT returns using software that is compatible with Making Tax Digital (MTD), unless HMRC has granted an exemption. HMRC recognises two kinds of product: record-keeping software, which holds your records and files the return, and bridging software, which connects non-compatible tools such as spreadsheets to HMRC. HMRC's software finder lists several hundred recognised products. Most are paid for, but some have free versions, and HMRC cannot recommend one product over another.
What "compatible" means
VAT Notice 700/22 sets out what the software, or the set of programs you use together, must be able to do:
- Keep digital records. Record and preserve the records the regulations require, such as the tax point, value and VAT rate of each sale and the input VAT on each purchase;
- Submit through the API. Send VAT return information to HMRC through its Application Programming Interface (API) platform, using the data held in those records;
- Receive from HMRC. Receive information back from HMRC through the same platform, such as your VAT obligations and filing confirmation.
One product can do all three, or several products can do them together. If they work together, they must be joined by digital links.
The three routes
| Route | How it works | Suits |
|---|---|---|
| Record-keeping (accounting) software | Invoices, bills and bank transactions are recorded in the package, which builds and files the return | Most businesses, especially those starting fresh or wanting bank feeds |
| Bridging software | Takes figures from a spreadsheet or non-MTD accounting system and submits them to HMRC | Businesses with established spreadsheets or legacy ERP systems |
| API-enabled spreadsheet | A spreadsheet with the MTD APIs built in, used to keep records and file directly | Low-volume businesses comfortable with spreadsheets |
Bridging is a legitimate long-term route, not a stopgap. The risk is in the links. HMRC accepts linked spreadsheet cells, CSV or XML import and export, and emailing a file for import as digital links. It does not accept copy and paste or retyping figures from one program into another. If another system already holds your digital VAT records, a bridging product that files correctly from a spreadsheet filled in by retyping that system's figures is still non-compliant.
How to choose: a checklist
Every product on HMRC's list can file a basic return. The differences show up in the details of your business. Before you commit, check:
- Your VAT scheme. Flat Rate, cash accounting, annual accounting, retail schemes and margin schemes each have their own records. Retail schemes need a digital record of daily gross takings. If the software cannot apply your scheme, you will be posting manual adjustments every period;
- Mixed-rate supplies. Some software cannot record a rate other than standard, reduced, zero or exempt. HMRC allows a workaround, but it adds manual work;
- Partial exemption and other adjustments. Calculations can be done outside the software, but each type of adjustment must be entered as its own line;
- Imports. Whether it handles postponed import VAT from your monthly statement;
- Volume and connections. Bank feeds, e-commerce or till integrations, and whether those connections export data digitally rather than as printouts;
- Agent access. Whether your accountant can work in the same file or receive a digital export;
- Accessibility and language. HMRC's finder lets you filter for Welsh-language products and for accessibility features;
- Exit route. You must keep VAT records for the required period, so check that you can export your data if you change product.
Setting it up
- Pick the product using HMRC's software finder and the checklist above;
- Load your business details. Your business name, principal place of business, VAT number and any VAT schemes must be held digitally;
- Grant authority. The software will ask you to authorise it to access your HMRC data. The authority lasts 18 months and can be checked or withdrawn at any time, so put a reminder in the diary to renew it;
- Record before you file. The law requires each period's records to be in the electronic account no later than the earlier of the filing deadline and the date you file;
- File and keep the receipt. The software shows the return, asks you to declare it is correct and returns HMRC's confirmation.
Illustration only. A wholesaler keeps sales in an older ERP system that cannot connect to HMRC. Each quarter it exports a CSV of sales and purchase totals into a VAT spreadsheet, then files through bridging software. That journey is compliant because every step after the ERP is a digital transfer. If a member of staff instead read the ERP totals off a printed report and typed them into the spreadsheet, the link would break and the return would not meet MTD rules, even though the figures were right.
When software is not used
- Exempt businesses. If HMRC has confirmed an exemption in writing, its letter tells you whether to file on paper or through your VAT online account. A business in an insolvency procedure files on paper, unless it has a Company or Individual Voluntary Arrangement, in which case it can use either route;
- Final return after deregistration. MTD software cannot be used once you are deregistered. The final return goes through your VAT online account;
- Penalty for the wrong route. A business that should use compatible software but does not can be charged a penalty of £100 to £400, depending on turnover.
HMRC's sources are Find software that's compatible with Making Tax Digital for VAT, VAT Notice 700/22 and regulation 32A of the VAT Regulations 1995. For the rules behind the software, see our guide to what MTD for VAT is.
If you are choosing or migrating systems, our cloud accounting team can set up and connect the software, and our Making Tax Digital service checks that your digital links hold up.