Making Tax Digital for VAT is in its fifth year of full mandation, and most practices filed it away long ago as a solved problem. The software is in place, the returns go in, nobody has been inspected. In 2026 that comfort deserves a second look, for two reasons. The penalty regime that replaced the default surcharge has real teeth, and it now catches nil and repayment returns the old system ignored. And MTD for Income Tax began in April, which means the quarterly rhythm VAT taught us is being multiplied across a much larger slice of the client list.
This article sets out what the rules actually require today, where files genuinely fail, and a checklist a practice can work through client by client. The dates and figures here were checked against current guidance in August 2026, but rules move, so confirm the current position before relying on any of them for a specific client.
Who is in scope today
Since April 2022, MTD for VAT applies to every VAT-registered business, regardless of turnover. That includes businesses that registered voluntarily below the registration threshold, which has been £90,000 since April 2024 and remains unchanged. Sole traders, companies, partnerships, charities and trusts are all in.
Exemptions exist but are narrow: businesses in an insolvency procedure, and those for whom it is not reasonably practical to use software because of age, disability, location or religious belief. An exemption is applied for and granted, not assumed. If a client is still filing outside MTD on the strength of "we asked about an exemption once", check that a decision was actually issued.
What digital record keeping actually requires
The core obligation is that specific records live in functional compatible software: the business name, address, VAT registration number and any VAT accounting schemes used, plus transaction-level data. For each supply made, the time of supply, the net value and the rate of VAT charged. For each supply received, the time of supply, the value and the amount of input tax being claimed.
There are sensible relaxations. Retailers on a retail scheme may record gross daily takings rather than every till transaction. Flat rate scheme users do not need digital records of supplies received, except capital expenditure goods costing £2,000 or more including VAT. Spreadsheets still count as software, provided they are joined to the filing product by digital links rather than by a person retyping numbers.
VAT records, digital or otherwise, must be preserved for six years.
Digital links: where files fail
The digital-links rule is the part of MTD most often quietly broken. Once transaction data exists in digital form, every subsequent transfer between software products must happen digitally, without manual intervention, all the way to the nine boxes that reach HMRC.
HMRC's Notice 700/22 is explicit that cut and paste, or copy and paste, does not constitute a digital link. The soft-landing period that tolerated it ended in April 2021. What does qualify: linked cells within or between spreadsheets, CSV or XML import and export, direct transfers between products, emailing a spreadsheet to an agent who imports it, even physically handing over data on a memory stick that is then imported. In practice, the journeys that fail look like this:
- A bookkeeper exports a report, then retypes the period totals into a separate filing spreadsheet.
- Figures are copied from one workbook into another because the linked-cell version broke months ago and nobody repaired it.
- A manual "correction" is typed over a calculated cell in the middle of the chain, with no record of why.
One nuance is worth knowing before you panic about every adjustment. Calculations made outside the digital records, such as partial exemption workings or a fuel scale charge, do not themselves need to be digitally linked; you may calculate the adjustment elsewhere and record the total. The rule bites on transfers of transaction data, not on the arithmetic of adjustments. The difference between an allowed adjustment and a broken link is whether you can show what the figure is and where it came from.
The points-based penalty regime
For periods starting on or after 1 January 2023, the default surcharge was replaced by separate regimes for late submission and late payment.
Late submission
Each late return earns one penalty point. Reach the threshold and HMRC charges £200, then a further £200 for every subsequent late return while the client remains at the threshold. The thresholds depend on filing frequency:
- Annual returns: 2 points
- Quarterly returns: 4 points
- Monthly returns: 5 points
Two features catch people out. First, nil returns and repayment returns earn points too; under the old surcharge they were harmless to file late, and that instinct persists in clients. Second, the reset rules are asymmetric. Below the threshold, an individual point simply expires after 24 months. At the threshold, points only reset once both conditions are met: a full period of on-time filing (12 months for quarterly filers, 6 months for monthly, 24 months for annual), and every return due in the previous 24 months actually submitted.
Late payment
Late payment is penalised separately, and the rates rose in April 2025. Nothing is charged if payment, or an agreed Time to Pay arrangement, happens within 15 days of the due date. Miss that window and the first penalty is 3% of the VAT still outstanding at day 15, a further 3% of whatever remains is added at day 30, and from day 31 a second penalty accrues daily at 10% a year on the outstanding balance. Late payment interest runs from day one on top, set at Bank of England base rate plus 4 percentage points since April 2025, so check the current rate when advising a client.
To put figures on a specific case, use our VAT penalty calculator, which shows the rule behind every line it produces.
MTD for Income Tax: the capacity problem has arrived
MTD for Income Tax stopped being a future problem in April 2026. Sole traders and landlords with qualifying income above £50,000, meaning gross self-employment plus gross property income tested on the 2024/25 return, are now mandated. The first quarterly update fell due on 7 August 2026. The threshold drops to £30,000 in April 2027 and, as announced, to £20,000 in April 2028. HMRC has said this first cohort will not receive penalty points for late quarterly updates during the first year, which is a grace on penalties, not on the obligation, and it does not extend to the year-end return.
For practices, the arithmetic matters more than the rules. Each mandated client brings four quarterly updates a year plus a final declaration, and the update deadlines of 7 August, 7 November, 7 February and 7 May land on exactly the same day of the month as the standard VAT deadline for the preceding quarter end. On 7 August 2026 a practice could have been filing June-quarter VAT returns and first-ever income tax updates on the same day. Count your clients above £30,000 now, because that is your April 2027 workload, and the time to change process is a quiet month, not a deadline week.
The checklist
Work through this per client, once, then keep it current. It is dull, and it is the whole game.
1. A per-client software register
One row per VAT-registered client: which product keeps the digital records, which product files, which VAT scheme applies, who owns the subscription, who has admin access, and when it was last reviewed. Half the value is discovering the client who is "on software" but actually keeps records in a workbook a former bookkeeper built. Price changes are a natural prompt for the annual review; with Xero's September 2026 price rise arriving, it is worth confirming what each client pays for at the same time as confirming what they file from.
2. A digital-links map
For each client, sketch the journey from source records to the nine boxes. Every arrow is either a digital link, a documented adjustment, or a problem. Mark each point where a person retypes, copies or "tidies up" a figure, then either eliminate it or convert it into a recorded adjustment with a stated reason. If the journey involves a spreadsheet, open it and check the links still resolve; a reference error someone papered over with a typed number is a broken digital journey in inspection terms.
3. An exception process for corrections
Errors happen, and MTD does not forbid them; it demands they be handled traceably. Agree in writing how your practice corrects. Errors under £10,000, or under £50,000 where below 1% of the box 6 figure, may be adjusted on the next return provided they were not deliberate; larger ones must be reported to HMRC, which since September 2025 means its online error-correction service or a letter, the VAT652 form having been withdrawn. Record who found the error, when, the amount and the reasoning. The habit you are building is the one review-first systems enforce by design: corrections as visible events, never silent edits over history.
4. Evidence retention that would survive an enquiry
Six years is the retention period, but retention alone is not the standard that matters; retrieval is. For any figure in any filed return, could you produce the source document and the chain from document to box within a day? Store documents against transactions rather than in a yearly folder of unsorted PDFs, and keep the record of who changed what alongside the books themselves. This is the discipline that separates a defensible file from a liability, covered in more depth in what makes a bookkeeping file audit-quality.
5. A penalty-points ledger
Track each client's current points, their threshold and the dates individual points expire. A quarterly client sitting at three points needs a different conversation before a deadline than a client at zero, and the reset conditions after a £200 charge are strict enough that you want to know exactly which returns must land on time, and for how long.
Where AIONA fits
AIONA is a bookkeeping platform for UK practices built around the assumptions this checklist makes: every journal links back to the source document that produced it, posted entries are immutable with corrections made by reversal, and overrides need a written reason recorded in a tamper-evident audit log. Its VAT engine builds the nine-box MTD return deterministically from posted journals and is tested against the HMRC sandbox; our application for HMRC software recognition is still in progress, so live submission is not yet available, and we will not pretend otherwise. If a review-first approach to the digital journey sounds like how you already want to work, there is more at aionatech.com.