MTD,
explained.
Plain English.
Making Tax Digital is HMRC's programme to bring tax filing into the same century as the rest of business software. MTD VAT has been live for several years; MTD for Income Tax Self Assessment is rolling in. This page is a working reference — what is required, what counts as a "digital link", what the new penalty regime looks like, and what to do about it.
What MTD is, and where MTD VAT fits.
Making Tax Digital (MTD) is HMRC's multi-year programme to digitise the way UK businesses keep records and file tax. The first phase, MTD for VAT, became mandatory on 1 April 2019 for VAT-registered businesses with taxable turnover above the £85,000 VAT threshold. From 1 April 2022 it was extended to all VAT-registered businesses regardless of turnover.
The next phase, MTD for Income Tax Self Assessment (MTD ITSA), is being rolled in for self-employed individuals and landlords — currently scheduled to start in April 2026 for those with combined gross income above £50,000, and April 2027 for those above £30,000. MTD for Corporation Tax has been postponed indefinitely.
For UK construction firms, MTD VAT is the live concern today. MTD ITSA matters for sole-trader subcontractors and is worth getting ahead of.
What MTD actually requires.
MTD does not change what you have to report — the VAT return is the same nine boxes it has always been, filed at the same quarterly cadence. It changes how:
- Digital records. Specified information about every supply made and received must be kept in a digital format — sales and purchases ledgers, with the date, value, VAT amount and rate. Paper records on their own are no longer compliant.
- Digital links. Where data moves between systems on the way to the VAT return, the transfer must be a "digital link" — an automated transfer with no manual rekeying. Copy-and-paste is not a digital link. Re-typing a figure into a spreadsheet is not a digital link.
- API submission. The return must be submitted to HMRC through a compatible software's API. The old VAT online portal is closed for MTD-mandated businesses. Submission by paper, by phone or by typing into the HMRC website is no longer an option.
The first two — digital records and digital links — are where most firms come unstuck. The submission is the easy part; the audit-trail discipline behind it is the hard part.
What counts as a digital link.
A digital link is "an electronic or digital transfer of data from one program, product or application to another", in HMRC's wording. The key word is automated — the data moves without a human re-typing or copy-pasting it. Acceptable digital links include:
- API calls between systems (preferred).
- Transferring data using formulae or links between cells, sheets or workbooks.
- Using import / export functions to move CSV or XML files.
- Linked databases or shared cloud-hosted ledgers.
- Email or USB transfer of an export file (if the file itself is unmodified).
What is not a digital link:
- Re-typing figures from a printout into a spreadsheet.
- Copy-paste between cells, even within the same workbook.
- Reading a number off one screen and entering it into another.
- Anything that gives a human the chance to "tidy up" the data on the way through.
The reason matters: a digital link is auditable end-to- end. Each step has a record. A copy-paste is invisible to anyone reviewing the chain after the fact, and invisible work is exactly what MTD was designed to eliminate.
Bridging software.
If your accounts live in a non-MTD system — old desktop software, a self-built spreadsheet, an industry tool that has not added an MTD API — you can use bridging software to make the final submission. Bridging takes a CSV or Excel export and pushes it through the HMRC API on your behalf. The export itself must come over a digital link, which is where firms still using spreadsheet-only setups have to be careful.
Bridging is allowed in perpetuity. There is no deadline after which you have to switch to fully integrated software. But each manual touchpoint between source ledger and bridge is a place an HMRC inspection will look.
Domestic Reverse Charge inside MTD.
Construction firms have an extra layer of MTD complexity in the form of the Domestic Reverse Charge (DRC) for VAT on construction services, in force since 1 March 2021. Under DRC, supplies between VAT-registered businesses inside the CIS chain are reverse-charged — the customer accounts for the VAT, the supplier does not charge it.
Inside an MTD VAT return, DRC supplies appear in specific boxes:
- Customer — Box 1 (output VAT due) and Box 4 (input VAT recoverable, subject to the normal rules). Net value in Box 7 (purchases). The supply is treated as both made and received for VAT purposes.
- Supplier — Box 6 (net sales) only. No entry in Box 1 because no VAT was charged.
For a comprehensive walk-through of DRC and its interaction with the CIS deduction process, see the CIS pillar guide.
Partial exemption, capital goods, fuel scale charges.
Standard MTD complications for construction firms:
- Partial exemption applies where you make some supplies that are exempt from VAT (most often residential conversion or housing-association work). Partial exemption calculations are still done in the usual way; the result is what feeds the MTD return.
- Capital goods scheme applies to land and buildings worth £250,000 or more (and computers above £50,000). Adjustments cycle over up to 10 years and feed Box 1 / Box 4.
- Fuel scale charges apply where the firm provides fuel for personal use of company vehicles. The charge is fixed by HMRC and updated annually.
None of these change because of MTD; they all still apply, and they all still flow into the same nine boxes. MTD just requires the calculations to be defensible from digital records, end to end.
The points-based penalty regime.
For VAT returns due on or after 1 January 2023, HMRC moved to a points-based penalty system. Each late return adds one point to your record. Once you reach the threshold for your filing frequency (4 points for quarterly filers, 5 for monthly, 2 for annual), a £200 penalty is charged for that and every subsequent late return until you serve a "period of compliance" — 12 months of on-time filing for quarterly filers — and your points reset to zero.
Late payment of VAT carries separate penalties, calculated on a sliding scale based on how late the payment is — with no penalty for the first 15 days (assuming a time-to-pay arrangement is agreed), 2% at 16 days, another 2% at 31 days, and 4% per annum daily thereafter. Interest also applies, charged at the Bank of England base rate plus 2.5%.
The shift from old percentage-based penalties to the points system means the cost of a single late return is lower in cash terms than before, but persistently late filing is now significantly more expensive — both in penalties and in the management time spent dealing with them.
Common MTD failures.
- Manual rekeying. Numbers transcribed from one spreadsheet into another, breaking the digital link chain.
- Spreadsheet templates with broken formulas. An Excel-based MTD setup that someone has manually overtyped a cell in, breaking the audit trail.
- Late notifications of agent changes. Switching accountants without telling HMRC, leaving submissions stuck behind authentication errors.
- Wrong VAT scheme used inside MTD-compatible software. Cash accounting vs accrual, flat-rate vs standard, partial exemption misapplied.
- DRC applied incorrectly. Charging VAT on a supply that should have been reverse-charged, or vice-versa. Both sides have to reverse and re-issue.
The quarterly
VAT return is one click.
MTD VAT is a recognised vendor route built into the platform. Digital records, digital links, API submission and DRC all handled. The quarterly close is a review, not a project.
HMRC-recognised submission
Direct API integration with HMRC. One-click submit. Receipt and submission ID stored against the return for permanent audit trail.
ChannelAPIDigital links end-to-end
Sale recorded on the AfP, posted to the ledger, attributed to the VAT return — no human in the chain, no rekeying, no copy-paste anywhere.
ComplianceMTD ✓DRC auto-applied
Per-subbie reverse-charge flag. Invoices generated under DRC or normal VAT depending on the contract. Wording matches HMRC requirements word for word.
Since01 Mar 2021Partial exemption
Standard or special method. Calculations stored, defensible. Annual adjustment ring-fenced in its own workspace and fed back into the return.
Modesstd · specialQuarterly close, reviewed
Return assembled by the morning of the close date. FD reviews on screen, signs off, submits. Adjustments tracked. Notes against each box for the auditor.
Time~30 min7-year archive
Returns, supporting records, submission receipts and adjustments kept for seven years — a year beyond HMRC's six-year requirement. Exportable any time.
Window7 years