If you run a small business or operate as a sole trader and you're VAT-registered, Making Tax Digital for VAT — almost always shortened to MTD for VAT — already applies to you. There is no opt-out. Yet a surprising number of sole traders are still unclear on the rules, unsure whether their current software qualifies, or quietly hoping HMRC won't notice. That last approach, to put it plainly, never ends well. This guide explains what MTD for VAT actually requires, what "compatible software" really means, and what practical steps you should take right now to keep your business on the right side of HMRC in 2026.
What Is Making Tax Digital for VAT, and Does It Apply to You?
Making Tax Digital is HMRC's long-running programme to move the UK tax system online and make record-keeping digital by default. The VAT strand of that programme — MTD for VAT — has been mandatory for all VAT-registered businesses since April 2022, regardless of turnover. If your business is VAT-registered in the UK, the rules apply to you. Full stop.
What the rules actually require is straightforward in principle. You must:
- Keep your VAT records digitally — meaning in software, not a spreadsheet you update by hand or a paper ledger.
- Submit your VAT returns to HMRC directly from that software via HMRC's API. Logging into your HMRC online account and typing the figures in manually is no longer permitted.
- Maintain a digital link between every record in your VAT account — from the original transaction right through to the submitted return.
That third point catches many sole traders out. Copying a total from one spreadsheet into another by hand breaks the digital link, even if both documents are on your computer. HMRC is clear: the data must flow digitally, without manual re-keying at any stage.
What Counts as MTD-Compatible Software?
Not every accounting tool qualifies. To be MTD-compatible, software must be able to connect directly to HMRC's systems via an approved API and submit your VAT return from within the platform itself. HMRC publishes a list of recognised compatible products, but the checklist below is a useful starting point when evaluating any tool:
- Direct API submission — the software submits the return to HMRC without you needing bridging software in between.
- Digital record-keeping — all sales, purchases, and VAT calculations are stored digitally within the system.
- Unbroken digital links — transactions flow from source to return without manual re-entry.
- VAT account maintenance — the software maintains the nine boxes of the VAT return automatically from your records.
Spreadsheets like Microsoft Excel or Google Sheets are not MTD-compatible on their own. You can use them as part of a workflow, but you'd need bridging software to connect them to HMRC — an extra cost and an extra layer of complexity that most sole traders would rather avoid. Purpose-built platforms such as BizHub365 include direct MTD for VAT API submission as standard, so there's no bridging software to configure and no manual data transfer between systems. The return goes from your records to HMRC in a few clicks.
Common Mistakes Sole Traders Make with MTD for VAT
Even well-organised sole traders trip up on MTD compliance. Here are the mistakes HMRC sees most frequently — and how to avoid them.
Still submitting via the HMRC portal. Many sole traders log into their Government Gateway account and key figures in manually, just as they always have. This has not been a compliant submission method since April 2022. If you're doing this, you need to switch to compatible software immediately.
Keeping paper receipts without digitising them. You must digitise records at the point of supply — that is, when the transaction happens, not at quarter-end. A good receipt-scanning feature, like the AI-powered one built into BizHub365, captures the data from a photo of a receipt and logs it digitally in seconds. That's the kind of workflow MTD was designed to encourage.
Using bridging software incorrectly. Bridging software can be compliant, but only if the digital link runs all the way from your source records to the bridging tool. If you're still copying totals by hand into the bridging spreadsheet, you've broken the digital link and the submission is not compliant, regardless of how the data reaches HMRC from that point.
Missing the VAT return deadline. Under MTD, the submission deadline is still one calendar month and seven days after the end of your VAT period — the same as before. The difference is that HMRC now knows whether you submitted via the API or not. Late or non-compliant submissions attract surcharges under the penalty points system introduced in January 2023, where accumulating points leads to a £200 fixed penalty per subsequent late return.
How to Get — and Stay — Compliant in 2026
If you're not yet fully compliant, the steps to get there are manageable. Here's a practical action plan:
- Audit your current process. Write down exactly how you record VAT transactions today and how you currently submit your return. Identify any point where data is moved manually.
- Choose MTD-compatible software. If you're not already using a qualifying platform, now is the time to switch. Look for a tool that handles VAT record-keeping, direct API submission, and ideally also covers invoicing, expenses, and payroll — so your records are held in one place from the start.
- Migrate your records. Transfer your current VAT records into the new software. Most platforms allow you to import historical data via CSV, which keeps your records continuous.
- Sign up for MTD for VAT via HMRC. If you haven't already done so, you must register your business for MTD for VAT through your Government Gateway account before submitting via the API for the first time.
- Run a test submission. Before your next VAT quarter ends, familiarise yourself with the submission process in your chosen software. A dummy run — reviewing the nine boxes, checking figures against your invoices — gives you confidence before it counts.
- Set up digital receipt capture. Make digitising expenses a habit rather than a quarterly panic. A mobile app that scans receipts on the go is the simplest way to maintain unbroken digital records throughout the quarter.
What's Coming Next: MTD for Income Tax (ITSA)
It's worth planning ahead. HMRC is rolling out Making Tax Digital for Income Tax Self Assessment — known as MTD for ITSA — in stages. From April 2026, sole traders and landlords with qualifying income above £50,000 must comply. The threshold drops to £30,000 from April 2027, with further expansion expected after that.
MTD for ITSA requires quarterly digital updates to HMRC on your income and expenses, plus an end-of-year finalisation — replacing the traditional Self Assessment tax return as we currently know it. The practical implication is significant: if you're already using MTD-ready software for VAT, you'll be well placed to extend that same workflow to ITSA with minimal disruption. Platforms like BizHub365 are already building towards full ITSA compliance, so businesses that adopt compliant software now won't need to overhaul their systems again in twelve months.
Conclusion: Compliance Is Simpler Than You Think
Making Tax Digital for VAT can sound intimidating, but the underlying requirement is actually quite logical: keep records digitally and submit to HMRC from the same system. The complexity comes from doing things the old way and trying to bolt on compliance afterwards. If you start with software that handles both record-keeping and direct API submission — and you digitise transactions as they happen rather than scrambling at quarter-end — you'll find that MTD largely runs in the background of your normal working routine.
The key actions are clear: audit your current process, switch to genuinely MTD-compatible software, and build good digital habits from day one. Whether you're a plumber in Leeds, a freelance designer in Bristol, or a retailer selling on Etsy and in a market stall, the rules are the same. Getting compliant now also puts you ahead of the MTD for ITSA curve — and that's one less thing to worry about when the next deadline arrives.