Since April 2022, all VAT-registered businesses in the UK must follow Making Tax Digital (MTD) for VAT rules. That means keeping digital records and submitting VAT returns through HMRC-recognised software — no more typing numbers into HMRC's website manually.
If you're still using spreadsheets or manual processes, you're breaking the law — and making your bookkeeping harder than it needs to be. The right MTD for VAT software solves both problems at once.
FinOwl is MTD for VAT compliant. Connect your bank, and your records are automatically kept digitally and categorised. When your VAT return is due, the figures are ready to submit.
Making Tax Digital (MTD) is HMRC's programme to modernise how UK businesses handle tax. For VAT, it has two core requirements:
MTD for VAT has applied to all VAT-registered businesses since April 2022 — including sole traders, partnerships, and limited companies. There are no exemptions based on business size. If you're VAT-registered, MTD applies to you.
The penalty regime is real. Late filing and late payment attract fines and interest. And HMRC is increasingly sophisticated at identifying non-compliant businesses through data-matching across VAT, Income Tax Self Assessment, and other records.
HMRC sets specific technical requirements. Software isn't just a \"submit\" button — it must handle the full record-keeping lifecycle:
| MTD Requirement | FinOwl | Spreadsheets |
|---|---|---|
| Digital record keeping (no paper) | ✓ | ✗ |
| Direct API submission to HMRC | ✓ | ✗ |
| Automatic transaction categorisation | ✓ | ✗ |
| VAT rate calculation per transaction | ✓ | ✗ |
| VAT return preparation (auto-populated) | ✓ | ✗ |
| Bank feed integration | ✓ | ✗ |
Using spreadsheets — even well-formatted ones — doesn't make you MTD-compliant. HMRC explicitly requires software that maintains digital records and submits via API. You can't bridge your way to compliance with a spreadsheet upload tool.
Every VAT-registered business. There are no size thresholds for MTD for VAT — unlike MTD for Income Tax (ITSA), which has income-based thresholds. If your business is registered for VAT, MTD rules apply.
This includes:
If your VAT taxable turnover is below the registration threshold (£85,000), you don't have to register for VAT — but if you choose to register voluntarily, MTD rules still apply once registered.
MTD compliance is the baseline. What makes software worth using is whether it actually reduces your admin workload. Here's what to look for:
Transactions appear in your records as they happen. No manual entry.
Income and expenses sorted into the right VAT categories automatically.
Correct rates applied: 20% standard, 5% reduced, 0% and exempt — no guesswork.
Your VAT return figures are ready when the quarter closes, not cobbled together last-minute.
Digital records kept for at least 6 years, as required by HMRC.
Not all software is equal. Watch out for these common traps:
Bridging tools let you keep records in spreadsheets and then upload them to HMRC. HMRC tolerated bridging during the transition period, but it's no longer acceptable. True MTD compliance requires your software to maintain records digitally, not just \"bridge\" a spreadsheet to HMRC at submission time.
Full accounting platforms (Xero, FreeAgent, Sage) are powerful — but they require significant setup, training, and ongoing maintenance. For sole traders with straightforward VAT needs, a purpose-built MTD tool can deliver compliance without the complexity overhead.
HMRC's MTD system requires software to communicate via a specific API. If a tool doesn't have this, it's not MTD-compliant regardless of what it calls itself.
MTD for Income Tax is coming. From 6 April 2026, self-employed businesses and landlords with income over £50,000 (2024/25 tax year) must use MTD-compliant software for Income Tax Self Assessment too. If you're approaching this threshold, choosing software that handles both VAT and Income Tax from the start saves a future migration.
FinOwl connects to your bank and automatically keeps your records in HMRC-compliant digital format. VAT figures ready when you need them.
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