Introduction
As the UK government continues to expand the Making Tax Digital (MTD) initiative, VAT-registered businesses must prepare for upcoming changes in 2025 and beyond. With HMRC pushing for a fully digitized tax system, businesses must adopt MTD-compliant software and ensure they meet new submission and record-keeping requirements.
At Pearson McKinsey Limited, we specialize in helping businesses transition to MTD seamlessly. Here’s what you need to know about the upcoming MTD for VAT changes in 2025, 2026, and 2027, and how we can support your business.
What is Making Tax Digital (MTD) for VAT?
MTD for VAT is part of HMRC’s broader plan to modernize the tax system by requiring businesses to:
- Maintain digital records of VAT transactions.
- Submit VAT returns using MTD-compatible software.
- Comply with new penalty rules for late submissions and payments.
Since April 2022, all VAT-registered businesses, regardless of turnover, have been required to follow MTD rules. For more details, visit the official HMRC MTD for VAT page.
How the MTD Process Works
The MTD process is designed to streamline VAT reporting and ensure accuracy through digital tools. Here’s a step-by-step breakdown of how it works:
- Set Up MTD-Compliant Software
- Businesses must choose and implement HMRC-approved accounting software (e.g., Xero, QuickBooks, FreeAgent, or Sage).
- The software must be capable of maintaining digital records and submitting VAT returns directly to HMRC.
- Maintain Digital Records
- All VAT-related transactions must be recorded digitally in the software. This includes:
- Sales invoices and receipts.
- Purchase invoices and expenses.
- VAT calculations and adjustments.
- Manual record-keeping (e.g., spreadsheets) is no longer sufficient unless they can be linked to MTD-compliant software.
- All VAT-related transactions must be recorded digitally in the software. This includes:
- Submit VAT Returns Digitally
- VAT returns must be submitted directly from the MTD-compliant software to HMRC.
- The software will automatically calculate VAT liabilities based on the digital records.
- Manual adjustments or copy-pasting data into HMRC’s portal will no longer be allowed from 2025.
- Comply with Deadlines and Penalty Rules
- Businesses must submit VAT returns by the due date to avoid penalties under the new points-based system.
- Late submissions and payments will result in fines and interest charges. Learn more about the penalty system on GOV.UK.
- Regularly Review and Update Records
- Businesses should regularly review their digital records to ensure accuracy and compliance.
- Any discrepancies or errors must be corrected promptly to avoid penalties.
- Prepare for Future Changes
- As HMRC expands MTD requirements, businesses should stay informed about new rules, such as potential monthly VAT updates or additional reporting requirements.
Upcoming MTD for VAT Changes in 2025
End of the Soft Landing Period
- Until now, businesses were allowed to copy-paste VAT return figures into HMRC’s system manually. From 2025, this will no longer be allowed.
- All VAT data must flow digitally from business records to HMRC without manual intervention.
- Businesses must use MTD-compliant accounting software to submit VAT returns.
Stricter Penalty System for VAT
- A new points-based penalty system will be introduced for late VAT submissions:
- Each late submission earns 1 penalty point.
- Reaching 4 points (for quarterly filers) triggers a £200 fine.
- Additional late submissions result in another £200 fine.
- Late payments will accrue interest charges at HMRC’s prevailing rates.
💡 Solution: Using MTD-compliant software ensures VAT returns are submitted on time, avoiding penalties.
Potential Expansion of MTD Requirements
- HMRC has suggested that more businesses could be required to comply with MTD for VAT in the future, including smaller businesses and landlords.
- Possible introduction of monthly VAT updates instead of quarterly returns.
Changes Expected in 2026 & 2027
While no major changes have been confirmed for 2026 and 2027, HMRC is considering:
- Extending MTD requirements to more businesses.
- Improving integration with digital payment systems for real-time tax reporting.
- Further automation to minimize manual tax processes.
For the latest updates, check the HMRC MTD news page.
What Businesses Need to Do Now
Switch to MTD-Compliant Accounting Software
Businesses must use approved accounting software such as:
- Xero
- QuickBooks
- FreeAgent
- Sage
These platforms integrate directly with HMRC, ensuring full compliance with MTD rules.
Maintain Digital Records of VAT Transactions
Businesses should keep detailed digital records of:
- Sales invoices & receipts
- Purchase invoices & expenses
- VAT calculations & adjustments
Review VAT Compliance Regularly
- Ensure VAT returns are submitted before the deadline to avoid penalties.
- Check software settings to ensure automatic data syncing with HMRC.
How Pearson McKinsey Limited Can Help
At Pearson McKinsey Limited, we offer expert guidance on MTD compliance, including:
- Software Setup & Training: We help businesses integrate and use MTD-compliant software.
- VAT Submission Assistance: Our accountants ensure timely and accurate VAT filings.
- Digital Record-Keeping Support: We assist in maintaining HMRC-compliant records.
- Penalty Prevention Strategies: We monitor submission deadlines to avoid fines.
📞 Call us at: 020 8520 8442
✉️ Email us at: info@pearsonmckinsey.co.uk
🌐 Visit our website: Pearson McKinsey Limited
Additional Resources
- HMRC’s Guide to Making Tax Digital
- VAT Penalties and Interest Charges
- List of MTD-Compliant Software