Late returns earn points
Each late VAT return, including nil returns, adds a penalty point. Reach the threshold for your return period and HMRC charges a £200 penalty, plus another £200 for every further late return while you're at it.
UK tax and compliance
Making Tax Digital for VAT
What the rules require, how penalties work and how Microsoft Dynamics 365 Business Central keeps your VAT records and files returns to HMRC.
This guide is part of our UK tax and compliance guide, covering Making Tax Digital, e-invoicing, CIS, UK GDPR and audit trails.
UK tax and compliance guideWhat Making Tax Digital for VAT is
Making Tax Digital for VAT is HMRC's requirement for VAT-registered businesses to keep their VAT records digitally and send VAT returns using software that connects to HMRC. It began in April 2019 for businesses above the VAT registration threshold, and has applied to every VAT-registered business, whatever its turnover, for VAT periods starting on or after 1 April 2022.
Most businesses are already filing through software. The risk now sits in the detail: figures copied from one spreadsheet to another, sales systems that don't feed the ledger, or returns adjusted by hand. Those manual steps break the digital link HMRC requires and are where errors creep in.
The rules
What Making Tax Digital for VAT requires
Three things: digital records, compatible software and digital links between any programs you use. All three apply to every VAT-registered business.
- Records
Keep VAT records digitally
Your business name, address, VAT number and any VAT schemes you use, plus the time of supply, value and VAT rate for every sale and purchase, and any adjustments, all held in software.
- Software
File through compatible software
Your software must keep those records, prepare the VAT return from them and send it to HMRC, as well as receive information back from HMRC. Returns can no longer be typed into the HMRC website.
- Digital links
No manual steps in between
Where you use more than one program, data must move between them digitally, by import, export, linked formula or API. Copying, pasting or retyping figures breaks the digital link.
Who can be exempt
You can apply to HMRC for an exemption if using digital tools isn't practical because of age, disability, remoteness or another reason, if the business is subject to an insolvency procedure, or if it is run entirely by members of a religious society whose beliefs are incompatible with electronic communications. Exemptions aren't automatic, so you need to apply.
Penalties
Penalties for late returns and payments
For VAT periods starting on or after 1 January 2023, a points-based system for late returns and separate penalties for late payment replaced the old default surcharge.
Late payment penalties
Nothing is charged if you pay, or agree a payment plan, within 15 days. After that, the first penalty is 3% of what was unpaid at day 15, plus 3% of what is still unpaid at day 30. From day 31 a second penalty builds up at 10% a year.
Using the wrong software
Filing returns without functional compatible software can lead to a penalty of up to £400 for each return. Late payment interest is also charged from the first day a payment is overdue.
| Return period | Points before a £200 penalty |
|---|---|
| Annual returns | 2 |
| Quarterly returns | 4 |
| Monthly returns | 5 |
Penalty rates are based on HMRC guidance published by November 2026. This guide is general information, not tax advice, so check the latest HMRC guidance or speak to your accountant about your own position.
Business Central
How Business Central handles Making Tax Digital for VAT
Microsoft Dynamics 365 Business Central keeps your VAT records, builds the return and submits it to HMRC from one system, so there are no digital links to break.
Connects to HMRC
Business Central's UK version links to HMRC's Making Tax Digital service, so returns go straight from the system that holds your VAT records.
Retrieves your obligations
See which VAT periods are open and when each return is due, with reminders so deadlines and penalty points don't creep up on you.
Builds the return from posted entries
The VAT return is calculated from posted sales and purchase transactions, so the digital link from invoice to return is never broken.
Shows payments and liabilities
View what HMRC says you owe and what you've paid without leaving Business Central or logging in to a separate portal.
Handles UK VAT treatments
VAT posting setup covers standard, reduced, zero-rated and exempt supplies, along with treatments such as the domestic reverse charge for construction services.
Keeps a clear audit trail
Posted entries can't be edited, corrections stay visible and every figure traces back to its document, which makes it easy to keep records for the 6 years HMRC normally expects.
Checklist
Check your VAT process in six steps
- 1List every place a VAT figure comes from, including sales systems, expense apps and spreadsheets
- 2Remove any step where figures are copied, pasted or retyped between programs
- 3Check that the VAT return is built from the same records you post your sales and purchases in
- 4Reconcile the VAT control account to each return before you submit it
- 5Diarise return and payment dates so you stay clear of penalty points and late payment penalties
- 6Check that your invoicing process is ready to move to e-invoices from 1 April 2029
Further reading
Related guides and pages
E-invoicing in the UK from 2029
What mandatory e-invoicing means, the Peppol network and how to prepare now.
Read more about E-invoicing in the UK from 2029Microsoft Dynamics 365 Business Central
Finance, VAT, sales, purchasing and stock in one system built for growing UK businesses.
Read more about Microsoft Dynamics 365 Business CentralMove to Business Central
Moving from Sage, QuickBooks, Xero, NAV or spreadsheets, and what happens to your VAT history.
Read more about Move to Business CentralMonth-end close process
Where VAT reconciliation fits in a faster, more reliable month-end close.
Read more about Month-end close processEnquiry form
Want VAT returns that build themselves?
Tell us how you prepare and file VAT today, and we'll show you how Microsoft Dynamics 365 Business Central could take the manual steps out.
FAQ
Frequently asked questions
Every VAT-registered business, whatever its turnover. Businesses above the VAT registration threshold have followed the rules since April 2019, and all other VAT-registered businesses, including those registered voluntarily, have followed them for VAT periods starting on or after 1 April 2022.
Yes, as long as the spreadsheet is digitally linked to bridging software that submits the return to HMRC, and figures move between programs without being copied, pasted or typed in by hand. Many businesses find it simpler to keep their VAT records and return in one finance system.
A digital link is an electronic transfer of data between programs or within one program, such as an import, an export, a linked formula or an API connection. Copying and pasting, or retyping figures, does not count as a digital link.
Businesses can apply to HMRC for an exemption if it isn't practical for them to use digital tools because of age, disability, remoteness or another reason, if they are subject to an insolvency procedure, or if the business is run entirely by members of a religious society whose beliefs are incompatible with using electronic communications.
Yes. The UK version of Microsoft Dynamics 365 Business Central connects to HMRC, retrieves your VAT obligations, builds the VAT return from your posted transactions and submits it. You can also view your VAT payments and liabilities from inside Business Central.
They are separate rules that build on each other. Making Tax Digital covers how you keep VAT records and file returns. Mandatory e-invoicing from 1 April 2029 covers how VAT invoices are sent and received between businesses. A finance system that already holds your VAT records digitally is a good starting point for both.