Making Tax Digital requires records to be kept digitally and returns to be filed from compatible software, with digital links between each stage of the process. The rules are procedural, but the exposure they create is substantive: errors that were once buried in a spreadsheet are now traceable.
Broken digital links
A digital link means data moves between systems without manual retyping. Copying a figure from a sales report into your VAT return by hand breaks the chain, even if the number is correct.
Linked workbooks, API connections, CSV imports and bridging software all satisfy the requirement. Manual re-keying and cut-and-paste do not.
Applying the wrong rate or liability
Zero-rated, exempt and outside-the-scope supplies are treated very differently, and coding them interchangeably distorts both boxes 6 and 7 and any partial exemption calculation.
Construction businesses in particular need to apply the domestic reverse charge correctly: the customer accounts for the VAT, and the supplier's invoice must say so explicitly.
- Exempt supplies restrict input tax recovery; zero-rated supplies do not
- Reverse charge purchases must be shown in both output and input tax
- Imports require postponed VAT accounting entries to be reconciled to the monthly statement
Reclaiming input tax you are not entitled to
Business entertainment, most cars, and any expenditure without a valid VAT invoice are common overclaims. So are personal costs run through the company account and blocked elements of mixed-use expenditure.
Keep the invoice, not just the bank line. A bank transaction alone is not evidence of a VAT-bearing supply.
Correcting errors properly
Below the error correction threshold and under 1% of box 6 turnover, adjustments can usually be made on the next return. Larger errors must be disclosed separately to HMRC.
Unprompted disclosures attract materially lower penalties than errors HMRC finds first, so raise them as soon as they are identified.
Fix the chain of custody for your data first, then review liability coding quarterly. Most MTD penalties are process failures, not tax disputes.
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