If your business is registered for VAT, Making Tax Digital (MTD) is already part of your month-end. If you are a sole trader or a landlord with meaningful income, it is arriving in stages. In both cases the question for your finance team is practical: can the system you run today keep the records, build the return and send it to HMRC without anyone retyping figures? This guide explains what MTD asks of an ERP, where a module or a third-party provider fills the gaps, and what to put to an integrator before you commit.
What Making Tax Digital actually requires
MTD for VAT requires VAT-registered businesses to keep their records digitally and to file VAT returns using software. The obligation began in April 2019 for the first businesses, and every registered business is now enrolled without having to do anything. The gov.uk guidance is explicit that you no longer sign up yourself.
Three ideas run through the rules:
- Digital records: certain information must be held electronically in your software, not on paper or in an ad hoc file.
- Digital links: data that moves from one program to another must do so electronically.
- Direct submission: the return goes to HMRC through its application programming interface (API), not by typing figures into a web form.
For an ERP, this is less a burden than a natural fit. A system that already posts every sales and purchase invoice to a single ledger holds most of what MTD needs. The work lies in configuration, in the link to HMRC, and in controls around anything that still sits outside the system.
MTD for VAT software: what the rules call “functional compatible software”
The term you will meet in the guidance is functional compatible software. In plain language, it must be able to do three things:
- Keep the digital records the rules require.
- Prepare the VAT return from those records.
- Communicate with HMRC through its API.
People often search for “HMRC recognised software” or “MTD for VAT software”, as though HMRC certified products one by one. The practical test is simpler and stricter: does the whole chain work in your own environment, with your own tax codes, your own bank feeds and your own period-end routine? A product that is capable on paper can still be set up in a way that breaks digital links.
Bridging software and API-enabled spreadsheets
HMRC accepts that submission can happen through bridging software or an API-enabled spreadsheet. This matters for companies that run an older ERP, or several systems side by side. The figures can stay in the existing tools, and a bridge handles the submission.
The trade-off is risk. Each extra tool is another place where a link can be broken by a manual step, and another item to explain to an auditor. If you are replacing an ERP anyway, building MTD into the core system is usually cleaner than carrying a bridge indefinitely. The guide to ERP legal requirements puts MTD alongside the other obligations that shape a UK system.
What counts as a digital link
The rules are blunt on this point. Manual entry and copy and paste between programs are not accepted. Transfers by API, CSV or XML import, and linked spreadsheet cells are. An ERP that exports a file which someone then re-keys into another tool, or pastes into a spreadsheet, fails the test even if every individual tool is capable.
Records you must keep, and for how long
Businesses must generally keep their VAT-related documents for at least 6 years, and longer where another tax demands it. The list covers the VAT account, copies of invoices issued to VAT-registered customers, bank statements, cash books, purchase and sales invoices, import and export documents, till rolls and relevant correspondence.
Two points deserve attention from anyone configuring a system:
- Not every record has to live in one program. The digital records can be spread across software, as long as they are linked electronically.
- Some documents, such as the C79 import VAT certificate, must be kept in their original form. Scanning them into the ERP is good practice, but it is not a substitute where the original must be retained.
Ask how your ERP archives attachments and whether the retention period is enforced by a setting or left to individual discipline.
The VAT return cycle in your ERP
A VAT-registered business normally files a return every three months, called its accounting period, and must file even if there is nothing to pay or reclaim. The online filing deadline is generally one calendar month and 7 days after the end of the period, which is also the payment deadline.
That rhythm should map neatly onto your ERP's period close. A sound set-up gives you:
| Step | What the ERP should do | What to test |
|---|---|---|
| Transaction posting | Apply the right VAT code to every line, including 20% standard, 5% reduced, 0% zero-rated and exempt supplies | Do the codes follow the product and the customer, or are they chosen by hand? |
| Period close | Lock the period and freeze the VAT account | Can a late invoice slip into a closed period without a trace? |
| Return preparation | Calculate the boxes from posted entries | Does the total reconcile to the ledger without a spreadsheet in between? |
| Submission | Send the return to HMRC through the API | Is the submission authorised by named users and logged? |
| Payment | Produce the amount and the due date | Does cash forecasting use the same date? |
The standard rate is 20%, the reduced rate is 5% and the zero rate is 0%; some supplies are exempt, including postage stamps and many financial and property transactions. The difficulty is rarely the arithmetic. It is the correct classification of mixed baskets, such as a food manufacturer who sells zero-rated and standard-rated lines, and the treatment of exports and imports.
Registration thresholds and growing businesses
A business must register for VAT when its taxable turnover over the previous 12 months passes £90,000, or when it expects to pass it within the next 30 days. That threshold has applied since 1 April 2024. Registration must be requested within 30 days of the end of the month in which the threshold was exceeded, and late registration can bring penalties. Businesses below the threshold may register voluntarily, and a business not established in the UK must register from its first taxable supply.
For a growing SME, this has a direct consequence for software choice. The day you register, you are inside MTD. A tool that was adequate as a simple bookkeeping package may not scale to digital records, multi-rate coding and API submission. Planning the ERP so that VAT compliance is switched on, not bolted on, saves a painful migration at the worst moment. Our guide on ERP for small businesses covers how to size a system for that growth.
Making Tax Digital for Income Tax
MTD for Income Tax applies to self-employed people and landlords who file Self Assessment, according to their qualifying income. The thresholds fall in three stages:
| Qualifying income | Starts |
|---|---|
| More than £50,000 (based on the 2024-2025 return) | 6 April 2026 |
| More than £30,000 (based on the 2025-2026 return) | 6 April 2027 |
| More than £20,000 (based on the 2026-2027 return) | 6 April 2028 |
HMRC judges qualifying income from the Self Assessment return, so the 2024-2025 return was the one examined for the first wave. The Income Tax (Digital Obligations) Regulations 2026, in force from 1 April 2026, require functional compatible software for keeping digital records and sending updates.
The new rhythm is a quarterly update. The first one covered the first three months of the tax year and was due by 7 August 2026, with no penalty points for late submission in the first year. The quarterly update does not replace the usual tax return, which remains due on 31 January.
Why this matters to an ERP buyer
An ERP is rarely used by a sole trader, so why mention it? Because many ERP buyers have owners, partners or directors with property or self-employed income, because your accountant will be moving clients onto compatible software, and because some trading businesses are unincorporated. If your finance team supports owners with such income, ask whether your ERP can export clean category totals into the software your accountant uses, through a digital link rather than by email and re-keying.
Payroll and the neighbouring obligations
MTD is only one of the digital duties on a UK finance team. Payroll runs on its own real-time reporting regime: the employer reports pay and deductions to HMRC in a Full Payment Submission on or before the employee's payday, with an Employer Payment Summary used for adjustments or months without pay. If your ERP includes payroll, or exchanges data with a payroll package, that interface needs the same scrutiny as the VAT link. The page on payroll software and RTI goes through this in detail.
Looking ahead, the government has announced mandatory e-invoicing for VAT-able business-to-business and business-to-government invoices from 2029, with a decentralised model and no central platform. Real-time transaction reporting will come only once e-invoicing is established. A system that already produces structured invoice data will adapt more easily; read our guide to e-invoicing and ERP when you plan a replacement.
What belongs in the ERP, in a module, or with a provider
| Capability | Typically in the core ERP | Typically a module or add-on | Typically a third party |
|---|---|---|---|
| VAT coding and digital records | Yes | Sometimes for complex schemes | No |
| VAT return preparation | Often | Often, as a UK localisation | Possible |
| API submission to HMRC | Depends on the product | Common | Common, through a bridge |
| Income Tax quarterly updates | Rarely | Sometimes | Usually, via accounting software |
| Payroll and RTI | Rarely | Sometimes | Often a payroll specialist |
This split varies by edition and by hosting model, so treat the table as a checklist for questions, not as a statement about any product. Among the platforms covered on this site, Sage is built around UK accounting practice, Microsoft Dynamics 365 Business Central and Oracle NetSuite are cloud systems with UK localisation to confirm, while Odoo and SAP Business One depend heavily on the localisation chosen and the partner who configures it. In every case, the proof is a demonstration on your data.
Points to test with your integrator
Before you sign, ask for these in writing and see them run in a test environment:
- A full cycle: post invoices and credit notes with every VAT code you use, close the period, produce the return and submit it through the API.
- Digital links: a map of every system that feeds the VAT figures, with the method of transfer for each. No step may involve re-keying or copy and paste.
- Mixed and awkward cases: zero-rated and exempt lines, imports, reverse-charge situations, partial exemption if relevant, and corrections to earlier periods.
- Roles and approval: who can submit, who can change a tax code, and where changes are logged.
- Retention: how long documents are held, how originals such as the C79 are handled, and how records are exported if you leave the system.
- Updates: who adapts the system when the rules change, how fast, and at whose cost. This should be in the support contract.
- Exemptions and exceptions: HMRC allows exemptions where digital compliance is impractical, for instance because of disability, location, insolvency or a religious objection. They are narrow, and an ERP project should not be planned around them.
- Data protection: a tax record contains personal data. Confirm that hosting, access control and breach procedures meet UK GDPR expectations.
The free matching service described in how it works can shortlist integrators who work with UK accounting rules. Our advice on choosing an ERP integrator and the outline of an ERP implementation will help you turn this list into contract terms.
A practical order of work
If you are starting from a legacy system, a sensible sequence is: first, document how the VAT return is built today and where anyone retypes data; second, decide whether the future state is a native ERP return or a bridge; third, run the new process in parallel for one full period before switching; and finally, brief your accountant so that Self Assessment and any Income Tax obligations for owners are handled on compatible software. MTD does not require a heroic project, but it punishes improvisation in the weeks before a filing deadline.
Frequently asked questions
Is my ERP automatically compliant with Making Tax Digital?
No. Compliance depends on the configuration, not only on the product. For VAT, the software must keep the required digital records, prepare the return from them and talk to HMRC through its API. Ask your integrator to demonstrate a full test cycle, from a posted invoice to a submitted return, before you rely on it.
Can I still use spreadsheets with MTD for VAT?
Yes, provided they are API-enabled or paired with bridging software, and provided data moves between programs through digital links. Manual re-keying and copy and paste are not accepted. Linked spreadsheet cells, CSV or XML imports and API transfers are. An ERP removes most of these fragile hand-offs.
Do I need to sign up to MTD for VAT myself?
No. According to gov.uk, every VAT-registered business is now enrolled and no longer needs to sign itself up. Your task is to make sure that your software is ready to keep digital records and file the return, ideally well before the next filing deadline.
Who is affected by Making Tax Digital for Income Tax?
Self-employed people and landlords who file Self Assessment, depending on their qualifying income. The threshold falls in stages: more than £50,000 from 6 April 2026, more than £30,000 from 6 April 2027 and more than £20,000 from 6 April 2028. Limited companies are not covered by this rule, but their directors may be if they have such income personally.
How long must VAT records be kept?
Businesses must generally keep their VAT records for at least 6 years, and longer if another tax requires it. Your ERP's archiving and retention settings should reflect this, and documents such as the C79 import certificate must remain in their original form.
Sources
- GOV.UK – VAT Notice 700/22: Making Tax Digital for VAT
- GOV.UK – Use software to submit your VAT returns
- GOV.UK – Record keeping for VAT (Notice 700/21)
- GOV.UK – VAT returns
- GOV.UK – Check when to sign up for Making Tax Digital for Income Tax
- GOV.UK – Deadline approaches for first Making Tax Digital quarterly update
- legislation.gov.uk – Income Tax (Digital Obligations) Regulations 2026
- GOV.UK – Register for VAT
- GOV.UK – Promoting electronic invoicing: consultation response
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