Making Tax Digital (MTD) is HMRC's initiative to modernise the UK tax system. Since April 2022, all VAT-registered businesses must keep digital records and submit VAT returns through MTD-compatible software. This means no more manual spreadsheets or paper records for VAT purposes. Your accounting software must be MTD-compliant, and your digital records must include specific information about each transaction.
Ensure your accounting software is MTD-compatible (Xero is fully compliant)
Set up digital record keeping for all transactions
Record the time of supply, value of supply and rate of VAT for each transaction
Maintain digital links between your records and VAT return submission
Do not manually transfer data between systems - use digital links only
Submit your VAT return directly through MTD-compatible software to HMRC
Keep digital records for at least 6 years
Businesses in United Kingdom operating under the VAT + MTD system must meet these compliance requirements set by HMRC:
Using spreadsheets without proper digital linking to MTD software
Manually copying figures from one system to another (breaks digital link requirement)
Not updating software to the latest MTD-compliant version
Assuming that using Xero alone makes you compliant without proper setup
Not keeping records in the required digital format
Ignoring MTD for Income Tax Self Assessment obligations starting in 2026
SortBooks connects to your Xero account and finds transactions sitting in catch-all accounts. AI suggests the right account and tax code, learning from your own past coding. You approve it and SortBooks updates Xero. Reconciled transactions are locked by Xero, so those stay in SortBooks with an Open in Xero link.
AI suggests a category and VAT + MTD code for each transaction. You approve it before anything changes in Xero.
Growth and above get a quarterly GST/VAT estimate to check before you lodge with HMRC.
Ask about your P&L, cash and who owes you, using live Xero data. Every dollar figure is checked against Xero.
Yes. Xero is fully MTD-compliant for VAT. SortBooks doesn't submit VAT returns. You still file through Xero's MTD submission, and SortBooks helps by keeping the VAT codes right on the transactions you approve.
HMRC uses a points-based penalty system. You receive a point for each late submission. Once you reach the threshold (4 points for quarterly filers), you receive a financial penalty of GBP 200 for each subsequent late submission.
SortBooks maintains fully digital records in Xero with proper digital links. Every transaction is categorised with correct VAT codes, and VAT returns can be submitted directly to HMRC through Xero - no manual intervention needed.
AI suggests, you approve, SortBooks updates Xero. Try it free for 14 days.