Making Tax Digital for VAT has been mandatory for all VAT-registered businesses since 2022, and MTD for Income Tax is being phased in for sole traders and landlords above defined thresholds. For businesses running Business Central, compliance is built into the system rather than requiring a separate bridging tool or manual process. This guide covers what MTD actually demands, where businesses most commonly get it wrong, and how Business Central handles it end to end.
What Making Tax Digital Actually Requires
MTD has two core requirements, and both are important. The first is digital record-keeping: transaction data must be maintained digitally in a format that can directly generate the figures needed for a tax submission. The second, and more technically specific, is the digital link: data must flow from the original records through to the submission without any manual re-entry step at any point in the chain.
This second requirement is what catches businesses out most often. A business that keeps its sales and purchase records in a spreadsheet, calculates the VAT return from those records, and then types the resulting figures into HMRC's portal is not compliant, because that final manual typing step is exactly the kind of transcription process MTD was designed to eliminate. The figures need to reach HMRC through an API connection, not through a human copying a number from one screen to another.
How Business Central Maintains the Digital Link
Business Central maintains the digital link from transaction to submission natively. VAT is calculated automatically from posted sales and purchase transactions as they are processed throughout the period, using the VAT rates and posting groups configured in the system. When the time comes to submit a return, Business Central generates the return figures directly from those transaction records and submits them to HMRC through a recognised API connection, without the figures being re-entered or transferred through any intermediate step.
This is not bridging software, which connects a spreadsheet to HMRC as a workaround to create a digital link where one does not naturally exist. Business Central is itself an MTD-compatible digital record-keeping system with a direct HMRC API connection, which is the cleanest possible implementation of what the regulation actually requires.
Where VAT Posting Setup Matters
The quality of MTD compliance within Business Central depends significantly on how VAT posting groups are configured, since these determine which VAT rate is automatically applied to which type of transaction. A well-configured setup means every sale and purchase is coded to the correct VAT treatment automatically, with minimal manual intervention. A poorly configured setup creates situations where transactions are coded to the wrong VAT rate, requiring manual correction before the return can be trusted, which is both inefficient and a risk of errors making it into the submission.
Common areas where VAT coding needs careful configuration include partial exemption for businesses with both exempt and taxable supplies, zero-rating for eligible goods and services, reverse charge VAT for construction and certain other sectors, and cross-border transactions where the supply place rules affect the correct VAT treatment.
Preparing for MTD for Income Tax
For sole traders and landlords within scope of MTD for Income Tax, the requirements extend beyond what VAT-registered businesses are already used to. Rather than a single annual Self Assessment return, MTD for ITSA requires quarterly digital updates of income and expenses throughout the tax year, followed by an annual final declaration. This means the underlying record-keeping needs to be structured for quarterly reporting from the outset rather than only capturing the information needed for an annual return.
What This Looks Like in Practice
A VAT-registered business previously using bridging software to connect a spreadsheet-based bookkeeping process to HMRC migrated to Business Central and removed the bridging software entirely, since Business Central's direct HMRC API connection made it redundant. This simplified the compliance process, reduced the risk of errors in the transfer between spreadsheet and submission, and removed the annual cost of the bridging software subscription.
An accountancy practice managing MTD VAT submissions for a portfolio of clients moved all clients to a Business Central environment and configured consistent VAT posting group structures across the portfolio, significantly reducing the variation in submission quality and the per-client review time previously needed to catch VAT coding errors before submission.
Getting Started with MTD in Business Central
For businesses already on Business Central, confirming that VAT posting groups are correctly configured for every transaction type they process is the most important compliance review, since the system's MTD submission capability is only as reliable as the posting setup behind it. For businesses not yet on Business Central, MTD compliance is one of the clearest arguments for moving from a spreadsheet-based process to a dedicated ERP.
The Advantage Transformation Sprint is a free, no-obligation session that reviews current MTD compliance status and VAT posting configuration, identifying any gaps before they become submission errors.
Achieve Clean MTD Compliance with Business Central
Advantage configures VAT posting groups and MTD submission settings within Business Central for UK businesses and accountancy practices, ensuring digital links are maintained correctly throughout. If you want to be confident your MTD compliance is clean, speak to our team.
Contact Advantage today or call 020 3004 4600.
Read more about Dynamics 365 Business Central or explore our Financial Control solutions.
Related Resources
Glossary: Making Tax Digital
VAT Return Automation in Business Central
Statutory Accounts Filing Readiness
Glossary: Statutory Accounts Filing
Dynamics 365 Business Central
