Rules and ethics
How HMRC's Making Tax Digital rules change what UK seller software must calculate
Marketplace seller tools must now calculate UK VAT, MTD for Income Tax quarterly updates and marketplace-facilitator VAT, with exact fields and figures.
For a UK marketplace seller, Making Tax Digital turns tax rules into calculations the software has to run: a rolling VAT threshold test, quarterly income tax updates, the boxes of the VAT return and the marketplace-facilitator split of who pays the VAT. This guide sets out each calculation and the HMRC rule behind it.
What to take away
- VAT registration is triggered at £90,000 of taxable turnover over 12 rolling months, so seller software must watch the total continuously.
- MTD for Income Tax brings quarterly digital updates for sole traders and landlords, phased by income from April 2026.
- Marketplace-facilitator rules decide who accounts for VAT, so software must flag seller status, marketplace establishment and goods location.
- HMRC's MTD for VAT rules fix the minimum record fields, and VAT Notice 700/12 defines the nine return boxes, two of which only apply to Northern Ireland trade with the EU.
The VAT registration threshold and the rolling turnover test
The threshold is £90,000 of taxable turnover. HMRC raised it from £85,000 on 1 April 2024, so confirm the figure in force before you set an alert. Guidance sits on VAT registration.
Two tests apply. The backward look uses the previous 12 months. The forward look asks whether the next 30 days alone will pass £90,000. Software must run both on every sale, because a November spike can breach the threshold mid-month.
VAT registration threshold
£90,000 | VAT registration threshold
Rolling 12-month turnover, not tax year
Taxable turnover only: standard and reduced rated
Excludes exempt sales
Exceed the threshold in a month and you notify HMRC within 30 days of that month's end. Cross it in April and registration begins on 1 June. Taxable turnover leaves out only VAT-exempt and out-of-scope sales; zero-rated goods, such as children's clothing, still count towards the threshold.
If you are weighing up packages, accounting software for UK marketplace sellers compares which products file both VAT and income tax updates.
What Making Tax Digital for Income Tax asks of quarterly updates
MTD for Income Tax replaces annual self assessment for sole traders and landlords, phased from April 2026 by qualifying income. Check the official collection for the dates in force.
Updates are due by 7 August, 7 November, 7 February and 7 May. They summarise quarterly income and expenses and feed a final declaration due by 31 January.
Marketplace income belongs in the updates, including sales where the marketplace collects VAT. Seller software needs five capabilities:
Quarterly updates
- Record income and expenses digitally, with date, amount and category.
- Calculate quarterly totals.
- Submit updates through HMRC's API.
- Retain records for at least five years after the 31 January deadline.
- Produce a final declaration including adjustments.
Many marketplace operations tools do not file income tax updates. HMRC's finder for MTD for Income Tax software lists Xero, QuickBooks Online, Sage Business Cloud Accounting and FreeAgent.
Digital records, return boxes and marketplace-facilitator VAT
Under Making Tax Digital for VAT, set out in HMRC's VAT Notice 700/22, records stay digital and filing runs through compatible software. Sale records show the time of supply, value and VAT rate; purchase records carry the same fields.
Bridging tools on HMRC's list, among them 123 Sheets and Absolute, link a spreadsheet to HMRC without holding the data.
The main return boxes are:
Digital records and return boxes
- 1
- VAT due on sales
- 2
- VAT due on EU acquisitions
- 3
- Total VAT due
- 4
- VAT reclaimed on purchases
- 5
- Net VAT to pay or reclaim
- 6
- Sales value excluding VAT
- 7
- Purchases value excluding VAT
The return has two more boxes, defined in HMRC's VAT Notice 700/12. Box 8 is the total value of supplies of goods and related costs, excluding VAT, to EU member states, and since 1 January 2021 it covers goods moved from Northern Ireland to the EU. Box 9 is the total value of acquisitions of goods and related costs, excluding VAT, from EU member states, now acquisitions brought into Northern Ireland. A seller trading only from Great Britain normally leaves both at zero, but the software still has to submit them, and HMRC warns that box 8 above box 6, or box 9 above box 7, suggests transposed figures.
Marketplace-facilitator rules, introduced in 2021, decide who accounts for VAT. A UK marketplace accounts for VAT on sales by overseas sellers where the goods sit in the UK.
Software must record seller VAT status, marketplace establishment and goods location per transaction, then exclude marketplace-collected VAT from the return. Mapping current UK rules onto one England seller journey shows how those flags work.
Example: one seller crossing the threshold mid-year
Sarah sells handmade jewellery on Etsy and Amazon UK. Her rolling 12-month turnover on 1 April was £80,000. May brings £12,000, lifting the total to £92,000.
She notifies HMRC by 30 June and charges VAT from 1 July. In July she sells £15,000: £13,000 standard-rated and £2,000 zero-rated, giving VAT of £2,600 against £600 reclaimed on materials.
One seller crossing the threshold
| Box | Line | Amount |
|---|---|---|
| 1 | VAT due on sales | £2,600 |
| 4 | VAT reclaimed | £600 |
| 5 | Net VAT to pay | £2,000 |
| 6 | Sales excluding VAT | £15,000 |
| 7 | Purchases excluding VAT | £3,000 |
If a marketplace collects VAT on some sales, she leaves it out of box 1 and keeps the income in her records. Her marketplace software budget needs a line for that review.
Common questions
Do I still file a VAT return when the marketplace collects the VAT?
Yes, you still file, but marketplace-collected VAT stays out of your boxes. Keep the sale in your income records as evidence.
When does MTD for Income Tax start for a seller under £50,000?
HMRC's published phasing started with qualifying income over £50,000, which brought sellers in from 6 April 2026. Below that, income over £30,000 in the 2025 to 2026 tax year means using it from April 2027, and over £20,000 in the 2026 to 2027 tax year from April 2028. Confirm the dates in force first.
How long must records be kept?
Six years for VAT. Income tax records must be kept for at least five years after the 31 January filing deadline.
What penalties apply to late or inaccurate submissions?
Late filing and late payment penalties apply. Inaccuracy penalties run from 0% to 30% for careless errors, 20% to 70% for deliberate ones and 30% to 100% where an error is deliberate and concealed.
