How HMRC's Making Tax Digital rules change what UK seller software must calculate

What to take away

• Marketplace seller tools must track the VAT registration threshold, MTD for Income Tax quarterly filing and marketplace-facilitator VAT treatment.
• HMRC's Making Tax Digital rules require digital records with specific fields for VAT and income tax.
• Seller software must reconcile marketplace statements to HMRC submissions and store records for at least six years.
• Worked figures show how a seller crossing the threshold mid-year calculates VAT on marketplace sales.
• Penalties for late filing and inaccuracies apply, and HMRC can check digital records.

Where the VAT registration threshold sits and how it changes seller software alerts

The VAT registration threshold in the UK is £90,000 for the 2024/25 tax year. This is the figure HMRC uses to decide when a business must register for VAT. For marketplace sellers, crossing this threshold triggers new obligations: charging VAT on sales, filing VAT returns and keeping digital records.

Seller software must monitor rolling 12-month turnover. It should alert the seller when turnover approaches the threshold, not just when it exceeds it. Because the threshold is based on a rolling 12-month period, not the tax year, software must calculate turnover continuously.

A sudden spike in sales, for example during the Christmas season, can push a seller over the threshold mid-month.

The threshold applies to taxable turnover, which includes standard-rated and reduced-rated sales, but not exempt sales. Most marketplace sales of goods are standard-rated, so the total sales figure from marketplaces like Amazon or eBay is usually the starting point.

Seller software must exclude any sales that are exempt, such as certain food items or children's clothing, if the seller deals in those categories. VAT rates on different goods are set by HMRC, and software must apply the correct rate to each item on the listing.

When a seller crosses the threshold, they must register for VAT within 30 days of the end of the month in which they exceeded it. For example, if a seller exceeds the threshold in April, they must register by 30 May.

The effective date of registration is the first day of the second month after exceeding the threshold. So if exceeded in April, VAT registration starts on 1 June.

Seller software should automatically calculate the registration deadline and the effective date. It should also generate an alert for the seller to complete registration. Some software integrates with HMRC's VAT registration service, but most require the seller to register manually.

Once registered, the seller must charge VAT on sales. For marketplace sales, the marketplace facilitator may be responsible for collecting and remitting VAT. This is known as marketplace-facilitator VAT treatment. The rules differ depending on whether the marketplace is a UK-established business or overseas.

For UK marketplaces, the facilitator is responsible for VAT on sales by overseas sellers. For sales by UK sellers, the seller remains responsible unless the marketplace has agreed to collect VAT.

Seller software must therefore know the VAT status of the seller and the marketplace. It must apply the correct VAT treatment to each sale. This is one of the most complex areas for software, because the rules changed in 2021 with the introduction of marketplace facilitator VAT.

Before committing to a package, it helps to gate identity, orders and tax at the start of your evaluation, rather than discovering gaps after go-live.

What Making Tax Digital for Income Tax requires from quarterly updates

Making Tax Digital for Income Tax (MTD for IT) is HMRC's programme to move sole traders and landlords from annual self assessment to quarterly digital reporting. It started in April 2026 for sole traders and landlords with qualifying income over £50,000.

From April 2027, it extends to those with income over £30,000, and from April 2028 to those with income over £20,000.

Under MTD for IT, a sole trader must keep digital records of income and expenses and submit quarterly updates to HMRC using compatible software. The quarterly updates are due by 7 August, 7 November, 7 February and 7 May.

These updates summarise income and expenses for the quarter. They are not full tax returns; they are cumulative updates that feed into the final declaration.

At the end of the tax year, the sole trader must submit a final declaration by 31 January the following year. This replaces the traditional self assessment tax return. The final declaration includes any accounting adjustments, such as capital allowances or losses brought forward.

For marketplace sellers, the quarterly updates must include all income from marketplace sales, as well as any other business income. Expenses can be claimed in the usual way, but must be recorded digitally. HMRC publishes an MTD step-by-step guide for sole traders and landlords on how to comply.

Seller software must therefore support MTD for IT by:

1. Recording income and expenses digitally, with the date, amount and category.
2. Calculating quarterly summaries of income and expenses.
3. Submitting the quarterly updates to HMRC via the MTD API.
4. Storing records for at least six years.
5. Producing a final declaration at the end of the tax year.

Many marketplace sellers already use accounting software that is MTD-compatible. However, seller software that focuses on marketplace operations may not yet have MTD for IT functionality. Sellers should check whether their software is on HMRC's list of compatible software. If not, they may need to use bridging software or a separate accounting package.

The quarterly updates are not the same as VAT returns. A seller may be registered for VAT and also in MTD for IT. They will then have two sets of digital records: one for VAT and one for income tax. Software should be able to handle both, or integrate with other tools.

Marketplace-facilitator VAT treatment and who holds the liability

Marketplace-facilitator VAT treatment determines who is liable for VAT on sales made through an online marketplace. The rules depend on the location of the seller and the marketplace.

For UK-established marketplaces, such as Amazon UK or eBay UK, the marketplace is responsible for collecting and remitting VAT on sales by overseas sellers. This applies to sales of goods located in the UK at the point of sale.

The marketplace is also responsible for VAT on sales by sellers that are not established in the UK, even if the goods are shipped from outside the UK.

For sales by UK-established sellers, the seller is responsible for VAT, unless the marketplace has agreed to collect VAT on their behalf. Some marketplaces offer a VAT collection service, but this is not mandatory.

For overseas marketplaces, the rules are different. If a marketplace is not established in the UK, the seller may be responsible for VAT, depending on the location of the goods and the seller.

The liability for VAT also depends on whether the seller is VAT-registered. If the seller is not VAT-registered, they cannot charge VAT. However, if the marketplace is responsible for VAT, the marketplace will charge VAT on the sale, regardless of the seller's VAT status.

Seller software must therefore determine the correct VAT treatment for each sale. This requires knowing:

• The seller's VAT registration status.
• The marketplace's establishment status.
• The location of the goods at the point of sale.
• The buyer's location.

This information must be stored digitally for each transaction. The software must then apply the correct VAT rate and record the VAT amount. For sales where the marketplace is responsible, the seller should not include VAT in their VAT return, but must still record the sale for income tax purposes.

Mapping current UK rules onto one England seller setup shows how these liability rules interact with marketplace operations in practice.

The exact fields seller software must store for MTD for VAT

Under charging, reclaiming and recording VAT rules, businesses must keep digital records of all sales and purchases. HMRC specifies the exact fields that must be stored. These are the minimum requirements for digital records.

For sales, the software must record:

• The time of supply (date and time).
• The value of the supply (net amount, excluding VAT).
• The VAT rate applied.
• The VAT amount.
• The gross amount (including VAT).
• The customer's name and address, if available.
• The invoice number or unique identifier.

For purchases, the software must record:

• The time of supply.
• The value of the supply.
• The VAT amount.
• The supplier's name, address and VAT registration number.
• The invoice number.

These fields must be stored digitally and linked to the VAT return. The software must also be able to produce a VAT return with the following boxes:

• Box 1: VAT due on sales.
• Box 2: VAT due on acquisitions from EU member states (now mostly zero).
• Box 3: Total VAT due.
• Box 4: VAT reclaimed on purchases.
• Box 5: Net VAT to pay or reclaim.
• Box 6: Total value of sales excluding VAT.
• Box 7: Total value of purchases excluding VAT.

Boxes 8 and 9 cover dispatches to and acquisitions from EU member states. The software must calculate these boxes automatically from the digital records. It must also allow the seller to make adjustments, such as for bad debt relief or partial exemption.

For marketplace sellers, the software must also record the marketplace facilitator's VAT treatment. This may mean that some sales are not included in the seller's VAT return. The software must be able to exclude those sales or mark them as outside the scope of UK VAT.

The exact fields are set out in HMRC's guidance on digital records for VAT. The Tax Agent's Handbook also provides detailed rules on what must be recorded and how to calculate VAT.

Worked figures: one seller crossing the threshold mid-year

Consider a sole trader, Sarah, who sells handmade jewellery on Etsy and Amazon UK. She is not VAT-registered at the start of the tax year. Her rolling 12-month turnover on 1 April is £80,000. She expects sales to increase in the run-up to Christmas.

In May, she makes £12,000 in sales. Her rolling 12-month turnover at the end of May is £92,000. She has exceeded the £90,000 threshold. She must register for VAT by 30 June. Her effective date of registration is 1 July.

From 1 July, she must charge VAT on her sales. Most of her jewellery is standard-rated at 20%. She sells a small number of children's items that are zero-rated. Her software must apply the correct rate to each item.

In July, she makes £15,000 in sales, of which £13,000 is standard-rated and £2,000 is zero-rated. The VAT on the standard-rated sales is £13,000 × 20% = £2,600. The zero-rated sales have no VAT.

She also makes purchases: £3,000 on materials, with £600 VAT. She can reclaim this VAT on her return.

Her VAT return for the quarter ending 30 September will show:

Box	Description	Amount
1	VAT due on sales	£2,600
4	VAT reclaimed on purchases	£600
5	Net VAT to pay	£2,000
6	Total value of sales excluding VAT	£15,000
7	Total value of purchases excluding VAT	£3,000

This is a simplified example. In practice, Sarah must also account for sales made through marketplaces where the facilitator is responsible for VAT. If Amazon collects VAT on her behalf for some sales, those sales are excluded from her VAT return. Her software must identify those sales and exclude them.

If Sarah is also in MTD for Income Tax, she must submit quarterly updates. For the quarter ending 5 July, she would report her income and expenses. Her income would include all sales, including those where VAT is collected by the marketplace. Her expenses would include the materials and any other allowable costs.

Digital records, spreadsheets and bridging software under MTD rules

HMRC allows businesses to use spreadsheets for digital records, but they must be compatible with MTD. This means the spreadsheet must be able to send data to HMRC via an API. Bridging software is used to connect the spreadsheet to HMRC's systems.

Bridging software takes the data from the spreadsheet and submits it to HMRC. It does not store the data itself; the spreadsheet remains the digital record. The software must be able to import the data, validate it and send it in the required format.

For MTD for VAT, bridging software must be able to produce a VAT return from the spreadsheet. For MTD for Income Tax, it must be able to produce quarterly updates and a final declaration.

Many sellers use a combination of marketplace software and accounting software. The marketplace software may not be MTD-compatible, so they use bridging software to connect to HMRC. This adds complexity, but it is allowed.

HMRC publishes a list of compatible software, including bridging software. Sellers should check that their software is on the list. If it is not, they may need to switch to a different package.

When you build a marketplace software budget, having VAT review and exit built in from the start avoids lock-in to a package that cannot file under MTD.

Reconciling marketplace statements to HMRC submissions

Marketplace statements show the gross sales, fees, refunds and VAT collected by the marketplace. The seller must reconcile these statements to their own records and to HMRC submissions.

For VAT, the seller must ensure that the VAT return includes only the sales for which they are liable. Sales where the marketplace is responsible for VAT should be excluded. The marketplace statement should show the VAT collected, which the seller can use to verify.

For income tax, the seller must include all income, regardless of who collected the VAT. The marketplace statement provides the gross income figure. The seller must also record expenses, including marketplace fees, which are deductible.

Reconciliation involves matching the marketplace statement to the seller's bank account and to the digital records. Discrepancies can arise from timing differences, refunds or currency fluctuations. Seller software should help automate this reconciliation.

For sellers using multiple marketplaces, reconciliation becomes more complex. The software must aggregate data from all sources and produce a single set of records. It must also handle different reporting periods and currencies.

HMRC's business tax and returns guidance provides the framework for what must be reported. The Tax Agent's Handbook gives detailed rules on reconciliation and record keeping.

Penalties, compliance checks and record retention

HMRC can charge penalties for late filing, late payment and inaccuracies in VAT returns and MTD updates. The penalties for late filing are based on the number of days late. For VAT, the penalty is a percentage of the VAT due. For MTD for Income Tax, similar penalties apply.

Inaccuracies can lead to penalties of up to 100% of the tax due, depending on whether the error was careless, deliberate or concealed. Sellers should take care to ensure their digital records are accurate.

HMRC can check compliance by asking for digital records. Businesses must keep records for at least six years from the end of the accounting period. For VAT, records must be kept for six years. For MTD for Income Tax, records must be kept for at least five years after the 31 January submission deadline.

Seller software must store records securely and allow them to be exported for inspection. It should also maintain an audit trail of changes.

The Information Commissioner's Office (ICO) enforces data protection rules, which apply to the storage of customer data. Sellers must comply with UK GDPR when keeping records.

HMRC's Tax Agent's Handbook is a useful reference for agents and sellers on record keeping and penalties.

Common questions

What is the VAT registration threshold in the UK? The threshold is £90,000 for the 2024/25 tax year. It is based on rolling 12-month turnover.

When does MTD for Income Tax start? It started in April 2026 for sole traders and landlords with income over £50,000. It extends to lower income levels in later years.

Who is liable for VAT on marketplace sales? For UK marketplaces, the facilitator is liable for VAT on sales by overseas sellers. For UK sellers, the seller is liable unless the marketplace collects VAT.

What fields must seller software store for MTD for VAT? It must store the time of supply, value, VAT rate and VAT amount for each sale. Purchases also need invoice and supplier details.

How long must records be kept? VAT records must be kept for six years. MTD for Income Tax records must be kept for at least five years after the submission deadline.

Can I use spreadsheets for MTD? Yes, but you need bridging software to connect the spreadsheet to HMRC's API.