If you sell online and you're VAT-registered, the software you use to file isn't a nice-to-have. Making Tax Digital (MTD) for VAT means you have to keep digital records and submit your returns through HMRC-compatible software. A notebook or a stand-alone spreadsheet won't do.
The good news is that the right tool does far more than keep you legal. It pulls in your sales from your store and marketplaces, applies the correct VAT treatment, and turns a quarterly headache into a job that takes minutes.
This guide is for online sellers, from sole traders running a single Shopify store to growing limited companies juggling several channels. We won't push a single product on you. Instead, we'll show you what actually matters, so you can pick the tool that fits your business.
<h2 id="what-is-mtd-for-vat">What is Making Tax Digital for VAT?</h2>
Making Tax Digital for VAT is mandatory for all VAT-registered businesses. The rules have applied to every VAT-registered business since 1 April 2022 (they applied to businesses above the threshold from April 2019). New registrations are signed up automatically unless they're exempt.
In plain terms, MTD for VAT means two things:
- You keep your VAT records digitally, with a clear digital link between your data and your return.
- You submit those returns through MTD-compatible software, not by typing figures into HMRC's website by hand.
The current VAT registration threshold is £90,000 of taxable turnover, in force since 1 April 2024. If your taxable sales go over that in any rolling 12-month period, you must register. Many ecommerce sellers also register voluntarily below that level so they can reclaim input VAT, and MTD applies to them too.
It's worth knowing what's coming next. MTD for Income Tax begins from 6 April 2026 for sole traders and landlords with qualifying income over £50,000 (based on the 2024/25 tax year), then over £30,000 from 6 April 2027, and over £20,000 from 6 April 2028. If you run your store as a sole trader, the software you choose now may need to handle both VAT and Income Tax updates later, so it's worth thinking ahead.
<h2 id="why-it-matters">Why does the right software matter for ecommerce?</h2>
Online selling generates messy data. A single Amazon payout can bundle dozens of orders, fees, refunds and adjustments into one figure. Shopify, eBay and WooCommerce each export transactions in their own format. VAT can apply at the standard rate of 20%, the reduced rate of 5%, or the zero rate of 0%, depending on what you sell and where the customer is.
Software built with ecommerce in mind handles this volume for you. It separates sales from fees, applies the right VAT rate to each line, and reconciles your payouts to your bank. Get it right and your return more or less prepares itself. Get it wrong, or do it by hand, and errors creep in fast.
That's the difference between software as a filing tool and software as a genuine time-saver. For a busy seller, it's usually the deciding factor.
<h2 id="what-to-look-for">What should you look for in VAT software as an online seller?</h2>
Not all accounting software is built for ecommerce. Here's what actually matters if you sell online.
MTD-compatible filing. This is non-negotiable. Check the tool appears on HMRC's list of software that works with Making Tax Digital for VAT before you commit. Don't take a vendor's word for it; confirm it on gov.uk.
Sales-channel integration. Your store and marketplaces (Shopify, Amazon, eBay, Etsy, WooCommerce) produce complex transaction data. Software that pulls this in automatically saves far more time than one that needs a monthly CSV export and manual tidy-up.
Multi-currency support. If you sell into the EU, the US or further afield, you need a tool that records foreign-currency transactions and converts them correctly for VAT.
Bank feeds. A live connection to your business bank account means transactions are matched automatically rather than keyed in by hand. This is where a lot of input VAT gets missed when it's done manually.
Transparent pricing. Some products advertise a low headline price, then charge extra for VAT filing, more users or certain integrations. Always check what's included at the tier you'll actually use.
Accountant access. Most platforms let you add your accountant for free. That matters at year-end and any time HMRC queries something. If you'd like us in your account, we can usually work in whatever tool you've already chosen.
<h2 id="free-options">Are there genuinely free MTD-compatible options?</h2>
Yes. If you're in your first year of trading or running a low-volume store, you don't necessarily need to pay a monthly subscription.
Some business bank accounts bundle full accounting software, including MTD VAT filing, at no extra cost while your account is active. A few providers offer a permanently free tier with basic VAT tracking that suits very small operations. There are also tools with a free plan capped by the number of entries per year, which works well for newer or lower-volume sellers.
These aren't stripped-back demos. They're real tools that handle genuine VAT compliance. The trade-off is usually fewer integrations and lighter reporting, so as your order volume and channels grow you'll likely want to move to a paid plan. Check each option against HMRC's compatible-software list before you rely on it.
If you're not sure which free route fits, that's exactly the sort of thing it's worth a quick conversation with an accountant about before you commit.
<h2 id="how-to-switch">How do you switch to MTD VAT software?</h2>
Switching is simpler than most people expect. The process looks like this.
- Check you're signed up for MTD for VAT. Most VAT-registered businesses are signed up automatically, but you can confirm through your HMRC online account.
- Set up your chosen software and connect your business bank account.
- Link your sales channels (your store and any marketplaces you sell on).
- Bring across your data, either by importing your transaction history or starting clean from the current VAT period.
- Authorise the software to talk to HMRC. You grant this permission once and renew it when prompted.
Most switches take well under a day. Before you move, export a full transaction history from your current system. Even if you don't import all of it, keeping that data as a backup is sensible.
If you'd rather not do any of this yourself, our VAT services for ecommerce sellers cover the setup, the switch and your ongoing returns.
<h2 id="common-mistakes">What VAT mistakes do ecommerce sellers make most?</h2>
We work with online sellers every day, and the same issues come up again and again.
Treating a Zapier-style workaround as a proper integration. A native connection that reconciles every payout is very different from a patched-together feed that still needs checking each month. Where you can, choose software with a direct integration to your main channel.
Forgetting input VAT. Sellers are usually careful about VAT on sales, then forget to reclaim VAT on stock, packaging, fulfilment costs and advertising. If your bank feed is clean and categorised, your software should capture this automatically. If it isn't, you're almost certainly leaving money on the table.
Not setting VAT aside. VAT you collect isn't your money. Tag it or move it to a separate pot as you go, monthly, so the bill is never a shock.
Misjudging cross-border rules. Selling into the EU brings distance-selling and import rules into play. Set up your VAT numbers and tax codes correctly from the start, and get advice if you're unsure.
Illustrative example. Suppose an online beauty brand selling on a store and a marketplace moves to integrated software that reconciles its marketplace payouts automatically. With fees and refunds finally captured cleanly, it starts reclaiming input VAT on seller fees, packaging and ads that it had been missing. The exact saving depends on the business, but the principle is simple: clean data in, accurate VAT out. This is a hypothetical scenario to show how the right setup helps, not a specific client.
Want help getting your ecommerce VAT right? Book a free 20-minute call with a Zmartly accountant. We'll review your current setup, recommend an MTD-compatible tool that fits your channels, and handle the switch if you'd like us to. Talk to a Zmartly accountant.
<h2 id="faqs">Frequently asked questions</h2>
Does VAT software have to be MTD-compatible? Yes. If you're VAT-registered, you must keep digital records and file through software that works with Making Tax Digital for VAT. Check HMRC's compatible-software list before you choose a tool.
Is there genuinely free MTD VAT software? Yes, for some businesses. Certain bank accounts bundle full accounting software at no extra cost, and a few tools offer a free tier or a free plan capped by volume. All must still be on HMRC's compatible-software list, so confirm before relying on one.
Will I need separate software for MTD for Income Tax? Probably not. MTD for Income Tax starts from 6 April 2026 for sole traders and landlords with qualifying income over £50,000, and most established accounting platforms aim to handle both VAT and Income Tax updates from one account. Check that any tool you pick is on HMRC's compatible list for both.
Can VAT software handle international and EU sales? Most established tools support multi-currency and can apply the correct VAT treatment once you've set up your VAT numbers and tax codes. Cross-border rules are easy to get wrong, so it's worth getting advice if you sell into the EU.
How much does good MTD VAT software cost? For most ecommerce businesses, paid plans typically run from around £10 to £20 a month, though prices and introductory offers change often, so always confirm on the provider's site. Free options bring this to zero for qualifying businesses.
What happens if I file my VAT return late? HMRC runs a points-based penalty system for VAT returns submitted late, in force since 1 January 2023. You get a penalty point for each late return, and once you reach the threshold for your filing frequency you receive a £200 penalty, with a further £200 for each subsequent late return. Late payment can attract separate interest and penalties. Getting your software set up and tested before your next deadline is the simplest way to avoid this.
