--- title: "MTD for VAT Penalties: What HMRC Says About Filing Without Functional Compatible Software | TCK Accounting" description: "HMRC says it may charge a penalty of up to £400 for every VAT return filed without functional compatible software under MTD for VAT." canonical: "https://www.tckaccounting.co.uk/blog/mtd-for-vat-penalties-what-hmrc-says-about-filing-without-functional-compatible-software" last_updated: "2026-01-27T11:59:12.069Z" --- # MTD for VAT Penalties: What HMRC Says About Filing Without Functional Compatible Software PublishedFriday, 23 January 2026 ![A computer on a desk in a small business office setting, displaying accounting software.](/_next/image?url=%2Fapi%2Fmedia%2Ffile%2Fhmrc-vat-software-editorial-uk-small-business.png%3Fv%3D1769183233536&w=1536&q=75&dpl=dpl_HkjxAMLz8SoKDEaYz6gDcGJLMf1v) ## Key takeaways - HMRC says it **may charge a penalty of up to £400 for every VAT return** filed **without functional compatible software**. - “Functional compatible software” is defined by HMRC as software (or a set of programs/apps) that can **keep digital records**, **send VAT return information to HMRC from those records**, and **receive information from HMRC**. - The risk HMRC describes is about **how the return is filed** (the MTD method), not just whether the figures are right. ## The question: can HMRC penalise you for filing a VAT return without functional compatible software? Yes. HMRC says that **if you file VAT returns but do not use functional compatible software, it may charge a penalty of up to £400 for every return you file**. This statement appears in HMRC’s compliance checks factsheet for Making Tax Digital (MTD) for VAT. ## What HMRC means by “functional compatible software” HMRC defines **functional compatible software** as a software program (or set of software programs, products, or applications) that can: - **record and store digital records** - **provide HMRC with information and VAT returns** from the data held in those digital records - **receive information from HMRC** In other words, it’s not enough that you keep records “somewhere digital” — HMRC’s definition focuses on whether your setup can both **maintain the required digital records** and **submit the VAT return to HMRC from those records**, using software that can also **receive** HMRC information. ## Why this matters (practical implications) For VAT-registered businesses and bookkeepers, HMRC’s position means there’s a distinct compliance risk if a VAT return is filed **outside** the MTD process (for example, using a method that does not meet HMRC’s definition of functional compatible software). Because HMRC frames the penalty as applying **“for every return you file”**, the potential exposure can repeat across VAT periods if the filing method does not meet the requirement. ## Common misunderstandings to avoid - **“We used software somewhere in the process, so we’re fine.”** HMRC’s definition is specific: the software must be able to **store digital records**, **submit the VAT return information to HMRC from those records**, and **receive information from HMRC**. - **“This only matters if HMRC opens a wider VAT enquiry.”** HMRC’s factsheet describes the penalty risk specifically for **filing returns without functional compatible software**, as a standalone issue. ## What to do if you’re unsure If you’re not confident your current process meets HMRC’s definition, use HMRC’s guidance to sense-check whether your tools and workflow are “functional compatible” under MTD for VAT. For the exact wording and context, see HMRC’s factsheet: - `https://www.gov.uk/government/publications/compliance-checks-how-to-avoid-penalties-for-making-tax-digital-for-vat-ccfs69/compliance-checks-how-to-avoid-penalties-for-making-tax-digital-for-vat-ccfs69` ## Summary HMRC’s stated position is clear: **it may charge a penalty of up to £400 for every VAT return filed without functional compatible software**. HMRC also defines functional compatible software as software (or a set of apps/programs) that can **keep digital records**, **send VAT return information to HMRC from those records**, and **receive information from HMRC**. 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