When Is an MTD Exemption Allowed? Rules, Process & Examples

While Making Tax Digital (MTD) is now mandatory for most VAT-registered businesses in the UK, not every business or individual has to comply. HMRC recognises that for some, keeping digital records or submitting VAT returns through MTD-compatible software may not be feasible.

That’s where Making Tax Digital exemptions come in. But these aren’t loopholes, they apply only in specific cases, and accountants need to understand the criteria clearly to support exemption claims or avoid non-compliance risks.

What Is an MTD Exemption?

An MTD exemption is an official acknowledgement from HMRC that a business is not required to comply with the digital requirements of MTD for VAT. This means they can continue submitting VAT returns manually (e.g., through paper or non-digital means) and are not legally obligated to maintain digital VAT records.

There are three main grounds under which clients may qualify:

1. Digital Exclusion Due to Age, Disability, or Remote Location

This is the most commonly accepted exemption.

HMRC allows businesses to opt out of MTD if they are genuinely unable to use digital tools because of:

• Age-related limitations (e.g., elderly sole traders who are not familiar with digital systems)
• Physical or mental impairments that make it difficult or impossible to use a computer or software
• Geographical remoteness where broadband or mobile data access is unreliable or unavailable

Example: A farm business in a rural part of Wales with no internet access may be exempt from MTD due to location-based digital exclusion.

2. Exemption on Religious Grounds

Some individuals are exempt from MTD requirements if their religious beliefs prevent them from using electronic or digital services.

This is rare but legitimate. For example, members of certain religious communities (such as the Amish or certain orthodox sects) may qualify. HMRC usually requests further information to confirm that the belief system genuinely restricts digital technology use.

3. Insolvency Proceedings

If your client’s business is subject to insolvency proceedings, such as administration, liquidation, or bankruptcy, they are automatically exempt from MTD obligations.

This exemption typically remains in place for the duration of the insolvency process.

Important: Exemptions are not granted automatically (except for insolvency). Your client must either meet clearly defined criteria or formally apply to HMRC with appropriate justification.

How to Apply for an MTD Exemption

If a client believes they qualify for a Making Tax Digital exemption, it’s not enough to simply opt out. With the exception of insolvency cases, HMRC requires a formal application outlining the reasons why digital compliance is not reasonably practical.

Here’s how to guide your clients through the process.

Step 1: Understand the Eligibility

Before applying, confirm that your client clearly fits into one of the following categories:

• They cannot use digital tools due to age, disability, or location
• They have religious objections to using computers or the internet
• They are subject to formal insolvency proceedings (no application needed here — exemption is automatic)

If there’s any doubt about eligibility, consult HMRC’s guidance or seek clarification via the VAT helpline.

Step 2: Submit an MTD Exemption Request to HMRC

To apply for an MTD exemption, you or your client must:

• Visit the official HMRC exemption application page
• Fill out the digital or postal form with clear reasoning for the exemption request
• Provide supporting details (e.g., broadband speed test results, age verification, or a letter from a medical professional if relevant)

Tip: Be specific. Vague reasons like “I prefer paper” or “I’m not good with computers” are unlikely to be accepted unless tied to a documented issue or condition.

Step 3: Await Confirmation

Once the request is submitted, HMRC will review the case. Processing typically takes 2 to 4 weeks, depending on the volume of applications.

If approved, the client will receive written confirmation that they’re exempt from MTD record keeping and digital VAT submissions. If rejected, HMRC may offer assistance or propose a temporary alternative.

Step 4: Keep Records of Exemption Status

As an accountant, it’s important to:

• Maintain written proof of the exemption approval
• Reassess the exemption annually (especially in cases of temporary disability or connectivity issues)
• Ensure that all other clients remain MTD-compliant if they do not have a valid exemption

📚5 Step Guide to Choosing an MTD Software

How Finexer Helps with MTD

While some clients may qualify for a valid MTD exemption, the majority of VAT-registered businesses still need to comply, and that’s where the real challenge begins. For firms managing clients who don’t have digital systems in place, Finexer bridges the gap without requiring full software migrations.

Finexer is built to help accountants:

Challenge	Without Finexer	With Finexer
Clients rely on CSVs or PDFs	Manual data entry increases error risk	Live transaction feeds from 99% of UK banks
Spreadsheets in use	Risk of broken digital links	Compatible with MTD bridging tools and Excel workflows
Clients hesitant to adopt full cloud software	Compliance becomes a barrier	Finexer adds digital capabilities without disrupting current tools
Managing smaller or seasonal clients	Monthly platform fees become a burden	Usage-based pricing with no setup fees or minimums
Keeping digital audit trails	Risk of non-compliance	Transactions are logged, traceable, and stored securely under FCA-regulated infrastructure

With Finexer, you can support your MTD clients and only escalate to full system changes when it’s necessary. It’s the ideal solution for firms that want to stay compliant without overcomplicating their workflow.

Common Misconceptions About MTD Exemptions

While MTD exemptions exist for valid reasons, many clients and sometimes even firms misunderstand what qualifies as a legitimate exemption. This can lead to incorrect assumptions, compliance risks, or missed deadlines.

Here are some of the most common misconceptions accountants should be aware of.

Misconception 1: “I Don’t Like Using Software, So I Must Be Exempt”

Discomfort with technology alone is not enough to qualify for an MTD exemption. Unless a client’s situation meets HMRC’s criteria for digital exclusion (such as verified disability or age), they are still required to comply with MTD for VAT.

Misconception 2: “Using a Spreadsheet Means I Don’t Need MTD Software”

Many clients assume spreadsheets are a workaround, but that’s only partially true. Spreadsheets must be linked to HMRC through bridging software to count as compliant. If they copy and paste values manually, they’re breaking the MTD rules — and they won’t qualify for an exemption just because they use Excel.

Misconception 3: “Small Businesses Are Automatically Exempt”

There is no exemption based on business size or revenue (as long as they are VAT-registered). MTD applies to most VAT-registered businesses, even if they submit only one return per year. The only exception would be if they voluntarily deregister or formally apply for an exemption and get approval.

Misconception 4: “I Filed Paper Returns Last Quarter, So I’m Fine”

Some clients may have submitted paper VAT returns in the past without penalty. But HMRC has made it clear: paper filing is only acceptable if an MTD exemption has been officially granted. Continuing with manual submissions without approval could result in non-compliance notices or fines.

A Quick Recap for Accountants

✅ Always verify eligibility before advising a client to opt out of MTD
✅ Support claims with specific, documented evidence
✅ Keep digital alternatives ready for clients who don’t qualify
✅ Use tools like Finexer to help clients stay MTD-compliant, especially when spreadsheets are involved