Making Tax Digital (MTD) is HMRC’s programme to move tax record-keeping and submission entirely online, using compatible software. The aim is to reduce errors in tax returns, make it easier for businesses to get their tax right, and give HMRC more timely visibility of tax liabilities. For UK businesses, it means the way you record transactions and file tax returns is changing — if it has not already changed for you.
What Does Making Tax Digital Actually Require?
MTD has two core requirements:
- Digital record-keeping: You must keep your financial records in a digital format using MTD-compatible software. Paper records or non-compatible spreadsheets are not sufficient on their own.
- Digital submission: Tax returns must be submitted to HMRC directly through MTD-compatible software, not via HMRC’s online portal (which is being phased out for MTD-mandated taxpayers).
Note that spreadsheets are not automatically banned — you can use a spreadsheet as long as it is linked to bridging software that submits digitally to HMRC. However, dedicated cloud accounting software is generally the simpler and more reliable approach.
MTD for VAT — Already in Force
MTD for VAT has been mandatory for all VAT-registered businesses since April 2022. If your business is VAT-registered, you must already be using MTD-compatible software to submit your VAT returns. If you are still submitting through HMRC’s old online portal, you are non-compliant and at risk of penalties.
The VAT registration threshold is currently £90,000 in annual taxable turnover (as of April 2024). Businesses below this threshold can voluntarily register for MTD for VAT.
MTD for Income Tax — Rolling Out from April 2026
MTD for Income Tax Self Assessment (MTD for ITSA) is being introduced in phases:
- April 2026: Self-employed individuals and landlords with gross income over £50,000 must comply
- April 2027: Extended to those with gross income over £30,000
- Future date (TBC): Expected to extend to those with income over £20,000
Under MTD for ITSA, affected taxpayers will need to submit quarterly updates to HMRC (a summary of income and expenses for each quarter) rather than a single annual Self Assessment return. A final declaration replaces the current Self Assessment tax return at the end of the tax year.
MTD for Corporation Tax
MTD for Corporation Tax is still in development. HMRC has indicated it will not be mandated before 2026 at the earliest. Limited companies should prepare for it but are not yet required to act.
What Software Do You Need?
You need software that appears on HMRC’s list of recognised MTD-compatible products. All major cloud accounting platforms (Xero, QuickBooks, Sage, FreeAgent, KashFlow) are MTD-compliant for VAT and are developing MTD for ITSA functionality. When choosing or reviewing your software, check HMRC’s approved software list at gov.uk to confirm compatibility.
For businesses that prefer to keep using spreadsheets, bridging software (such as Absolute Tax’s MTD bridging tool or Tax Optimiser’s service) can link your spreadsheet data to HMRC’s API, satisfying the digital submission requirement. This is a workable but not ideal long-term solution.
What Are the Penalties for Non-Compliance?
HMRC introduced a points-based penalty system for MTD non-compliance. Each missed submission earns a point. Accumulate enough points and a £200 financial penalty is triggered, with further penalties for continued failure. Separate late payment penalties apply for tax paid after the due date.
HMRC has been relatively lenient during the early MTD rollout phases, but penalties are being enforced. Non-compliance is a growing risk as the programme matures.
What Should You Do Now?
- Check whether MTD for VAT already applies to you (it does if you are VAT-registered)
- Confirm your accounting software is on HMRC’s MTD-compatible list
- If you are self-employed or a landlord with income over £50,000, begin preparing for MTD for ITSA ahead of April 2026
- If you are still using spreadsheets alone, consider moving to cloud accounting software now rather than under pressure at a deadline
