What Features Must MTD Accounting Software Have to be HMRC Compliant?

Understanding Making Tax Digital for Income Tax Self Assessment (MTD ITSA)

Making Tax Digital (MTD) is a fundamental part of the UK government's plan to modernise the tax system, making it more efficient, more effective, and easier for taxpayers to get their tax right. The cornerstone of MTD for Income Tax Self Assessment (ITSA) is the requirement for businesses and landlords to keep digital records and to submit quarterly updates of their income and expenses to HMRC using MTD-compatible software. This represents a significant shift from the traditional annual tax return.

From April 2026, sole traders and landlords with qualifying business or property income exceeding £50,000 will be mandated to comply with MTD ITSA. This threshold will reduce to £30,000 from April 2027. For those affected, selecting and utilising HMRC-compliant software is not merely an option, but a legal obligation. This guide outlines the essential features such software must possess to ensure you remain compliant and manage your tax obligations effectively.

Core MTD Principles and Their Software Implications

At its heart, MTD ITSA is built upon three key principles, each with direct implications for the functionality of compliant accounting software: digital record keeping, quarterly updates, and the year-end finalisation process.

Digital Record Keeping: The Foundation of MTD

The first and most critical requirement of MTD is the obligation to keep digital records of all business or property income and expenses. This means that traditional paper-based ledgers or manual spreadsheet entries that are not linked to MTD-compliant software will no longer suffice as the sole method of record keeping.

Software Implications: An HMRC-compliant software solution must provide robust capabilities for storing and managing these digital records. This includes:

• Transaction Logging: The ability to accurately record every income and expense transaction, including date, amount, category, and a description. This data must be stored digitally and be easily retrievable.
• Bank Feed Integration: Seamlessly connecting with bank accounts to automatically import transactions. This significantly reduces manual data entry and minimises errors. The software should intelligently categorise these transactions, or allow for easy manual categorisation.
• Receipt and Invoice Capture: Functionality to upload, store, and link digital images of receipts and invoices directly to corresponding transactions. This eliminates the need for physical storage and provides an audit trail. Features like optical character recognition (OCR) can further automate this.
• HMRC-Approved Categorisation: The software must use or map to HMRC's specified income and expense categories, ensuring that data is presented in a format acceptable for tax submissions.
• Data Storage and Accessibility: Records must be stored securely for the required period (typically 5 years after the 31 January submission deadline for the relevant tax year) and be readily accessible for review or audit.

Quarterly Updates: Regular Reporting to HMRC

Instead of a single annual submission, MTD ITSA requires businesses and landlords to submit summaries of their income and expenses to HMRC every three months. These are known as 'quarterly updates' and must be sent digitally via HMRC's API.

Software Implications: Compliant software must automate the process of generating and submitting these updates:

• Automated Update Generation: The software should automatically aggregate the digital records for the relevant quarter, producing a summary of income and expenses in the required HMRC format.
• Direct API Submission: The most crucial feature is the ability to connect directly to HMRC's systems via an Application Programming Interface (API). This allows for secure, digital submission of the quarterly data without manual re-entry into government portals.
• Review and Approval Workflow: Before submission, the software should present a clear summary for review, allowing the user to check for errors and confirm accuracy. A clear audit trail of submissions is also vital.
• Confirmation and Tracking: The software should provide confirmation of successful submission from HMRC and maintain a record of all submitted updates, including their status and submission dates.
• Deadline Reminders: Automated notifications for upcoming quarterly submission deadlines are invaluable for avoiding penalties.

Year-End Finalisation: EOPS and Final Declaration

After the four quarterly updates for a tax year, businesses and landlords must complete two final annual submissions: an End-of-Period Statement (EOPS) for each business or property, and a single Final Declaration which combines all income sources.

Software Implications: Compliant software must facilitate these crucial year-end processes:

• End-of-Period Statement (EOPS) Support: The software must consolidate the data from the four quarterly updates for each business or property. It needs to allow for accounting adjustments that are typically made at year-end, such as accruals, prepayments, stock valuations, capital allowances, and adjustments for private use of assets. The EOPS must also be submitted to HMRC via API.
• Final Declaration Preparation: This is the equivalent of the current Self Assessment tax return. The software should aggregate all income sources (e.g., multiple sole trades, property income, employment income, dividends, pensions) to calculate the final tax liability. It must factor in personal allowances, reliefs, and any tax already deducted at source. The Final Declaration is also submitted via HMRC's API.
• Error Correction Functionality: The ability to easily review and correct any errors identified in previous quarterly updates or the EOPS before the Final Declaration is made.

Essential Software Features for HMRC Compliance

Beyond the core principles, specific functionalities within MTD-compliant software are non-negotiable for adhering to HMRC's requirements. These features ensure accuracy, efficiency, and full compliance.

1. Digital Record-Keeping Capabilities

The bedrock of MTD ITSA is the requirement to keep digital records. Your chosen software must excel in this area, transforming raw financial data into a structured, compliant format.

• Automated Data Import: Integration with bank accounts, credit cards, and payment processors (e.g., Stripe, PayPal) to automatically import transaction data. This reduces manual entry and ensures all transactions are captured.
• Smart Categorisation: AI-powered categorisation of income and expenses, allowing users to quickly assign transactions to HMRC-approved categories. It should also 'learn' from user input to improve accuracy over time.
• Receipt & Document Management: Functionality to upload, store, and attach digital copies of receipts, invoices, and other supporting documents to individual transactions. This is crucial for audit purposes and proving expenses.
• Audit Trail: A clear, immutable audit trail of all transactions, changes, and submissions, demonstrating how figures were arrived at.

2. Quarterly Reporting Functionality

Submitting quarterly updates is a new obligation for many. The software must make this process as straightforward and error-free as possible.

• Automated Summary Generation: The software should automatically compile the necessary income and expense summaries for each three-month period from your digital records.
• Direct HMRC API Submission: This is non-negotiable. The software must have a robust, secure, and tested connection to HMRC's MTD API to send the quarterly updates directly. Manual input into a separate HMRC portal is not compliant.
• Pre-Submission Review: A clear, user-friendly interface to review the quarterly summary before submission, highlighting key figures and allowing for final checks.
• Submission Confirmation & History: Immediate confirmation from HMRC upon successful submission, and a clear historical record within the software of all submitted updates, including HMRC's submission reference.

3. End-of-Period Statement (EOPS) Support

The EOPS is your chance to apply annual accounting adjustments to your quarterly data. Your software must guide you through this.

• Consolidation of Quarterly Data: The software must seamlessly pull together all four quarterly updates for a given tax year for each business or property.

• Accounting Adjustments Facilitation: Tools to input and calculate common year-end adjustments such as:

  • Capital allowances (e.g., Annual Investment Allowance, full expensing)
  • Private use adjustments (e.g., portion of car or home office expenses)
  • Stock valuation
  • Accruals and prepayments
  • Bad debt relief

  The software should clearly show how these adjustments impact the final figures.

• EOPS Submission via API: Direct digital submission of the completed EOPS to HMRC.

4. Final Declaration Preparation

The Final Declaration brings everything together, much like your current Self Assessment. Software must support its comprehensive nature.

• Aggregation of All Income Sources: Ability to combine data from all EOPS (multiple businesses, properties) and integrate other income types (e.g., employment, pensions, dividends, savings interest).
• Personal Allowances & Reliefs: Functionality to apply personal allowances, tax reliefs, and deductions to accurately calculate the overall tax liability.
• Final Declaration Submission: Direct submission of the complete Final Declaration to HMRC via API, replacing the traditional SA100 form.
• Tax Calculation & Payment Reminders: Display of the final tax calculation and reminders for payment deadlines.

5. Bridging Software Compatibility (Transitional)

While full integration is ideal, some businesses may initially rely on spreadsheets for parts of their record keeping.

• Integration with Spreadsheets: If the primary accounting software is not end-to-end, it might offer 'bridging software' capabilities. This means it can take summary data from a spreadsheet (where digital records are kept) and transmit it to HMRC via the MTD API.
• Data Validation: Bridging software should include checks to ensure data imported from spreadsheets is in the correct format before submission, preventing common errors.

Note on Bridging Software: While bridging software can facilitate compliance for those still heavily reliant on spreadsheets, it is generally considered a transitional solution. Fully integrated accounting software, like AccountsOS, offers a more streamlined, error-resistant, and efficient approach to MTD compliance by maintaining all records digitally from the outset.

6. Error Correction and Adjustments

Mistakes happen, and compliant software must provide a clear pathway to rectify them without incurring penalties.

• Amendment Tools: Easy-to-use functions to amend previously submitted quarterly updates or EOPS. This might involve submitting a revised update or making an adjustment in a subsequent period.
• Audit Trail of Corrections: Comprehensive logging of all corrections made, including dates and reasons, maintaining the integrity of the digital records.

7. HMRC Recognised Software Status

The ultimate check for compliance is HMRC's own recognition.

• Official Recognition: The software provider must be listed on HMRC's official list of MTD-compatible software for Income Tax Self Assessment. This list is the authoritative source for verifying compliance.
• Ongoing Updates: HMRC's requirements can evolve. Compliant software providers will regularly update their systems to reflect any changes in MTD legislation or API specifications, ensuring continuous compliance.

Key Benefits of Using MTD-Compliant Software

Beyond simply meeting HMRC's requirements, MTD-compliant software offers significant advantages that can transform how you manage your business or property finances.

• Reduced Errors and Increased Accuracy: Automated data entry from bank feeds and smart categorisation drastically reduce the risk of manual errors, leading to more accurate financial records and tax submissions.
• Significant Time Savings: Automating record keeping, quarterly update generation, and direct API submissions frees up considerable time that would otherwise be spent on manual data entry and administrative tasks.
• Real-time Financial Overview: With up-to-date digital records, you gain a clearer, real-time understanding of your business or property's financial performance, enabling better decision-making.
• Easier Tax Planning: Regular updates and real-time tax estimates help you track your tax liability throughout the year, allowing for better financial planning and avoiding year-end surprises.
• Reduced Stress and Penalties: Automation, deadline reminders, and direct submission capabilities significantly reduce the stress associated with tax compliance and help avoid late filing or payment penalties.
• Improved Collaboration with Accountants: Digital records can be easily shared with your accountant, streamlining communication and enabling them to provide more proactive advice.

Who Needs MTD ITSA Compliant Software?

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is being introduced in phases, initially targeting those with higher incomes. It is critical to understand if and when these rules will apply to you.

Who	Qualifying income	Start
Sole Traders & Landlords	Above £50,000	April 2026
Sole Traders & Landlords	Above £30,000	April 2027
General Partnerships	All income levels	To be confirmed

Qualifying Income Explained

The income thresholds refer to your total gross income from qualifying businesses and/or property, before any expenses are deducted. If you have multiple sole trades or multiple rental properties, the income from all of these sources is aggregated to determine if you meet the threshold.

Exemptions from MTD ITSA

While MTD ITSA will become mandatory for a significant number of sole traders and landlords, certain individuals and businesses may be exempt:

• Low Income: If your qualifying income remains below the mandated thresholds, you are not required to join MTD ITSA.
• Digital Exclusion: Individuals who are genuinely unable to comply with MTD due to age, disability, location, or other reasons, and cannot reasonably be expected to do so, may be able to apply for an exemption.
• Religious Objection: Those whose religious beliefs are incompatible with the use of electronic communications may also be exempt.
• Insolvency: Individuals undergoing insolvency procedures may have different reporting requirements.

If you believe you might be exempt, it is crucial to contact HMRC directly to confirm your status and understand the process for applying for an exemption. Do not assume you are exempt without official confirmation.

Choosing the Right MTD Software for Your Needs

With numerous software providers on the market, selecting the right MTD-compliant solution can seem daunting. Consider the following factors to ensure you choose software that best fits your specific requirements.

HMRC Recognition

This is paramount. Always verify that the software is on HMRC's official list of MTD-compatible software for Income Tax. This ensures it meets the technical and functional requirements for digital record keeping and API submissions.

User-Friendliness and Interface

The software should be intuitive and easy to navigate, even for those without extensive accounting experience. A clear, logical interface will minimise errors and make the quarterly reporting process less stressful. Look for features like clear dashboards, simple transaction entry, and guided submission processes.

Core MTD Features

Ensure it covers all the essential features discussed in this guide: robust digital record keeping, automated quarterly updates, EOPS support, and Final Declaration preparation. Verify its capability to connect directly to HMRC's API.

Cost and Pricing Structure

Compare pricing models. Some software offers tiered subscriptions based on features or transaction volume. Consider the overall value, not just the monthly fee. Look for transparent pricing without hidden costs.

Customer Support and Resources

Access to reliable customer support (phone, email, chat) is crucial, especially during the initial transition to MTD. Check if the provider offers comprehensive help guides, tutorials, and community forums.

Scalability and Future-Proofing

Consider if the software can grow with your business. Will it support additional income streams, employees, or more complex accounting needs in the future? Ensure it is regularly updated to meet evolving HMRC requirements.

Security and Data Protection

Your financial data is sensitive. The software should employ robust security measures, including data encryption, multi-factor authentication, and regular backups, to protect your information in compliance with GDPR.

Integration with Other Tools

If you use other business tools (e.g., e-commerce platforms, CRM), check if the MTD software integrates with them to further streamline your financial processes and avoid data silos.

Worked Examples of MTD ITSA Compliance

To illustrate how MTD-compliant software works in practice, let us consider a few scenarios for a sole trader and a landlord.

Example 1: Sole Trader Quarterly Submission

Sarah runs a freelance graphic design business. Her accounting period aligns with the tax year (6 April - 5 April). For the first MTD quarter (6 April to 5 July), she needs to submit her income and expenses.

Scenario Breakdown:

• Sarah connects her business bank account to AccountsOS.
• Throughout the quarter, all transactions automatically import.
• AccountsOS's AI categorises most transactions, e.g., "Client Payment" (Income), "Software Subscription" (IT Costs), "Travel Expenses" (Travel).
• Sarah manually reviews and confirms categories, adding digital receipts for larger expenses like a new monitor.
• By 5 July, her digital records are complete for the quarter.
• AccountsOS automatically generates a summary report:
  • Total Income: £12,500
  • Total Expenses: £1,800
• Sarah reviews this summary within AccountsOS.
• With a click, she submits the quarterly update directly to HMRC via AccountsOS's API.
• AccountsOS provides HMRC's confirmation reference and records the submission date.

Outcome: Sarah has successfully completed her first MTD quarterly update, ensuring compliance and having a real-time view of her tax liability.

Example 2: Landlord End-of-Period Statement (EOPS)

David is a landlord with one rental property. He has submitted four quarterly updates for the tax year ending 5 April 2027. Now he needs to submit his EOPS.

Scenario Breakdown:

• AccountsOS consolidates all four quarterly updates for David's property, showing total income and expenses for the year.
• David needs to make an adjustment for a capital allowance on a new boiler installed in the property. He enters the asset cost and date into AccountsOS.
• AccountsOS automatically calculates the Annual Investment Allowance (AIA) or other relevant capital allowance.
• He also recalls he used his personal car for a property inspection. He logs the mileage in AccountsOS, which calculates the allowable expense.
• AccountsOS generates the EOPS, incorporating these adjustments.
  • Gross Rental Income: £15,000
  • Allowable Expenses (including mileage): £3,500
  • Capital Allowances: £2,000
  • Taxable Property Profit: £9,500
• David reviews the EOPS summary in AccountsOS.
• He then submits the EOPS to HMRC via the integrated API.
• AccountsOS confirms the submission and stores the record.

Outcome: David's property income and expenses are accurately reported, including year-end adjustments, ready for the Final Declaration.

Example 3: Correcting an Error in a Previous Quarter

Maria, a sole trader, submitted her Q2 update. Later, she realised she accidentally categorised a personal expense as a business expense.

Scenario Breakdown:

• Maria goes back to her Q2 records in AccountsOS.
• She locates the incorrect transaction and re-categorises it as 'private expense' or removes it from business expenses.
• AccountsOS's audit trail logs this change.
• For MTD, errors can be corrected in a subsequent quarterly update or in the EOPS. AccountsOS will automatically factor this correction into the next relevant submission.
• When she prepares her Q3 update, AccountsOS will reflect the revised figures for the year-to-date, effectively correcting the Q2 error in the aggregated data sent to HMRC.

Outcome: Maria's records are now accurate, and the correction will be automatically included in her next MTD submission, preventing potential issues with HMRC.

Penalties for MTD ITSA Non-Compliance

HMRC is introducing a new penalty system for MTD for Income Tax Self Assessment, designed to be fairer and more proportionate than the previous regime. However, consistent failures to comply will still result in financial penalties.

Scenario	Penalty
Late quarterly update	Points-based system, financial penalties for repeated failures
Late End-of-Period Statement	Points-based system, financial penalties
Late Final Declaration	Points-based system, financial penalties
Failure to keep digital records	Potential financial penalties
Inaccurate submission	Potential financial penalties depending on carelessness/deliberation
Late payment of tax	Interest charged, escalating penalties

Points-Based System: For late submissions of quarterly updates, EOPS, and the Final Declaration, HMRC will implement a points-based system. Each missed deadline accumulates a point. Once a certain threshold of points is reached (e.g., 4 points for annual filers), a financial penalty of £200 is issued. Points expire after a period of compliant submissions.

Late Payment Penalties: Separate penalties apply for late payment of tax, similar to the current system, starting with a 2% charge after 30 days, increasing after 6 months and 12 months. Interest will also be charged on overdue amounts.

Inaccuracy Penalties: If HMRC finds errors in your submissions, you could face penalties for inaccuracies. The amount depends on whether the inaccuracy was careless, deliberate but not concealed, or deliberate and concealed. Penalties can range from 0% to 100% of the additional tax due.

The Future of Making Tax Digital

Making Tax Digital is an ongoing programme, and MTD for Income Tax Self Assessment (ITSA) is just one phase of HMRC's long-term vision for a fully digital tax system.

While the current focus is on sole traders and landlords, it is anticipated that MTD will eventually be extended to other taxpayer groups and income types. General partnerships, regardless of income, are expected to join MTD ITSA at a date yet to be confirmed. There are also plans for MTD for Corporation Tax (CT) in the future, meaning limited companies will also eventually need to comply with similar digital record-keeping and submission requirements.

For businesses and individuals, this means that embracing digital accounting software now is not just about meeting current compliance, but about future-proofing your financial management. As MTD expands, having a robust, compliant software solution will become increasingly essential for all taxpayers.

How AccountsOS Ensures Your MTD Compliance

AccountsOS is designed from the ground up to be fully compliant with Making Tax Digital for Income Tax Self Assessment.

Automated Digital Record Keeping

Connect bank accounts and capture receipts to automatically categorise income and expenses in a MTD-compliant format.

Seamless Quarterly Updates

Generate and submit your quarterly updates directly to HMRC via our integrated API, with clear review steps.

Guided EOPS & Final Declaration

AccountsOS helps you prepare your End-of-Period Statement and Final Declaration, including necessary adjustments, for direct submission.

Real-time Tax Estimates

See your estimated MTD tax liability update as you record transactions, helping you plan ahead and avoid surprises.

Frequently asked questions

Do I need MTD software if I only have a small side income?

MTD for Income Tax Self Assessment (ITSA) currently applies to sole traders and landlords with qualifying income above specific thresholds (£50,000 from April 2026, £30,000 from April 2027). If your income is below these thresholds, you are not currently mandated to use MTD software.

Can I still use spreadsheets for MTD?

You can use spreadsheets to record your digital records, but you will need 'bridging software' to send the summarised data from your spreadsheet to HMRC via their API. HMRC's preference is for fully integrated software solutions.

What if I have multiple income sources, like a sole trade and property income?

MTD-compliant software must be able to handle all relevant income sources that fall under MTD ITSA. It will consolidate these for your End-of-Period Statements and the Final Declaration, ensuring a complete picture is sent to HMRC.

What happens if I make a mistake in a quarterly update?

HMRC understands that errors can occur. MTD-compliant software allows you to make adjustments and corrections in subsequent quarterly updates or in your End-of-Period Statement. It is important to correct errors as soon as they are identified.

How do I know if software is truly HMRC-compliant?

HMRC maintains a list of software providers that are recognised for MTD for Income Tax. Always check this list on the GOV.UK website to ensure the software you choose meets the necessary standards.

Is MTD for Income Tax the same as MTD for VAT?

While both are part of the Making Tax Digital initiative and require digital record keeping and API submissions, they are distinct. MTD for VAT applies to VAT-registered businesses above the VAT threshold, while MTD for ITSA applies to sole traders and landlords above specific income thresholds.

What is an End-of-Period Statement (EOPS)?

The EOPS is an annual summary that consolidates your quarterly updates for each business or property, allowing you to make any final accounting adjustments before your overall tax position is finalised in the Final Declaration.

Will MTD software calculate my exact tax bill?

MTD software will help you prepare the data for your tax return and calculate your taxable profits for your business or property income. Your final overall tax liability will be determined after the Final Declaration, which includes all personal income and allowances.

Related guides

• Making Tax Digital Hub
• MTD for Sole Traders Guide
• MTD for Landlords Guide
• HMRC Recognised Software