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ComplianceUpdated 2026-10-19

Do I need accounting software for Making Tax Digital?

Quick Answer

Yes, if you're VAT-registered you must already use MTD-compatible software. From April 2026, self-employed and landlords earning over £50,000 must also use MTD-compatible software for Income Tax.

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Detailed Explanation

Making Tax Digital software requirements

MTD mandates the use of compatible digital tools for keeping records and submitting returns to HMRC. You cannot use the HMRC website to file manually.

Current MTD requirements (already in force)

MTD for VAT (all VAT-registered businesses)

- Must use MTD-compatible software to keep digital VAT records - Must file VAT returns through the software's API connection - Cannot file through the HMRC online portal - Digital links required between any spreadsheets and filing software

Upcoming MTD requirements

MTD for Income Tax Self Assessment (from April 2026)

- Applies to self-employed and landlords with income over **£50,000** - From April 2027: extends to income over **£30,000** - Quarterly updates to HMRC (not just annual return) - End-of-period statement replaces traditional tax return

MTD for Corporation Tax

- Expected but **no confirmed date** yet - Likely 2026 or later - Currently voluntary

What 'compatible software' means

Software must: 1. Keep digital records of transactions 2. Connect to HMRC's API to submit returns 3. Maintain digital links between records and submissions 4. Be on HMRC's approved list (though HMRC doesn't formally certify software)

Popular MTD-compatible options

| Software | MTD VAT | MTD ITSA | Price | |---|---|---|---| | AccountsOS | Yes | Planned | £20/month (14-day free trial) | | Xero | Yes | Yes | £16-65/month | | QuickBooks | Yes | Yes | £12-35/month | | FreeAgent | Yes | Yes | £35/month | | Sage | Yes | Yes | £14-40/month | | HMRC-compatible spreadsheets + bridging | Yes | Varies | Free-£10/month |

Can I use spreadsheets?

Yes, but with conditions: - You need bridging software to connect your spreadsheet to HMRC - Digital links must exist between your spreadsheet and the bridging software - No retyping data - it must flow digitally - Copy-paste is acceptable as a digital link - Several free and low-cost bridging tools are available

What are 'digital links'?

A digital link is an electronic or automatic transfer of data between software programs or parts of a program. This includes: - Automated data transfers between apps - Importing/exporting CSV files - Copy-paste between cells or programs - API connections

What's not a digital link: - Manually typing figures from one system into another - Reading numbers from a screen and entering them

Penalties for non-compliance

If you're required to use MTD but don't: - Points-based system

You accumulate penalty points for each late/non-digital submission - At a certain threshold (usually 4 points): **£200 penalty** - Points expire after 24 months of compliance - Additional penalties for continued non-compliance

Getting started with MTD

  • **Check your obligations** - Are you VAT-registered? Self-employed with income over £50,000?
  • **Choose compatible software** - Consider your business needs and budget
  • **Set up digital record-keeping** - Import your existing data
  • **Sign up for MTD** via your Government Gateway account
  • **File your first return** through the software

Source: HMRC Making Tax Digital Guidance

Real-World Examples

Growing Business and MTD for ITSA

You're a freelance web developer and your income from self-employment has grown steadily. In the 2025/26 tax year, you earned £48,000. That is above the £30,000 threshold for MTD for ITSA from April 2027, so you need to start researching compatible software now.

Landlord with Multiple Properties

You are a landlord renting out three properties. Your combined rental income is £60,000. This puts you over the £50,000 MTD for ITSA threshold coming in April 2026, meaning you need to use MTD-compatible software to record your rental income and expenses and submit quarterly updates to HMRC.

Switching from Spreadsheets for VAT

You run a small retail business and are VAT registered. You currently use spreadsheets to track your VAT. You must switch to MTD-compatible software like Xero or QuickBooks Online by your next VAT return deadline as spreadsheets alone are no longer compliant.

Common Mistakes to Avoid

  • Assuming spreadsheets are compliant for MTD if you manually enter totals into MTD bridging software, as this breaks the digital link rules.
  • Waiting until the last minute to choose and implement accounting software, leading to rushed decisions and potential errors.
  • Not understanding the features of the software and failing to use it effectively to manage your finances.
  • Ignoring the requirement for digital links between different software packages, even if you are using multiple programs.

What happens if I don't comply with MTD?

HMRC can issue penalties for non-compliance with MTD regulations. These penalties can vary depending on the severity and frequency of the non-compliance and are points-based.

Can I get help with the cost of MTD-compatible software?

While HMRC doesn't directly offer grants for software, the cost is a legitimate business expense you can deduct from your profits, reducing your tax liability. Some software providers may also offer introductory discounts or free trials.

What if my business is exempt from MTD?

In very specific circumstances, HMRC may grant exemptions from MTD, for example, if it's not reasonably practical to use digital tools due to age, disability, or location. You need to apply for an exemption from HMRC.

Does the software handle all the calculations automatically?

Yes, MTD-compatible software will automatically perform VAT or Income Tax calculations based on the data you input. However, it's crucial to ensure the data you enter is accurate for correct tax reporting.

Practical Tips

  • Research different accounting software options carefully, comparing features, pricing, and user reviews before making a decision.
  • Start using the software well in advance of the MTD deadline to familiarize yourself with its features and processes.
  • Back up your accounting data regularly to prevent data loss due to technical issues or human error. Consider using cloud-based backup solutions.
  • Take advantage of training resources and support offered by the software provider to learn how to use the software effectively. Look for online tutorials, webinars, and customer support options.

Related Questions

What is Making Tax Digital (MTD)?

Making Tax Digital is HMRC's initiative requiring businesses to keep digital records and submit returns using compatible software. VAT is already under MTD; Income Tax follows in April 2026.

How often do I submit VAT returns?

Most businesses submit VAT returns quarterly, with payment due one month and seven days after the period ends. You can also opt for monthly or annual returns in certain circumstances.

What records do I need to keep for my limited company?

Keep all business records for at least 6 years. This includes bank statements, invoices, receipts, payroll records, and accounting records. Companies House records must be kept indefinitely.

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