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ComplianceUpdated 2026-02-12

What is Making Tax Digital (MTD)?

Quick Answer

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.

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Detailed Explanation

Making Tax Digital timeline

VAT (already in force)

- All VAT-registered businesses must use MTD-compatible software - Submit VAT returns through API (not manual entry) - Keep digital records - Digital links required between software and spreadsheets

Income Tax Self Assessment (from April 2026)

- Applies to self-employed and landlords with income over £50,000 - Extended to £30,000+ income from April 2027 - Quarterly updates to HMRC - End of period statement instead of tax return

Corporation Tax

- Expected 2026+ but no confirmed date - Currently voluntary

What MTD requires

1. Use HMRC-approved software 2. Keep digital records of transactions 3. Submit returns through software (not HMRC website) 4. Digital links between data sources

What counts as 'digital records'

- Accounting software (like AccountsOS) - Spreadsheets with digital links to submission software - Not paper records typed in at year-end

Penalties for non-compliance

- Fixed penalties for late filing - Penalty points system leading to £200 fines - Interest on late payment

Source: HMRC Making Tax Digital Roadmap

Real-World Examples

VAT-Registered Catering Business

Sarah owns a catering company, registered for VAT. Since April 2022, she's been using Xero to record all her sales and purchases and submits her VAT returns directly to HMRC via Xero's API, fulfilling her MTD obligations for VAT.

Freelance IT Consultant - Income Tax

David is a freelance IT consultant earning £60,000 a year. From April 2026, he'll need to use MTD-compatible software to submit quarterly updates to HMRC about his income and expenses, replacing the traditional annual self-assessment return for this portion of his income.

Landlord with Multiple Properties

Jane owns several rental properties, generating an income of £40,000 annually. While she won't be mandated to join MTD for Income Tax in April 2026, she should prepare for potential future expansions of MTD, especially as the £30,000 threshold comes into play in April 2027.

Common Mistakes to Avoid

  • Continuing to manually enter data from paper records directly into the HMRC website, rather than using MTD-compatible software.
  • Failing to ensure digital links are in place if you're using a combination of software and spreadsheets for VAT records.
  • Assuming that because you use software for invoicing, it automatically means you are MTD compliant – check compatibility with HMRC.
  • Ignoring the upcoming MTD for Income Tax rules and waiting until the last minute to implement a system, potentially leading to penalties.

What happens if my business doesn't comply with MTD?

HMRC can impose penalties for non-compliance with MTD rules, ranging from warnings to financial fines. The severity of the penalty depends on the frequency and seriousness of the non-compliance.

Do I need to submit quarterly updates for Income Tax if my income is below the threshold?

No, MTD for Income Tax only applies to self-employed individuals and landlords with a total gross income from self-employment and property exceeding £50,000 from April 2026, and £30,000 from April 2027. You'll continue to file your self-assessment return annually until your income reaches the threshold.

What constitutes a 'digital link' between spreadsheets?

A digital link means transferring or exchanging data electronically without manual intervention. Copying and pasting, or manually retyping data between spreadsheets, is *not* a digital link.

If I'm part of a VAT group, how does MTD affect us?

VAT groups must comply with MTD requirements in the same way as individual VAT-registered businesses. The nominated representative of the VAT group is responsible for ensuring MTD compliance for the entire group.

Practical Tips

  • Research MTD-compatible accounting software early and choose one that suits your business needs and budget, many offer free trials.
  • If using spreadsheets, implement formulas and links now to ensure seamless data transfer and compliance with digital link requirements for VAT.
  • Attend HMRC webinars or consult with an accountant to fully understand your MTD obligations and get personalised advice.
  • Start transitioning to digital record-keeping now, even if you're not yet required to by MTD, to get comfortable with the process and avoid a rush later.

Related Questions

Do I need accounting software for Making Tax Digital?

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.

When does Making Tax Digital for Income Tax start?

MTD for Income Tax Self Assessment starts in April 2026 for those with qualifying income over £50,000, April 2027 for £30,000+, and April 2028 for £20,000+.

What software is compatible with Making Tax Digital?

MTD-compatible software must be on HMRC's list of compatible software. Free options include QuickFile, My Tax Digital, and FreeAgent (via NatWest/Mettle). Paid options include Xero, QuickBooks, Sage, and AccountsOS (on HMRC's own list for MTD for VAT; 14-day free trial, then £20/month + VAT).

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