Making Tax Digital — Complete Guide for UK Businesses

Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system. It requires businesses and individuals to keep digital records and submit tax information using HMRC-approved software. Understanding the timetable, software requirements, and compliance rules now will save significant stress — and penalties — later.

1. What is Making Tax Digital?

Making Tax Digital (MTD)is HMRC's long-term initiative to move tax administration online. The programme has two core requirements:

• Digital record keeping— maintaining records electronically using software that meets HMRC's functional compatibility standards
• Digital submission— filing tax returns or updates directly from compatible software via HMRC's Application Programming Interface (API), rather than via the Government Gateway web portal

MTD was first announced in 2015 and has been phased in gradually. VAT was the first tax brought into MTD; income tax and corporation tax follow on a later timetable. The stated aims are to reduce the tax gap (estimated at £35.8 billion in 2022/23), reduce errors caused by manual data entry, and make tax more visible to businesses throughout the year rather than once annually.

2. MTD for VAT

MTD for VAT was the first phase of the programme:

• April 2019 — mandatory for VAT-registered businesses with taxable turnover above the £85,000 VAT threshold
• April 2022 — extended to all VAT-registered businesses, including those voluntarily registered below the threshold

Since April 2022, every VAT-registered business must:

1. Keep digital VAT records (sales, purchases, and the VAT account)
2. Use MTD-compatible software to submit VAT returns — direct submission via the Government Gateway portal is no longer available
3. Maintain digital links between all software used in the VAT return journey (see section 6)

Paper records and manual VAT calculations are not permitted unless an exemption applies. HMRC has indicated that failure to comply with MTD for VAT is itself a breach of VAT regulations, and penalties apply separately from any inaccuracy in the return itself.

3. MTD for Income Tax Self Assessment (ITSA)

MTD for Income Tax Self Assessment (ITSA) will replace the current annual Self Assessment return for most self-employed people and landlords. The timetable:

• April 2026 — mandatory for self-employed individuals and/or landlords with total gross income from those sources above £50,000
• April 2027 — extended to those with income above £30,000
• April 2028 — extended to those with income above £20,000

Under MTD for ITSA, affected taxpayers must:

• Keep digital records of all self-employment and property income and expenses
• Submit four quarterly updates per year (roughly every 3 months) summarising income and expenses for each business or property
• Submit an end-of-period statement (EOPS) after the tax year end, confirming the annual figures and adding any adjustments
• Submit a final declaration (replacing the current Self Assessment tax return) confirming total income from all sources

General partnerships will be brought into MTD for ITSA at a date to be confirmed by HMRC. Employed individuals with no self-employment or property income are not affected.

4. MTD for Corporation Tax

MTD for Corporation Tax (CT) is at consultation stage and is not yet mandatory. Key points:

• HMRC published a consultation on MTD for CT in 2021; the earliest possible mandation date was originally suggested as 2026, though no firm date has been confirmed
• A voluntary pilot is planned before any mandation; businesses can choose to participate early
• The programme is expected to follow broadly similar principles to MTD for ITSA — digital records, periodic updates, and API-based filing

Businesses should monitor HMRC announcements and ensure their accounting software is kept up to date, but no immediate action is required on MTD for CT beyond awareness.

5. Compatible Software

HMRC maintains a list of MTD-compatible software products on its website. There are two main approaches:

• Native MTD software— cloud accounting platforms that connect directly to HMRC's API and handle both record keeping and submission. Major providers include:
  • Xero
  • QuickBooks Online (Intuit)
  • Sage Accounting
  • FreeAgent (owned by NatWest Group; free for RBS/NatWest/Ulster Bank business customers)
  • KashFlow, Zoho Books, and many others
• Bridging software— tools that sit between a spreadsheet (or legacy system) and HMRC's API, converting exported data into the required format for submission. Suitable for businesses that wish to continue using Excel or other non-MTD-native tools

When choosing software, consider: cost, the number of users, integration with your bank feed, payroll capability, and whether the provider has confirmed MTD for ITSA readiness for when that becomes relevant to you. Using software not on HMRC's approved list means your submissions will not be accepted.

6. Digital Links

A digital link is an electronic transfer of data between software applications that does not involve manual re-keying. HMRC requires a continuous digital audit trail from individual transactions all the way through to the final tax submission.

Examples of permitted digital links:

• Spreadsheet formulas that pull data from one sheet or workbook to another
• Macros that copy and paste data automatically between applications
• API connections, XML or CSV imports, and automated data feeds
• Email attachments of digital files (CSV, XML) that are then imported into another system

Not permitted:

• Manually typing a figure from one software system into another
• Copy-pasting a figure from a spreadsheet cell into a different system by hand
• Transferring data via a printed intermediary

Many businesses use a combination of software — for example, a till system, a spreadsheet, and an accounting package. Each link in that chain must be digital. Bridging software can help where native integration is not possible.

7. Quarterly Updates under MTD for ITSA

Under MTD for ITSA, each affected taxpayer must submit four quarterly updates per year for each source of self-employment income and each property business. The update periods align with the quarters ending 5 July, 5 October, 5 January, and 5 April (or, where a business elects to use the calendar year, 30 June, 30 September, 31 December, and 31 March).

Key points about quarterly updates:

• No tax is due as a result of a quarterly update — the submission is informational only
• Updates contain a summary of income and expenses for the quarter; they do not need to be audited accounts
• Adjustments, claims for reliefs and allowances, and personal income from other sources are dealt with at the end-of-period statement and final declaration stages
• Late or missing quarterly updates will attract penalties under the new points-based penalty system (see section 9)
• HMRC will use the quarterly data to calculate an in-year tax estimate, visible in the taxpayer's HMRC online account — intended to help with budgeting, not to trigger early payment

8. Exemptions from MTD

HMRC may grant exemptions from MTD requirements in the following circumstances:

• Digital exclusion — individuals who cannot use digital tools due to age, disability, or location (e.g. no reliable internet access). HMRC assesses these cases individually
• Religious objection — members of certain religious groups whose beliefs are incompatible with the use of electronic technology
• Below the relevant income threshold — businesses and individuals below the applicable turnover or income threshold are not required to join MTD until they exceed it
• Insolvency — businesses in formal insolvency proceedings may be exempt while proceedings are ongoing

To apply for a digital exclusion exemption, contact HMRC directly. If exempted from MTD for VAT, businesses must still file VAT returns — just not via the MTD route. Exemptions do not remove the underlying tax obligation.

9. Penalties

MTD for VAT — a points-based late submission penalty regime was introduced from January 2023:

• Each late submission earns 1 penalty point
• Once the points threshold is reached (2 for quarterly filers), a £200 fixed penalty applies for each subsequent late submission
• Points expire after 24 months of compliant filing
• A separate late payment penalty applies: 2% on any VAT unpaid after 15 days, a further 2% at 30 days, and a daily rate for continued non-payment

MTD for ITSA — the same points-based system is planned, with 4 points for quarterly filers triggering a £200 penalty. HMRC has confirmed the intention to align the penalty regimes across MTD taxes.

Failure to comply with the digital record-keeping and digital links requirements (as opposed to simply filing late) can result in inaccuracy penalties of up to 30% of the potential lost revenue (unprompted) or 15% (prompted) where errors arise from the non-compliance.

10. Practical Steps to Prepare

• Check your obligations — determine which MTD regime applies to you and when, based on your VAT status and level of self-employment or property income
• Sign up for an MTD pilot — HMRC runs voluntary pilots for MTD for ITSA; joining early helps identify issues before mandation
• Choose your software now — do not wait until the mandation date; set up and test your chosen software well in advance so your digital records are established from day one
• Appoint an agent — if you use an accountant or tax agent, ensure they are authorised to act for you under MTD; the process is separate from the existing Government Gateway authorisation
• Audit your data flow — map how transaction data flows from its source to the tax submission and identify any gaps in your digital links
• Consider a bridging solution— if you use spreadsheets and do not want to switch software, explore bridging tools that connect your existing system to HMRC's API
• Set calendar reminders — quarterly update deadlines will be in addition to existing filing obligations; missing them attracts penalty points from day one

MTD timetable at a glance