Making Tax Digital

Making Tax Digital (MTD) is HM Revenue & Customs' flagship initiative to transform the UK tax system into a fully digital, real-time process. The goal is to make tax administration more efficient, reduce errors, and give businesses a clearer picture of their tax position throughout the year. MTD is being rolled out in phases, starting with VAT.

MTD for VAT

Since 1 April 2019, all VAT-registered businesses with taxable turnover above £85,000 have been required to file VAT returns using MTD-compatible software and to maintain digital records. From November 2022, mandatory MTD filing was extended to all VAT-registered businesses regardless of turnover. This means every VAT-registered business must use approved software to submit returns directly to HMRC's systems via API. Spreadsheets can still be used, but they must be linked to MTD-compatible bridging software that connects to HMRC.

MTD for Income Tax (MTD for IT)

MTD for Income Tax is being phased in from the 2026–27 tax year. Initially, sole traders and landlords with total business or property income above £50,000 will be required to maintain digital records and submit quarterly updates to HMRC, with an end-of-year finalisation. The requirement will extend to those with income above £30,000 from the 2027–28 tax year. Partnerships and general partnerships are expected to be brought into the system at a later date.

Digital Record-Keeping

Under MTD, businesses must maintain digital records of all income and expenses. For VAT, this includes records of supplies made and received. For Income Tax, it includes all business income and expenditure. The records must be kept digitally using functional compatible software. "Digital records" means the data is held in a digital format — simply scanning paper receipts is not sufficient; the relevant data must be entered into software.

Bridging Software

Bridging software is an application that sits between a spreadsheet or legacy accounting package and HMRC's MTD API. It extracts the required data, formats it for submission, and sends it to HMRC. Bridging software is a practical solution for businesses that prefer to maintain their records in spreadsheets but need to comply with MTD filing requirements. Many bridging software options are free or low-cost.

Quarterly Updates

For MTD for Income Tax, businesses must send quarterly updates to HMRC summarising their income and expenses for that quarter. The updates are cumulative and must be submitted within one month of the quarter end. A final declaration is made after the end of the tax year to confirm the figures and make any adjustments. The quarterly updates do not require a payment at the time of submission — payments continue to be made via Self Assessment.

Penalties

Failure to comply with MTD requirements can result in penalties. Late submission of VAT returns attracts points-based penalties. For MTD for IT, a new penalty regime is being introduced, with late submission penalties based on the number of returns missed and late payment penalties based on interest on overdue amounts. HMRC provides a "soft landing" period for businesses new to MTD, but deliberate non-compliance is dealt with firmly.

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