Making Tax Digital (MTD) is HMRC's programme to move UK tax record-keeping and submission to digital systems. It has been rolling out in stages since 2019, and it will continue to expand over the coming years. If it has not yet affected your business, it is likely to do so.
This article explains what it is, who it applies to, and what you need to have in place.
What Making Tax Digital requires
MTD has two main requirements:
Digital record-keeping. You must maintain your accounting records in software that HMRC recognises, rather than in a paper ledger or a basic spreadsheet. The key distinction is that the software must be able to send data digitally to HMRC — it is not sufficient to type figures from a spreadsheet into the HMRC website manually.
Digital submission. Your VAT returns, and eventually your Income Tax returns, must be submitted directly from your accounting software using HMRC's API. You cannot submit them manually through the HMRC portal.
Who it applies to — and when
MTD for VAT has applied to all VAT-registered businesses since April 2022. It came in first for businesses with taxable turnover above the VAT registration threshold in April 2019, and was extended in April 2022 to every VAT-registered business, including those trading below the threshold. If your business is VAT-registered, you are already required to keep digital records and submit VAT returns through MTD-compatible software.
MTD for Income Tax Self Assessment (MTD for ITSA) is the phase now underway. It requires self-employed individuals and landlords to keep digital records and send HMRC quarterly updates, on top of the annual tax return. It is being phased in by income, and the first band is already live:
| Qualifying income over | You are in scope from |
|---|---|
| £50,000 | 6 April 2026 |
| £30,000 | 6 April 2027 |
| £20,000 | 6 April 2028 |
Qualifying income is your gross self-employment and property income before expenses, and HMRC assesses it on the tax year two years before the start date — so the April 2026 band was judged on your 2024 to 2025 return. The practical consequence is that you can be brought into scope by a figure you filed two years ago, which is why it catches people out.
What software qualifies?
HMRC maintains a list of software that is compatible with its MTD APIs. Most established accounting packages — including Xero, QuickBooks, Sage, and FreeAgent — are on the list. Microsoft Dynamics 365 Business Central submits VAT returns to HMRC natively — it connects to HMRC's MTD service directly and needs no bridging software.
If you are currently using software that is not on the list, or if you are using a spreadsheet, you will need to make a change before your compliance deadline.
What "bridging software" means
If your current accounting system cannot submit directly to HMRC, bridging software sits between your records and HMRC's systems. It takes the data you have and submits it in the format HMRC requires. It is a short-term solution rather than a long-term one — HMRC's direction of travel is toward software that handles everything natively.
What the quarterly reporting change means in practice
For businesses brought under MTD for ITSA, the requirement to submit quarterly updates is a significant change. Instead of one annual submission, you will make four quarterly submissions of summary data, plus the annual return.
This does not mean you need to do your accounts four times a year. It means your accounting software needs to be kept current enough to pull that summary at the end of each quarter. For a business where the books are already up to date, the additional effort is modest. For a business where the annual accounts process involves weeks of catching up, quarterly reporting will require a change in how the accounts are maintained day-to-day.
The most common mistakes businesses make
- Assuming they are compliant because they use accounting software, without checking whether it is HMRC-approved and whether submissions are actually going through the MTD API rather than the manual portal.
- Leaving the change to the last quarter before a deadline, when accountants and software providers are at their busiest.
- Not telling their accountant that they are making the switch, which can create confusion about who is responsible for submission.
In short
Making Tax Digital is not a change to what you owe. It changes how the figures reach HMRC: kept in software, and sent from that software rather than typed into a website.
For VAT-registered businesses that has been the position since April 2022. For self-employed people and landlords it is arriving in three bands, and the first is already live. The practical risk is not the rule itself — it is discovering late that a return you filed two years ago put you in scope, and having to change how you keep your records mid-year.
How to check where you stand
Two questions settle it for most businesses.
Are you VAT registered? If yes, you are already in scope and have been since April 2022. Your records must be kept digitally and your returns submitted from software — if anyone in your business still types VAT figures into the HMRC website by hand, that is not compliant, however tidy the spreadsheet behind it is.
What was your gross self-employment and property income two years ago? Not your profit — your income before expenses. That figure, from the tax year two years before each start date, is what HMRC uses to decide which band you fall into and when. It is worth checking now rather than being told later, because the assessment is made on a return you have already filed and cannot change.
What to do now
1. Check whether your business is within scope — use HMRC's current published thresholds and dates, or ask your accountant. 2. Confirm that your accounting software is MTD-compatible and that you are already submitting through it (not manually). 3. If you are not yet compliant, identify a compliant software solution and plan a migration before your deadline — not during it. 4. If you use Business Central or are considering it, check whether your version is configured for MTD submission.
If your business systems are not set up for MTD, or you are not certain whether they are, speak to us. We work with UK small businesses on system setup, accounting software, and integration — and we can tell you quickly whether you are compliant.