Making Tax Digital: What UK Businesses Must Know

The Scale of the MTD Programme

Making Tax Digital is not a single HMRC initiative but a rolling programme that will eventually require digital record keeping and quarterly reporting from the majority of UK taxpayers. The first phase, covering VAT, has been mandatory for all VAT-registered businesses since April 2022. The next phase, covering income tax for the self-employed and landlords, begins in April 2026 for those with qualifying income above 50,000 pounds, extending to those above 30,000 pounds from April 2027.

For businesses already operating within MTD for VAT, the practical requirements are well understood. For the self-employed and property landlords approaching the income tax phase, the requirements represent a significant change in how financial records must be kept and reported throughout the year, not just at the annual Self Assessment deadline.

MTD for VAT: What Is Required

Under MTD for VAT, businesses must keep digital records of their VAT transactions and submit returns using MTD-compatible software. The digital records requirement means that the VAT account, including details of supplies made and received, must be maintained in digital form. Paper records that are later manually entered into software do not satisfy the requirement; the records must originate digitally or be captured digitally at the point of transaction. HMRC provides the authoritative technical requirements on the Making Tax Digital for VAT guidance page.

Businesses cannot submit VAT returns manually or through HMRC’s older online portal under MTD. Submission must be made through software that is linked to HMRC’s systems via an Application Programming Interface. Most mainstream accounting software, including Xero, QuickBooks, and Sage, has been MTD-compatible for several years. Businesses using spreadsheets to manage their VAT can continue to do so if a bridging software solution is used to submit the return.

MTD for Income Tax: What Is Coming

From April 2026, self-employed individuals and landlords with qualifying income above 50,000 pounds must comply with MTD for Income Tax. This requires digital record keeping of income and expenses and the submission of quarterly updates to HMRC throughout the year, followed by a final declaration that replaces the current Self Assessment return. The quarterly updates are cumulative summaries rather than full returns, but they must be submitted within one month of each quarter end. Full details are on the Making Tax Digital for Income Tax guidance page.

The quarterly reporting requirement fundamentally changes the rhythm of tax compliance for affected taxpayers. Instead of preparing financial records once a year in advance of the January deadline, records must be accurate and complete on a rolling quarterly basis. For taxpayers who currently leave bookkeeping until year-end, this represents a significant operational change that requires preparation well ahead of April 2026.

Choosing MTD-Compatible Software

HMRC maintains a list of compatible software products for both MTD for VAT and MTD for Income Tax. The choice of software should reflect the nature of the business, the complexity of the accounting, and the level of integration required with banking and payroll systems. For most small businesses, a cloud-based platform that connects to bank feeds and supports automated transaction categorisation will reduce the manual work involved in maintaining digital records.

Free or low-cost bridging software is available for businesses that prefer to maintain their records in a spreadsheet and use a separate tool purely for submission. This approach is compliant but requires more manual effort to prepare the submission file each quarter and introduces a greater risk of data entry error compared with a fully integrated accounting platform.

Preparing for MTD Before the Deadline

The businesses that will find the MTD transition most straightforward are those that already maintain accurate monthly records and use cloud accounting software. If your bookkeeping is currently paper-based or relies on a spreadsheet updated infrequently, the gap between your current approach and the MTD requirement is significant. Our outsourced bookkeeping service keeps digital records current on a monthly basis, which means MTD compliance is built into the workflow rather than requiring a separate effort.

For businesses already VAT-registered and within MTD, ensuring your VAT records are accurate and your software connection to HMRC is functioning correctly before each quarterly deadline is the ongoing requirement. Our VAT returns service handles this as part of a managed bookkeeping arrangement.

About the Author

Stuart Kerr is Managing Director of Bookkeeping Packages Ltd, an outsourced bookkeeping service supporting UK small businesses and accountancy practices. With over 20 years of bookkeeping experience, Stuart specialises in helping businesses maintain accurate records and management accounts. Stuart is a bookkeeper, not a regulated financial adviser. Nothing in this article constitutes tax or financial advice. Call 0161 531 0087 or visit bookkeepingpackages.co.uk.

The information in this article is provided for general guidance only. Stuart Kerr is a professional bookkeeper, not a regulated financial adviser. This content does not constitute tax or financial advice. For advice specific to your circumstances, please consult a qualified accountant or tax adviser.

By Stuart Kerr, Managing Director, Bookkeeping Packages Ltd