Making Tax Digital requires affected UK taxpayers to maintain specified financial records digitally and send information to HMRC through compatible software. It already applies to VAT-registered businesses, and Making Tax Digital for Income Tax became mandatory from April 2026 for the first group of qualifying sole traders and landlords.
The programme changes more than the method used to submit a tax return. Businesses within the rules need a continuing digital bookkeeping process that records income and expenditure throughout the year and supports quarterly updates to HMRC.
The practical requirements depend on whether the taxpayer is complying with Making Tax Digital for VAT, Making Tax Digital for Income Tax or both. Limited companies are not currently included within Making Tax Digital for Income Tax, although they may already need to follow the VAT requirements.
What Making Tax Digital means
Making Tax Digital is HMRC’s programme for replacing parts of manual tax administration with digital records and software-based submissions. It currently has two main areas affecting businesses: VAT and Income Tax.
Making Tax Digital for VAT requires VAT-registered businesses to maintain specified VAT records digitally and submit VAT Returns through compatible software.
Making Tax Digital for Income Tax applies to qualifying individuals with self-employment or property income. Those within the rules must use compatible software to create digital records, send quarterly summaries and complete their tax return.
The requirements do not mean that every receipt or invoice is sent to HMRC. Supporting documents remain with the taxpayer, while the compatible software sends the totals and return information required by HMRC.
Making Tax Digital for VAT
All VAT-registered businesses should now be using Making Tax Digital for VAT unless HMRC has granted an exemption. Newly registered businesses are generally enrolled automatically.
The business must keep specified VAT records in digital form and submit its VAT Returns through compatible software. The frequency of VAT Returns does not change merely because the business uses Making Tax Digital.
HMRC’s Making Tax Digital for VAT guidance explains the current requirements and provides access to supporting notices and software information.
A business may use one accounting platform for record keeping and submission or connect several software products using digital links. The final return cannot normally be copied manually from one system into another where the rules require a digital connection.
Digital records for VAT
Digital VAT records generally need to include the business name, principal place of business, VAT registration number and details of any VAT schemes used.
For sales, the records need totals for the relevant VAT period showing the time of supply, net value and rate of VAT charged. Purchase records need the time of supply, net value excluding VAT and amount of input tax claimed.
The business must also maintain its VAT account digitally. This brings together output tax, input tax, adjustments and the figures used to complete the VAT Return.
Original invoices and receipts can still exist in paper form. The requirement concerns the specified VAT data and the digital route used to maintain and submit it. Businesses must continue retaining source evidence supporting the entries.
Spreadsheets and digital links
A spreadsheet can form part of a compliant Making Tax Digital system. However, the information used to prepare and submit the VAT Return must be transferred through appropriate digital links.
Bridging software can connect a spreadsheet to HMRC’s systems. This allows a business to retain a spreadsheet-based process while making the submission through compatible software.
Copying and pasting or manually typing totals between separate software products does not generally satisfy the digital-link requirement. Digital links can include formulas, linked cells, file imports, application programming interfaces and other electronic transfers.
HMRC’s VAT-compatible software finder includes full accounting packages and bridging products that can submit returns.
Making Tax Digital for Income Tax
Making Tax Digital for Income Tax applies to qualifying sole traders and landlords in stages. The first mandatory group entered the system from 6 April 2026.
Individuals whose qualifying income exceeded £50,000 on their 2024 to 2025 Self Assessment return must use Making Tax Digital for Income Tax for the 2026 to 2027 tax year, unless an exemption or exclusion applies.
The programme is scheduled to extend to individuals with qualifying income over £30,000 from 6 April 2027, based on their 2025 to 2026 return. Those with qualifying income over £20,000 are scheduled to enter from 6 April 2028, based on their 2026 to 2027 return.
HMRC’s Making Tax Digital for Income Tax guidance explains the current process for digital records, quarterly updates and tax-return submission.
How qualifying income is calculated
Qualifying income broadly consists of gross income from self-employment and property before deducting business or property expenses. It is not based on taxable profit.
Where an individual has more than one self-employment or receives both trading and property income, the qualifying amounts are combined when assessing the threshold.
For example, a person with £35,000 of gross self-employment income and £20,000 of gross property income may have qualifying income of £55,000 even if the profit remaining after expenses is much lower.
Income from employment, pensions, dividends and savings does not generally form part of the qualifying-income threshold, although it may still need to be included in the individual’s final tax return.
The threshold test should be completed using the figures reported on the relevant Self Assessment return rather than an estimate based solely on bank receipts.
Who is not brought into MTD for Income Tax
Making Tax Digital for Income Tax currently applies to qualifying individuals, not limited companies. A director who receives only salary and dividends is not brought within the rules merely because they operate a company.
However, a director who separately has qualifying self-employment or property income may need to comply in relation to those activities.
Some people and types of income are excluded or may qualify for exemption. These can include digitally excluded taxpayers and certain individuals whose circumstances fall within specific legislative exclusions.
A taxpayer should not assume that age, limited computer experience or the use of an accountant creates an automatic exemption. HMRC considers digital-exclusion applications according to the taxpayer’s circumstances.
Digital records for Income Tax
A person using Making Tax Digital for Income Tax must create and store digital records of income and expenses for each relevant self-employment and property business.
The digital record generally includes the amount, date and category of each transaction. It must be created and stored using software that works with Making Tax Digital for Income Tax.
The taxpayer must still retain supporting documents such as invoices, receipts and bank statements. The digital record does not replace the evidence used to prepare and verify the tax return.
Where more than one software product is used, the products need to be digitally linked before quarterly updates and the tax return are submitted.
Businesses moving from manual or incomplete records can review our guide to setting up a Xero account. The accounting structure should be established before transactions begin accumulating within the new digital process.
What the quarterly updates contain
Every three months, the compatible software totals the digital income and expense records for each self-employment and property business. These totals are sent to HMRC as quarterly updates.
The updates are summaries rather than complete tax returns. They generally contain totals for the income and expense categories used in the digital records.
No accounting or tax adjustments normally need to be made before a quarterly update is submitted. Adjustments, allowances and other return information are dealt with through the later tax-return process.
A person with both self-employment and property income will generally need updates for each relevant income source. Someone operating more than one self-employment may also have separate reporting obligations for each business.
Quarterly update periods and deadlines
For taxpayers using standard update periods, the quarters run from 6 April to 5 July, 6 July to 5 October, 6 October to 5 January and 6 January to 5 April.
The corresponding submission deadlines are 7 August, 7 November, 7 February and 7 May.
Taxpayers whose accounting periods end on 31 March may use calendar update periods beginning on 1 April. The submission deadlines remain the seventh day of the relevant month.
HMRC’s guidance on sending quarterly updates provides the current period dates, submission rules and information included.
An update can be submitted after the update period ends and before the deadline. HMRC also permits an update to be sent up to ten days before the period ends where no further transactions are expected.
Quarterly updates are not four tax returns
The quarterly updates do not require a complete tax calculation every three months. They transmit summaries of the digital records maintained for each business.
The figures can therefore change before the final tax return is prepared. The taxpayer or agent may need to correct entries and make accounting adjustments after the year ends.
The updates can provide an indication of the emerging tax position, but they should not be treated as a final tax bill. Other income, reliefs, allowances and adjustments may not yet have been included.
Businesses should still consider setting aside money for tax throughout the year. An estimate generated from incomplete quarterly information does not guarantee the amount eventually payable.
Correcting digital records
Where a taxpayer becomes aware of an error, the digital records should be corrected as soon as reasonably possible. The correction should remain within the connected software process.
A transaction already included in a quarterly update can still be corrected. The later update and final tax return will use the amended digital information according to the software and HMRC process.
Deleting transactions solely to make totals agree can damage the audit trail. The correction should identify what was wrong and preserve suitable evidence for the revised treatment.
Regular bank reconciliation helps identify missing, duplicated and incorrectly recorded transactions before they flow into quarterly updates.
The final tax return under MTD
After the end of the tax year, the taxpayer must review the digital records and make any required accounting and tax adjustments. Other income, gains, allowances and reliefs also need to be included where relevant.
The completed tax return is then submitted through Making Tax Digital-compatible software by 31 January following the end of the relevant tax year.
Someone entering Making Tax Digital in April 2026 still submits the 2025 to 2026 Self Assessment return through the previous process by 31 January 2027. Their first tax return completed through MTD software covers 2026 to 2027 and is due by 31 January 2028.
Making Tax Digital does not alter the ordinary 31 January payment deadline for Income Tax. Payments on account may also remain due according to the taxpayer’s circumstances.
Our guide to Self Assessment deadlines and penalties explains why the annual filing and payment obligations remain important alongside quarterly updates.
Penalties for late MTD updates
The late-submission penalty system for Making Tax Digital for Income Tax uses penalty points. After the introductory period, a person required to send quarterly updates can receive a point when a deadline is missed.
For quarterly obligations, reaching four points can result in a £200 penalty. Further failures while the points threshold remains active can generate additional penalties.
HMRC has confirmed that it will not apply penalty points for late quarterly updates during the 2026 to 2027 tax year. The updates must still be submitted before the taxpayer can complete the tax return for that year.
Late tax-return penalties continue to apply. The absence of quarterly-update points during the first mandatory year should not be treated as permission to ignore the digital-record and submission requirements.
Choosing compatible software
Compatible software must be capable of maintaining or receiving the required digital records, producing quarterly updates and submitting the final tax return.
Some products provide complete bookkeeping and tax-return functions. Others focus on record keeping, property income, spreadsheets or bridging between existing records and HMRC.
The right choice depends on the number of businesses, VAT registration, property income, payroll, bank accounts and whether the taxpayer or an agent will maintain the records.
HMRC’s Making Tax Digital for Income Tax software guidance allows users to compare compatible products and the functions they provide.
A business should not select software solely because it can make the submission. The system must also support dependable transaction processing, reconciliation and access to the information the owner and accountant require.
Using Xero or QuickBooks for Making Tax Digital
Cloud accounting platforms such as Xero and QuickBooks can support digital record keeping, bank connections and VAT submissions. The available Income Tax functionality should be checked against the taxpayer’s precise requirements.
Software should be authorised to connect with HMRC using the correct taxpayer or business credentials. A VAT connection does not automatically mean that the Income Tax service has also been authorised.
The opening balances, accounting period and income sources should be checked before the first quarterly update. Incorrect setup can cause transactions to be included in the wrong period or business.
Businesses comparing platforms can review our QuickBooks bookkeeping service and information about Xero bookkeeping services.
Making Tax Digital for landlords
Individual landlords may need to use Making Tax Digital where their qualifying property and self-employment income exceeds the applicable threshold.
Several UK rental properties will generally form one UK property business for digital reporting purposes. The landlord may still track each property separately to obtain useful management information.
Digital records should include rental income and property expenses. Letting-agent statements need to be recorded carefully because the amount transferred to the bank may be net of fees, repairs or other deductions.
Our guide to property and landlord bookkeeping explains how gross rent, agent deductions, finance costs and individual properties can be organised.
Making Tax Digital for sole traders
A sole trader within the qualifying-income threshold must maintain digital records for the business and send quarterly updates through compatible software.
The obligation applies to the individual rather than creating a separate legal entity. Personal and business transactions should still be distinguished clearly within the records.
A dedicated business bank account can make the process easier, although the precise legal requirement depends on the business structure. Personal payments passing through a business account must not be treated automatically as allowable expenses.
Businesses that currently prepare their records only once a year need to move towards a continuing bookkeeping routine. The first quarter is not the point at which eleven months of earlier records can be reconstructed.
Making Tax Digital and new businesses
A newly established business may not enter mandatory Making Tax Digital immediately because HMRC first needs qualifying income information from a submitted tax return.
However, beginning with compatible software and consistent digital records can avoid a disruptive transition when the threshold is eventually met.
Our guide to bookkeeping for startups explains how new businesses can organise accounts, expenditure and supporting documents from the outset.
A startup should consider the accounting period, VAT position, bank accounts and software requirements before selecting a system. Moving incomplete records later can be more difficult than establishing them correctly at the beginning.
Digital records still require evidence
An imported bank transaction is not necessarily enough to establish the nature of an expense or the VAT charged. Invoices, receipts, contracts and other supporting documents still need to be retained.
Bank feeds can confirm that money moved, but they may not show who received the underlying supply, whether the cost was personal or which business activity it related to.
Digital attachments can be stored within accounting software or another secure document system. The process should allow the evidence to be found and connected to the accounting entry when needed.
HMRC can request supporting records during a compliance check. Making a successful digital submission does not mean that the underlying figures have been verified or accepted as correct.
Preparing records before each update
Quarterly updates should be produced from records that have been maintained throughout the period. Waiting until the submission deadline to process all transactions can increase omissions and classification errors.
Bank accounts, cards and payment platforms should be reconciled regularly. Missing invoices and unidentified payments should be raised while the transactions remain familiar.
Our guide to good bookkeeping habits explains how regular processing and document collection support dependable financial records.
The beginning of each tax year is also a useful point to check software authorisation, accounting periods and changing thresholds. Our new tax year bookkeeping checklist covers the wider records and settings that should be reviewed.
Preparing Xero records for the final return
Quarterly submission does not remove the need for a complete year-end review. The records still need to include all income and expenses and any corrections identified after the fourth update.
Bank, credit-card, loan and payment-platform balances should be reconciled. Outstanding invoices, fixed assets, finance costs and other year-end matters should be identified for the accountant or tax adviser.
Our guide to preparing for year end in Xero explains how reconciled records and supporting documents can reduce unnecessary reconstruction before the final accounts or tax return.
The tax adviser may still need to make adjustments for capital allowances, private use, accruals, prepayments and other matters that are not determined solely by the routine bookkeeping.
Common Making Tax Digital misunderstandings
One common misunderstanding is that quarterly updates create four complete tax returns. They are summaries generated from the digital business records, followed by a final tax return after the end of the year.
Another is that quarterly reporting means tax must be paid quarterly. Making Tax Digital does not currently replace the ordinary Income Tax payment timetable, although taxpayers may choose to budget more frequently.
Businesses may also assume that buying accounting software creates compliance automatically. The records still need to be complete, correctly categorised, digitally linked and submitted on time.
A final misunderstanding is that bank feeds remove the need to retain invoices and receipts. The feed supports reconciliation, but it does not replace evidence explaining the transaction.
When outsourced MTD bookkeeping helps
Some sole traders and landlords can maintain their own digital records successfully. External support becomes more useful where several income sources, bank accounts, VAT, payroll or property statements need regular processing.
The scope should identify who maintains the digital records, completes reconciliations, sends quarterly updates and prepares the final tax return. Routine bookkeeping and tax-return responsibility should not be assumed to be the same service.
Bookkeeping Packages Ltd provides online bookkeeping services that can maintain current digital records and provide access through cloud accounting software.
Where responsibility for the complete monthly workflow needs to be transferred, our outsourced bookkeeping service explains how transaction processing and reconciliation can be structured.
VAT-registered businesses can also review our VAT returns service for support with records and submissions forming part of an agreed bookkeeping arrangement.
To discuss your current software, qualifying income and digital bookkeeping process, use the Bookkeeping Packages enquiry form.
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 reliable financial records and useful management information.
This article is provided for general information only. Stuart Kerr is a professional bookkeeper, not a tax, legal or regulated financial adviser. Nothing in this article constitutes tax, legal or financial advice. Advice specific to your circumstances should be obtained from an appropriately qualified professional.