What Is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's programme to move tax record-keeping and submissions to digital systems. The objective is to reduce errors, make tax administration more efficient, and allow businesses and individuals to see their tax position in real-time. MTD affects VAT and, increasingly, Income Tax Self Assessment.
MTD for VAT: Already Mandatory
MTD for VAT has been mandatory for all VAT-registered businesses since April 2022. Requirements: keep digital VAT records in MTD-compatible software, submit VAT returns directly through the software via HMRC's API (not manual submission), and maintain a digital audit trail linking transactions to your VAT return. Compatible software: Xero, QuickBooks, Sage, FreeAgent, and many others. The penalty for non-compliance is a 400 GBP fixed penalty plus 5 GBP per day.
MTD for Income Tax Self Assessment (MTD ITSA)
MTD ITSA is rolling out in phases: mandatory from April 2026 for sole traders and landlords with income over £50,000 (now in effect); mandatory from April 2027 for those with income over £30,000. Under MTD ITSA, affected taxpayers must: keep digital income and expense records, submit quarterly updates to HMRC (instead of a single annual return), and submit a final declaration (replacing the current Self Assessment return) at year end.
Compatible Software for MTD
HMRC does not provide its own free MTD software. The most widely used options are: Xero (full-featured, good for growing businesses), QuickBooks (online and Self-Employed versions), Sage Business Cloud, FreeAgent (free with many business bank accounts), and Bokio or Anna (lower-cost alternatives). Spreadsheet bridging software is also available for businesses that prefer to continue using Excel.
How to Prepare for MTD ITSA
Start using MTD-compatible software now — do not wait until the mandate. Ensure your bookkeeping is current and accurate before the first quarterly submission. Consider hiring a bookkeeper or accountant if you are not comfortable with digital record-keeping. Check whether your current software is on HMRC's approved list.
FAQ
What are the penalties for missing MTD submissions?
HMRC uses a points-based system. Each missed submission earns one penalty point; when a threshold is reached (which varies by submission frequency), a 200 GBP penalty is charged. The regime is designed to be proportionate for occasional errors while penalising persistent non-compliance.
Further Reading
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