What is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's programme to digitise the UK tax system. Businesses must keep digital records and submit returns using MTD-compatible software rather than typing figures into the HMRC portal.
MTD for VAT (already live)
All VAT-registered businesses — regardless of turnover — must:
- Keep digital VAT records
- File VAT returns through approved software (Xero, QuickBooks and other HMRC-approved platforms)
- Maintain a digital link between systems (no manual re-keying of figures)
Penalties apply for late or non-compliant filing under HMRC's points-based system.
MTD for Income Tax Self Assessment (ITSA)
Phased in from April 2026 for sole traders and landlords with combined gross income over £50,000, then £30,000 from April 2027. You will need to:
- Keep digital records of all business and rental income/expenses
- Send quarterly updates to HMRC (4 per year)
- Submit a final declaration after the tax year ends
This replaces the annual Self Assessment for affected taxpayers.
Which software qualifies?
HMRC maintains an approved software list. The most common choices for UK SMEs:
- Xero — best all-rounder for limited companies and growing SMEs
- QuickBooks — strong for sole traders and tradespeople
Both are HMRC-approved for MTD and integrate with the app ecosystem most small businesses need.
How to prepare now
- Move off spreadsheets onto cloud accounting
- Connect bank feeds so transactions flow in automatically
- Set up category rules to auto-code recurring transactions
- Adopt a receipt-capture app (Dext, Hubdoc, AutoEntry)
- Reconcile monthly — not yearly
Common misconceptions
- "My turnover is under £85k so MTD doesn't apply" — wrong. Since April 2022, MTD for VAT applies to all VAT-registered businesses
- "Bridging software is a long-term fix" — HMRC tolerates it for now but the direction of travel is full digital
- "I can carry on with my desktop spreadsheet" — only if it's linked digitally to MTD-compatible software
Not sure if you're MTD-ready? Book a free 15-minute review and we'll audit your setup.