How to Prepare for Making Tax Digital

Making Tax Digital (MTD) is HMRC’s programme to move the UK tax system online. It requires businesses to keep digital records and submit tax returns through compatible software rather than using HMRC’s online portal. MTD is already live for VAT and is being rolled out to Income Tax Self Assessment.

What Has Already Changed

MTD for VAT

Since April 2022, all VAT-registered businesses – regardless of turnover – must comply with MTD for VAT . This means:

• VAT records must be kept digitally
• VAT returns must be filed through MTD-compatible software
• There must be a digital link between records and the return (no manual re-keying)

If you are already VAT-registered and filing through compatible software, you are compliant. If you are still using spreadsheets, you need bridging software or a move to cloud accounting software .

What Is Coming Next

MTD for Income Tax Self Assessment (ITSA)

MTD for Income Tax applies to self-employed individuals and landlords and is being phased in:

Under MTD for ITSA, affected taxpayers must:

• Keep digital records of income and expenses
• Submit quarterly updates to HMRC (instead of one annual return)
• Submit a final declaration at the end of the tax year (replacing the Self Assessment return)

MTD for Corporation Tax

MTD for Corporation Tax is not yet mandated. HMRC has indicated it will not be introduced before 2026 at the earliest, and no firm date has been set. Limited companies should prepare by moving to digital record-keeping and compatible software, but there is no immediate compliance requirement.

The Five-Step Preparation Plan

Step 1: Assess Your Current Position

Start by understanding where you stand today:

Step 2: Choose Compatible Software

HMRC publishes a list of software that is compatible with MTD. Your software must be able to:

• Store digital records in the required format
• Submit VAT returns directly to HMRC via the MTD API
• Submit quarterly updates for ITSA (when applicable)
• Maintain digital links between records and submissions

Cloud accounting software is the simplest way to comply because it is designed for digital record-keeping from the ground up, with automatic bank feeds, categorisation and MTD submission built in.

Step 3: Digitise Your Records

If you currently keep any records on paper or in non-compatible spreadsheets, you need to digitise them:

The key principle is that there must be no manual re-keying of data between systems. If you use a spreadsheet to calculate VAT and then type the figures into your accounting software, that breaks the digital link.

Step 4: Set Up Quarterly Reporting

Under MTD for ITSA, the tax year is divided into four quarterly periods:

Each quarterly update must be submitted by the end of the month following the quarter (e.g. Q1 by 5 August). The update summarises income and expenses for the period.

The final declaration – replacing the annual Self Assessment return – must be submitted by 31 January following the end of the tax year.

Step 5: Test and Refine

Before your compliance date arrives:

• Run a parallel test – keep your existing records alongside the new digital system for a quarter to check they match
• Review the quarterly summary your software produces and make sure it looks correct
• Submit a test update if your software supports it
• Talk to your accountant about how the quarterly process will work alongside their year-end work

Common Concerns

Will MTD Mean More Work?

For businesses already using cloud accounting software with bank feeds, MTD adds very little extra work. The quarterly updates are largely automated – the software pulls from the records you have already entered.

For businesses still using paper records or basic spreadsheets, the transition is more significant, but the long-term result is less manual work, not more.

What About Spreadsheets?

You can still use spreadsheets if they are linked to MTD-compatible bridging software that submits the data to HMRC. However, every link in the chain must be digital – you cannot manually type figures from one spreadsheet into another.

In practice, most businesses find it easier to switch to purpose-built accounting software rather than maintaining a chain of linked spreadsheets.

What If I Have Multiple Income Sources?

If you have both self-employment income and property income, each source must be reported separately through MTD. Your software must handle multiple income streams and submit them individually.

Do Partnerships Need to Comply?

General partnerships with individual partners earning above the threshold are within scope of MTD for ITSA. Each partner submits their own quarterly updates for their share of the partnership income, in addition to the partnership’s own return.

Penalties Under MTD

HMRC has introduced a new points-based penalty system for late submissions:

Points expire after a period of compliance (24 months for quarterly submissions). Late payment penalties are separate and are calculated as a percentage of the tax outstanding.

What to Do Now

1. Check your software – confirm it is MTD-compatible and will support ITSA when required
2. Move to digital records if you have not already
3. Set up bank feeds to automate transaction recording
4. Talk to your accountant about how quarterly reporting will change your working relationship
5. Monitor HMRC’s timeline – dates can shift, and the thresholds may change

The businesses that find MTD easiest are those that have been keeping good digital records all along. If your bookkeeping is already up to date in cloud software, compliance is largely automatic.