What is Making Tax Digital?

Making Tax Digital Explained

Making Tax Digital (MTD) is HMRC’s initiative to modernise the UK tax system by requiring businesses and individuals to keep digital records and submit tax information to HMRC using compatible software. The programme aims to reduce errors, make tax administration more efficient, and give taxpayers a more real-time view of their tax position.

MTD is being rolled out in phases, starting with VAT and extending to income tax and eventually corporation tax .

MTD for VAT

MTD for VAT is now mandatory for all VAT-registered businesses, regardless of turnover. The requirements are:

• Digital record keeping: VAT records must be maintained using functional compatible software
• Digital submission: VAT returns must be submitted through MTD-compatible software, not through HMRC’s online portal
• Digital links: Where data is transferred between software products (for example, from a spreadsheet to an accounting package), the transfer must be digital — no manual re-keying

Key Dates for MTD for VAT

Businesses using the VAT Flat Rate Scheme are also required to comply with MTD for VAT.

What Records Must Be Digital?

For VAT purposes, the following records must be kept digitally:

• Business name, address, and VAT registration number
• Details of VAT accounting schemes used
• Date and value of supplies and purchases
• Rate of VAT charged
• Adjustments to a return
• Time of supply (tax point)
• Reverse charge transactions

Digital Links

A digital link is an electronic transfer of data between software programs. Acceptable digital links include:

• Automated data transfers between applications
• Linked cells in spreadsheets
• XML, CSV, or other electronic file imports
• API connections between systems

Copying and pasting figures between programs or manually typing data from one system into another is not an acceptable digital link.

MTD for Income Tax Self-Assessment (ITSA)

MTD for Income Tax will require self-employed individuals and landlords to keep digital records and submit quarterly updates to HMRC instead of a single annual self-assessment return.

Timeline

How MTD for ITSA Works

Under MTD for ITSA, affected taxpayers must:

1. Keep digital records of income and expenses using compatible software
2. Submit quarterly updates to HMRC (reporting periods align with the tax year quarters)
3. Submit an End of Period Statement (EOPS) to finalise their business income for the year
4. Submit a Final Declaration to bring together all sources of income and calculate tax liability

The quarterly reporting periods are:

Quarterly updates must be submitted by the 7th of the month following the end of each quarter.

Exemptions

Some individuals are exempt from MTD for ITSA:

• Those with qualifying income below the threshold
• Digitally excluded individuals (those unable to engage digitally for reasons of age, disability, remoteness, or religion)
• Trustees and personal representatives
• Non-UK resident landlords (initially)

MTD for Corporation Tax

MTD for Corporation Tax is the final phase of the programme. HMRC has stated it will not be mandated before 2026 at the earliest. Pilot testing is expected before any mandatory rollout.

When implemented, companies will need to keep digital records and file their corporation tax returns through MTD-compatible software.

Compatible Software

To comply with MTD, you must use software that is recognised by HMRC as compatible. This software must be able to:

• Record and store digital records
• Submit information to HMRC via its APIs
• Receive information back from HMRC

HMRC publishes a list of compatible software on GOV.UK. Options include:

• Full accounting software that handles record keeping and submission
• Bridging software that links spreadsheets or non-compatible software to HMRC’s systems

Spreadsheets can still be used for record keeping, but they must be connected to HMRC via bridging software or an API-enabled add-on. Manual submission through the HMRC portal is not permitted under MTD.

Penalties Under MTD

MTD operates under the points-based penalty system for VAT (introduced January 2023):

Late Submission Penalties

• Each late submission adds 1 penalty point
• When you reach the penalty point threshold, you receive a £200 penalty
• The threshold depends on your filing frequency:

Points expire after a period of compliance (24 months for quarterly filers).

Late Payment Penalties

Benefits of MTD

While MTD introduces additional obligations, it also provides benefits:

• Fewer errors — HMRC estimates digital record keeping reduces errors by up to 30%
• More accurate tax position — real-time visibility of tax liabilities
• Easier record keeping — digital records are easier to maintain, search, and back up
• Streamlined processes — automated calculations and submissions reduce administrative burden

Preparing for MTD

Businesses that are not yet within the scope of MTD should prepare by:

• Reviewing current record-keeping practices and moving to digital where possible
• Choosing MTD-compatible software well in advance
• Ensuring all accounting processes support digital record keeping
• Training staff on new software and procedures
• Establishing digital links between any software programs used
• Speaking to an accountant about the practical implications

The transition to digital record keeping is a significant change for many businesses, but starting early makes the process more manageable. Businesses already complying with MTD for VAT will find the extension to income tax and corporation tax more straightforward, as the core principles of digital records and software-based submissions are the same.