Making Tax Digital
The Complete Guide for UK Businesses
Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system by moving record-keeping and submissions to compatible digital software. This guide explains who is affected, what the rules require, and how to stay compliant — from MTD for VAT (already mandatory) to MTD for Income Tax Self Assessment (ITSA), which rolls out from April 2026.
MTD at a Glance
MTD for VAT
MandatorySince April 2022
All VAT-registered businesses
Keep digital VAT records and submit returns using HMRC-approved software.
MTD for Income Tax
UpcomingApril 2026 / April 2027
Self-employed & landlords
Quarterly digital updates to HMRC replace the annual Self Assessment return.
MTD for Corporation Tax
ConsultationNo date confirmed
Limited companies
HMRC is consulting on future Corporation Tax digitalisation. No action required yet.
What is Making Tax Digital?
Making Tax Digital is a government initiative launched by HMRC to close the UK's tax gap — the difference between tax owed and tax actually collected. Manual data entry and paper-based processes introduce errors; MTD addresses this by requiring businesses to maintain digital records and submit data directly to HMRC via software APIs.
Importantly, MTD does not change how much tax you owe. It changes how you keep records and how you report. Instead of filling in forms on the HMRC website, your accounting software communicates directly with HMRC systems.
Digital Records
All relevant transactions must be stored and maintained digitally — not on paper, and not in spreadsheets unless bridging software provides a compliant digital link.
Digital Links
Where multiple software systems are used (e.g. a point-of-sale system feeding an accounting platform), data must transfer digitally. Manual re-keying between systems is not permitted.
Software Submission
Returns must be submitted directly from HMRC-recognised software via an API connection. The old HMRC online portal is no longer available for MTD-mandated returns.
MTD for VAT
Mandatory since April 2022MTD for VAT is the broadest phase of Making Tax Digital. Since April 2022, every VAT-registered business in the UK — regardless of turnover — must comply. There is no minimum threshold for MTD VAT.
Digital VAT Records
Maintain a digital record of all supplies made and received, your VAT account, and supporting documentation in MTD-compatible software.
Submit via Software
File all VAT returns directly through MTD-compatible software connected to HMRC. The old HMRC online VAT portal is closed for mandated businesses.
No Manual Transfer
If data moves between systems (e.g. from a sales platform to your accounting tool), the transfer must be digital. Copy-pasting between programs is not permitted.
Six-Year Retention
Digital VAT records must be retained for at least six years (ten years for VAT MOSS records) and must remain accessible.
Penalties for Non-Compliance
HMRC operates a points-based penalty system for late MTD VAT submissions (introduced January 2023). Accumulating five penalty points triggers a £200 fine per late submission thereafter. Filing a VAT return outside MTD rules (e.g. using the old portal without an exemption) can result in a fixed £400 penalty per return.
Digital Exclusion Exemptions
A small number of businesses may apply for a digital exclusion exemption if complying with MTD is not reasonably practicable — for example due to disability, age, religious beliefs, or remoteness. Exemptions must be applied for directly with HMRC and are granted on a case-by-case basis.
MTD for Income Tax Self Assessment
Rolling out from April 2026MTD for ITSA fundamentally changes how self-employed individuals and landlords report income to HMRC. The annual SA100 Self Assessment return is replaced by quarterly digital updates throughout the year, followed by a final declaration.
Implementation Timeline
Mandatory for self-employed individuals and landlords whose combined qualifying income from self-employment and property exceeds £50,000.
Extended to those with qualifying income exceeding £30,000.
Those with qualifying income between £10,000 and £30,000. HMRC is consulting on this group; no confirmed date.
Quarterly Updates
Submit a summary of income and expenses to HMRC every quarter — due in April, July, October, and January. These are not final tax returns but progress updates.
End of Period Statement
After each tax year ends, make any adjustments and submit an End of Period Statement (EOPS) for each income source (e.g. self-employment, UK property).
Final Declaration
Replace the current SA100 return with a Final Declaration confirming your total income, tax reliefs, and any other adjustments. This is where your tax liability is confirmed.
Digital Records Throughout the Year
All business income and expense transactions must be recorded in MTD-compatible software as they occur — not retrospectively at year-end.
MTD for Corporation Tax
No mandation date confirmedHMRC is consulting on Making Tax Digital for Corporation Tax, but no implementation date has been confirmed. HMRC has stated that MTD for Corporation Tax will not be mandated before April 2026 at the earliest, and the actual date is likely to be later. Limited companies should monitor HMRC announcements but are not required to take any action at this stage.
MTD-Compatible Software
MTD requires HMRC-recognised software that can connect to HMRC APIs, store digital records, and submit returns electronically. Not all accounting tools qualify — check the HMRC approved software list before committing to a platform.
Xero
Cloud-based; widely used by small businesses and accountancy practices. Ostoya's preferred platform.
QuickBooks Online
Popular for sole traders and small limited companies.
FreeAgent
Common among freelancers and micro-businesses.
Sage 50 / Sage Business Cloud
Suitable for a range of business sizes.
Dext (formerly Receipt Bank)
Document capture tool; must be paired with a primary MTD-compliant accounting platform.
Bridging software
Allows spreadsheet-based records to be submitted compliantly. Permitted for VAT; check ITSA eligibility separately.
Ostoya clients are typically set up on Xero. We handle software configuration, digital link review, and HMRC registration as part of our onboarding process.
How to Get MTD-Ready
Whether you are preparing for MTD VAT (already mandatory) or MTD for ITSA (April 2026 onwards), this checklist covers the key steps.
- 01
Confirm your obligations
Verify whether you are already mandated (all VAT-registered businesses) or establish your MTD ITSA start date based on qualifying income. Use HMRC's tools or ask your accountant.
- 02
Choose HMRC-approved software
Select a platform from the HMRC approved software list that fits your business size, sector, and workflow. Confirm it supports the specific MTD phase you need (VAT, ITSA, or both).
- 03
Migrate your records
Import existing records into your chosen platform. Ensure historical data, opening balances, and outstanding transactions are correctly transferred before your compliance start date.
- 04
Establish digital links
Map how data moves between any systems you use (e.g. e-commerce platform → accounting software). Replace any manual steps with digital exports, integrations, or imports.
- 05
Register for MTD with HMRC
Sign up via the HMRC portal for MTD VAT or MTD ITSA. Your software provider or accountant can guide you through the authorisation process and link your software to your HMRC account.
- 06
Test before your first deadline
Run a test submission or dry-run with your software before your first live return is due. Confirm the API connection is working and the data is mapping correctly.
Frequently Asked Questions
Is MTD for VAT mandatory for every VAT-registered business?
Yes. Since April 2022, MTD for VAT applies to all VAT-registered businesses in the UK, regardless of turnover. You must keep digital VAT records and submit returns using HMRC-recognised software. The only exceptions are businesses that hold a valid digital exclusion exemption from HMRC.
What happens if I do not comply with MTD for VAT?
HMRC uses a points-based system for late MTD VAT submissions. Each late submission earns one penalty point. Reaching five points results in a £200 fine per subsequent late submission. Filing a VAT return outside MTD rules entirely — for example using the old HMRC portal without an exemption — can attract a fixed £400 penalty per return, on top of any late filing penalties.
Can I continue using spreadsheets under MTD?
Yes, with bridging software. Spreadsheets alone do not meet MTD requirements because they cannot directly connect to HMRC APIs. However, you can continue to record transactions in a spreadsheet if you use HMRC-recognised bridging software to transfer and submit the data. All links between the spreadsheet and the bridging tool must be digital — no manual copy-pasting is permitted.
When does MTD for Income Tax Self Assessment start?
MTD for ITSA becomes mandatory in April 2026 for self-employed individuals and landlords with combined qualifying income from self-employment and property over £50,000. From April 2027, it extends to those with qualifying income over £30,000. HMRC is still consulting on those with income between £10,000 and £30,000 — no confirmed date for this group.
Do I still file a Self Assessment return under MTD for ITSA?
Not in the current form. MTD for ITSA replaces the annual SA100 return with quarterly digital updates (income and expense summaries sent four times per year), an End of Period Statement for each income source after the tax year, and a Final Declaration confirming your total taxable income and any adjustments. The quarterly updates are not final returns — they are progress reports.
My accountant submits my VAT returns. Does that change under MTD?
No — your accountant can continue to submit on your behalf using agent MTD software linked to your HMRC account. The records themselves, however, must still be kept digitally and the submission must go through MTD-compliant software rather than the old HMRC portal. Ostoya handles this for all VAT clients as standard.
How can Ostoya help with Making Tax Digital?
Ostoya manages MTD compliance end-to-end for VAT-registered businesses and self-employed clients. This includes setting up HMRC-approved software (we typically use Xero), configuring digital links, registering with HMRC for MTD, and handling all submissions on an ongoing basis. If you are unsure whether you are already mandated or what steps to take next, contact us for a no-obligation conversation.
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