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Making Tax Digital — What Small Businesses Need to Do
Making Tax Digital — What Small Businesses Need to Do
Making Tax Digital is HMRC’s flagship digitalisation programme, and it’s expanding fast. Whether you’re already filing VAT digitally or bracing for MTD for Income Tax, here’s what every small business needs to know right now.
What is Making Tax Digital?
Making Tax Digital (MTD) is HMRC’s programme to modernise the UK tax system. The core idea: businesses must keep digital records and use HMRC-approved software to submit tax returns, replacing manual paper-based processes entirely.
MTD is rolling out in stages. VAT-registered businesses are already in scope. Self-employed individuals and landlords are next, with the most significant deadline coming in April 2026.
MTD for VAT — already mandatory
Since April 2022, MTD for VAT has applied to all VAT-registered businesses, regardless of turnover. If you’re VAT-registered, you must already be:
- Keeping digital VAT records using compatible software
- Submitting VAT returns directly from that software via HMRC’s API
- Maintaining a digital audit trail with no “copy and paste” breaks between your records and submission
If you’re still submitting VAT returns manually through HMRC’s old portal, you are not compliant and could face penalties.
⚠ No manual entry allowedYou cannot enter figures manually into HMRC’s own portal and be MTD compliant. The data must flow digitally from your records into your return. Bridging software (which reads a spreadsheet and submits it via API) is permitted as a short-term solution.
MTD for Income Tax — the big change coming
The most significant expansion is MTD for Income Tax Self Assessment (ITSA), which will transform how self-employed people and landlords report their income to HMRC:
| Date | Who it affects | What changes |
|---|---|---|
| April 2026 | Self-employed & landlords with income over £50,000 | Must keep digital records and submit quarterly updates to HMRC, plus an end-of-period statement |
| April 2027 | Self-employed & landlords with income over £30,000 | Same requirements as above |
| TBC (likely 2028) | Those with income over £20,000 | Government has committed to this threshold; date not yet confirmed |
This replaces the traditional single annual Self Assessment return with four quarterly updates per year, plus a final declaration. Quarterly updates don’t mean quarterly tax payments — they’re information submissions. You still pay tax through the normal Self Assessment payment schedule.
What you need to do to prepare
- Find out if and when you’re in scope. Check whether your gross business income or rental income exceeds the relevant threshold. If you have both self-employment and rental income, both are considered together.
- Choose MTD-compatible software. HMRC maintains a list of approved software on gov.uk. Popular options include QuickBooks, Xero, FreeAgent, and Sage. Some free or low-cost options exist too. Look for software that handles both record-keeping and quarterly submission.
- Start keeping digital records now. Don’t wait until the deadline. Transitioning to digital bookkeeping is the steepest part of the learning curve. Getting comfortable with your software 12–18 months early makes a significant difference.
- Sign up for MTD for ITSA when eligible. You cannot sign up until you’re in the mandated group or HMRC opens voluntary sign-up. Watch gov.uk for guidance on pilot schemes and voluntary entry windows.
- Speak to your accountant. MTD changes the cadence of your accountant relationship. Quarterly submissions mean quarterly check-ins are sensible. Many accountants are already MTD-ready; make sure yours is too.
What counts as a “digital record”?
HMRC requires you to record each transaction digitally, including: date of the transaction, amount, category (e.g. office costs, travel, materials), and whether it’s income or expenditure. You don’t need to scan every receipt, but you do need the figures captured in compliant software — not in a Word document or an ordinary Excel spreadsheet unless bridging software is used.
Penalties for non-compliance
HMRC is introducing a new points-based penalty system alongside MTD. Each late or missed submission earns a penalty point. Once you reach the threshold (currently four points for quarterly filers), a £200 financial penalty applies — with further £200 penalties for each subsequent failure. Points expire after two years of full compliance.
📌 What to do this yearEven if the 2026 deadline doesn’t apply to you yet, this is a good moment to: review your current record-keeping, trial one or two MTD-compatible software packages, and speak to your accountant about their MTD migration plan. The businesses that struggle most are those who leave it until six months before the deadline.
MTD and Making Tax Digital for Corporation Tax
HMRC has confirmed plans for MTD for Corporation Tax, but no firm implementation date has been set. Limited company owners should monitor HMRC announcements but are not yet required to act.
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