What is Making Tax Digital? A Comprehensive Guide
- Modified: 25 February 2026
- 13 min read
- Tax & VAT, Running a Business
Ruth Dsouza
Author
Ruth Dsouza Prabhu is a content developer who specialises in crafting clear, compelling narratives from complex ideas. With expertise in marketing communications and lifestyle writing, she simplifies business concepts for a wide audience. Her writing blends strategy, storytelling, and thought leadership, always with a focus on clarity, credibility, and meaningful impact.
Mosan Ali
Reviewer
Mosan Ali is our Accounting Manager based in the UK and has a wealth of knowledge of UK GAAP, VAT, and PAYE. With 12 years of experience crunching numbers and ensuring compliance, he keeps our financial reporting ship-shape. Think of Mosan as our blog's accounting guru. He carefully reviews our UK-focused content, ensuring it's accurate, up-to-date, and packed with helpful tips for UK businesses. Get your taxes right from day one with our informative blog posts.
Making Tax Digital is reshaping how UK businesses report tax to HMRC. If you’re a founder, sole trader, landlord, or running an SME, you need to understand what’s changing — and when it affects you. This guide breaks down everything from VAT requirements to upcoming Income Tax obligations, so you can plan ahead and stay compliant without drowning in paperwork.
Key Takeaways
- Making Tax Digital applies to most businesses, including VAT-registered businesses such as private limited companies, sole traders, and landlords, and will eventually extend to corporate tax for companies.
- Maintaining accurate digital records of all transactions is essential to meet HMRC requirements and ensure transparency.
- Using HMRC-approved, MTD-compliant software allows businesses to submit returns efficiently, reduce errors, and stay fully compliant.
What is Making Tax Digital?
Making Tax Digital (MTD) is HMRC’s long-term programme to digitise the UK tax system. It started with VAT in April 2019 and is expanding to Income Tax from April 2026. The core idea is simple: instead of paper forms or typing figures directly into HMRC’s website, you keep digital records and submit information using approved software.
All VAT-registered businesses have been within MTD for VAT since 1 April 2022. Many sole traders and landlords will be brought into MTD for Income Tax between 2026 and 2028, depending on their qualifying income thresholds.
Why the UK Government Is Implementing Making Tax Digital
The UK government launched Making Tax Digital as part of a broader strategy to modernise the tax system and improve tax compliance. One of the main challenges has been the significant tax gap caused by errors and inaccuracies in manual record keeping and submissions, which cost billions annually.
By requiring businesses and individuals to keep digital tax records and submit returns using authorised software, MTD aims to:
- Reduce errors caused by manual data entry and paper-based processes
- Increase transparency and improve the accuracy of tax information submitted to HMRC
- Provide taxpayers with more frequent updates on their tax liabilities through quarterly reporting
- Enhance the efficiency of tax administration and reduce the burden of compliance
This initiative supports the government's plan to create a more reliable, real-time tax system that benefits both taxpayers and HMRC without changing tax rates or allowances.
Expert accountants on your side
Our team of qualified accountants helps founders get their taxes right from the start.
Who Must Comply With Making Tax Digital?
Making Tax Digital applies to most VAT-registered businesses and will gradually extend to income tax and corporation tax. The rules differ depending on the type of tax and the structure of the business. Below is a breakdown of who must comply, what is required, and when the obligations take effect.
Making Tax Digital for VAT
Making Tax Digital for VAT is already mandatory for all new VAT-registered businesses in the UK, regardless of turnover. If your business is registered for VAT, you must:
- Keep VAT records in a digital format.
- Use MTD-compatible software.
- Submit VAT returns directly to HM Revenue & Customs through that software.
This applies to private limited companies, sole traders, partnerships, and other VAT-registered entities. Even if your turnover falls below the VAT threshold, once you are voluntarily registered for VAT, MTD rules apply.
Businesses that fail to maintain digital records or submit returns using compatible software may face penalties under HMRC’s points-based system.
Making Tax Digital for Income Tax (MTD for ITSA)
Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will apply to:
- Landlords with UK property income.
From April 2026, individuals with qualifying income above the relevant threshold will be required to:
- Keep digital records of income and expenses.
- Submit quarterly updates to HMRC using compatible software.
- File an annual final declaration.
MTD for ITSA does not currently apply to directors of limited companies solely because they receive salary or dividends. However, it will apply if they also earn qualifying self-employment or property income above the threshold.
This reform significantly changes how sole traders and landlords report income, moving from one annual tax return to multiple digital submissions throughout the year.
Making Tax Digital for Corporation Tax
Making Tax Digital for Corporation Tax is not yet mandatory. However, HMRC has confirmed that it will eventually fall within the MTD framework.
When implemented, UK limited companies will likely be required to:
- Maintain fully digital accounting records.
- Submit corporate tax returns using MTD-compatible software.
- Provide more frequent digital reporting.
Although no confirmed start date has been announced, companies should prepare by adopting compliant digital accounting systems now. Most private limited companies already use accounting software, which positions them well for future MTD tax requirements.
Prepare your limited company for future MTD requirements with Osome accounting services. We provide fully digital bookkeeping, statutory accounts, and corporate tax compliance to keep your company aligned with HMRC rules.
Making Tax Digital Deadlines
Making Tax Digital is being introduced in stages. The applicable deadline depends on the type of tax and the structure of the business. Below is a summary of the key implementation dates.
- Making Tax Digital for VAT – Mandatory for all VAT-registered businesses since April 2022. All VAT returns must be submitted using MTD-compatible software to HMRC.
- Making Tax Digital for Income Tax (MTD for ITSA) – From April 2026, individuals with qualifying self-employment or property income above £ 50,000 must comply. From April 2027, the threshold reduces to £ 30,000.
- Making Tax Digital for Corporation Tax – Not yet mandatory. HMRC has confirmed that it will move into the MTD framework in the future, with implementation dates to be announced.
Businesses should review their accounting systems in advance of the relevant deadline to ensure full digital record-keeping and reporting compliance.
Not sure how much VAT to charge or reclaim? Use our simple VAT Calculator to work out VAT-inclusive and VAT-exclusive amounts in seconds.
What Digital Records Must Be Kept?
Under Making Tax Digital, businesses and individuals must maintain accurate digital accounting records to submit tax information efficiently and accurately to HM Revenue & Customs. Digital records are electronic versions of your financial transactions and must cover all relevant income, expenses, and VAT data.
To comply, records should include:
- Sales and purchase transactions – invoices, receipts, and payments.
- VAT information – input and output tax for all sales and purchases.
- Income and expense details – for self-employed individuals or landlords under MTD for ITSA.
Records must be stored in functional compatible software, which can:
- Record and calculate tax automatically.
- Submit returns directly to HMRC digitally.
Allow corrections or updates if needed.
If multiple systems are used, they must be connected via digital links. A digital link is an electronic connection that ensures data flows directly between software programs without manual re-entry — for example, exporting invoices from accounting software to VAT return software or connecting spreadsheets via a compatible API.
Maintaining complete, digital records with proper links is essential to meet MTD requirements and avoid penalties.
Your Making Tax Digital checklist
If you are VAT registered, you must sign up for MTD. Here’s what you need to get started with Making Tax Digital.
What Is MTD-Compatible Software?
Making Tax Digital (MTD) requires businesses and individuals to use software that is compatible with HMRC systems for recording and submitting tax information. Making Tax Digital software ensures that digital records can be maintained accurately and transmitted securely to HM Revenue & Customs.
To qualify as MTD-compatible, software must be able to:
- Record and store all relevant financial transactions digitally.
- Calculate tax liabilities automatically.
- Submit VAT, income tax, or corporate tax returns directly to HMRC.
- Maintain an audit trail for all transactions.
Spreadsheets alone typically do not comply, because they cannot directly submit information to HMRC or create the required digital links between records. However, if a spreadsheet is connected to compatible software through a functional digital link, it may be acceptable.
Making Tax Digital software connects to HMRC systems either directly via APIs or through secure digital links. This ensures that data flows seamlessly, reducing errors and manual entry, while keeping records fully compliant with MTD requirements.
Ensure full MTD compliance with ease — Osome’s HMRC-approved, MTD-compliant software and accounting packages handle VAT returns accurately and support you with any post-submission queries.
Who Is Exempt From Making Tax Digital?
While Making Tax Digital applies to most businesses and individuals, certain groups may be eligible for exemptions. These exemptions ensure that businesses or individuals facing specific challenges are not unfairly penalised while maintaining overall compliance.
Digitally excluded
Some businesses and individuals may not have the necessary digital access or skills to use MTD-compliant software. Those who cannot maintain digital records due to lack of internet access or technological limitations may apply for an exemption.
Religious objections
MTD requires the use of digital systems, which can conflict with certain religious beliefs. Businesses or individuals with valid religious objections to using digital technology may qualify for exemption if supported by HMRC-approved documentation.
Insolvency cases
Businesses currently in insolvency or administration may be exempt from MTD obligations. This allows affected companies to focus on financial recovery without facing additional compliance burdens.
Age or disability grounds
Older individuals or those with disabilities that prevent them from using digital tools may also be granted exemptions. HMRC considers reasonable accommodations to ensure that compliance requirements are fair and achievable.
Some individuals will be exempt from MTD IT, such as those without a National Insurance number and non-UK resident foreign entertainers and sportspeople who don't have any other income sources that qualify for MTD.
Penalties for Non-Compliance
Failing to comply with Making Tax Digital (MTD) can have serious consequences for businesses and individuals. HMRC takes compliance seriously, and penalties are designed to encourage accurate record-keeping and timely submission of digital returns.
Late submission
Submitting VAT, income tax, or corporate tax returns after the required deadline can lead to financial penalties. Even small delays can accumulate points under HMRC’s penalty system, and repeated late submissions increase the severity of fines. Using Making Tax Digital software ensures submissions are made on time and reduces this risk.
Failure to keep digital records
MTD requires that all relevant financial transactions and tax data are maintained digitally in a format compatible with HMRC systems. Failing to keep these records — for example, relying solely on unlinked spreadsheets or paper records — can result in penalties. Accurate digital record-keeping is essential both for filing and for responding to audits or HMRC queries.
Points-based penalty system
HMRC applies a points-based penalty system for VAT to manage repeated non-compliance. Each late or inaccurate submission adds points, and accumulating points can lead to automatic fines or more intensive investigations. This system highlights the importance of consistent MTD compliance across all submissions.
Overall, understanding the potential penalties underscores the urgency of using proper digital record-keeping systems and compatible software. Businesses that prepare in advance and maintain accuracy can avoid fines, preserve good standing with HMRC, and reduce administrative stress.
Accounting Manager
How to Register for Making Tax Digital in the UK
To register for Making Tax Digital (MTD), follow these steps to ensure full compliance with HMRC requirements:
1 Create an HMRC online account
If you don’t already have one, visit the HMRC website and sign in or register for a new account. You will need an email address and a secure password.
2 Link your business to your HMRC account
Use your Unique Taxpayer Reference (UTR) along with your National Insurance number (for sole traders) or company registration number (for limited companies). Follow the HMRC instructions to confirm your business details.
3 Enrol for Making Tax Digital
Once your business is linked, enrol for the relevant taxes. Most VAT-registered businesses above the VAT threshold must enrol for MTD for VAT. Other taxes, such as income tax or corporate tax, may be added in the future.
4 Choose and set up MTD-compatible software
Select accounting or bookkeeping software that is HMRC-approved and MTD-compliant. Install the software, link it to your HMRC account, and input your business information. This software will allow you to record transactions digitally and submit your returns directly to HMRC.
5 Submit digital VAT returns
Use your MTD-compatible software to submit VAT returns digitally on a quarterly basis, in line with HMRC deadlines. Ensure all transactions are recorded accurately to calculate VAT payable or receivable correctly.
6 Keep accurate digital records
Maintain all business transactions in a digital format, including invoices, receipts, and expenses. Your software should store this data securely and make it easily retrievable for HMRC audits or compliance checks.
7 Pay any tax due on time
After submitting your VAT return, make sure to pay the VAT owed to HMRC by the specified deadline to avoid penalties.
8 Stay informed and compliant
Keep up to date with any changes in MTD requirements or deadlines. HMRC plans to expand MTD to income tax and corporate tax, so regular updates will ensure ongoing compliance.
How Osome Supports Making Tax Digital Compliance
Osome helps businesses stay fully compliant with Making Tax Digital by providing an end-to-end digital accounting solution. Our platform ensures automated digital record-keeping, capturing all company transactions accurately and in real time, so VAT and future tax records are always reliable.
With Osome, VAT submissions are filed directly to HMRC using HMRC-approved, compliant software, reducing errors and meeting all deadlines with confidence. Our team of professional accountants also provides expert support for complex transactions, HMRC queries, and compliance checks, giving directors peace of mind. Osome makes MTD compliance stress-free and manageable, allowing limited company directors to focus on running and growing their business without worrying about VAT obligations.
Summary
Making Tax Digital (MTD) is transforming how private limited companies manage VAT and, in the future, corporation tax. By keeping all financial transactions in a digital format and submitting returns through HMRC-approved, compliant software, companies can improve accuracy, reduce errors, and ensure timely compliance with reporting obligations. Adopting digital record-keeping practices early allows companies to stay ahead of upcoming requirements, streamline accounting workflows, and maintain a clear audit trail. This approach not only supports regulatory compliance but also enhances transparency and efficiency in day-to-day financial management.
Ruth Dsouza Prabhu is a content developer who specialises in crafting clear, compelling narratives from complex ideas. With expertise in marketing communications and lifestyle writing, she simplifies business concepts for a wide audience. Her writing blends strategy, storytelling, and thought leadership, always with a focus on clarity, credibility, and meaningful impact.
