What is Making Tax Digital?

Making Tax Digital is a government program designed to modernize the tax system by requiring taxpayers to keep digital records and submit tax information electronically. The goal is to reduce errors, improve transparency, and make tax administration smoother for both taxpayers and HM Revenue & Customs (HMRC).

MTD started with VAT returns in 2019 and is gradually expanding to cover income tax and corporation tax. The key features include:

• Keeping digital records of income and expenses

• Using compatible software to submit tax returns

• Quarterly updates instead of annual submissions for some taxes

This shift encourages real-time tax management, helping taxpayers avoid surprises at the end of the year.

Why Making Tax Digital Matters

The traditional tax system relies heavily on manual paperwork, which can lead to mistakes and delays. MTD addresses these issues by:

• Reducing errors: Digital records and software checks minimize calculation mistakes.

• Saving time: Automated processes cut down the hours spent on bookkeeping and filing.

• Improving accuracy: Real-time updates provide a clearer financial picture throughout the year.

• Enhancing compliance: Digital submissions make it easier to meet deadlines and avoid penalties.

For example, a small business using MTD-compatible software can track sales and expenses daily, generating VAT returns automatically. This reduces the risk of missing deductible expenses or misreporting income.

Who Needs to Comply with Making Tax Digital?

MTD currently applies to different groups depending on the tax type:

• VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) must use MTD for VAT.

• Self-employed individuals and landlords with income above £50,000 will need to use MTD for Income Tax from April 2026, Income above £30,000 will need to use MTD Income Tax from April 2027 and Income over £20,000 from April 2028.

• Limited companies will eventually use MTD for Corporation Tax, though this is still in development.

Even if you are not required to use MTD yet, adopting digital record-keeping early can prepare you for future changes and improve your financial management.

How to Prepare for Making Tax Digital

Adapting to MTD involves a few key steps:

1. Choose Compatible Software

You need software that can keep digital records and submit tax returns directly to HMRC. Many accounting packages now offer MTD compliance features. Examples include:

• QuickBooks

• Xero

These platforms allow you to connect your bank accounts, track expenses, and file returns seamlessly.

2. Keep Digital Records

Start recording all income and expenses digitally. This means:

• Saving invoices and receipts electronically

• Using spreadsheets or accounting software to log transactions

• Avoiding paper-only records

Digital records make it easier to generate reports and submit accurate tax information.

3. Understand Your Reporting Schedule

MTD introduces quarterly updates for some taxes, replacing the traditional annual return. This means you will report income and expenses every three months, helping you stay on top of your tax position.

4. Train Your Team or Yourself

If you have employees handling accounts, ensure they understand MTD requirements and software use. If you manage your own finances, take time to learn the new system or seek professional advice.