Making Tax Digital (MTD) is the UK government's program to digitalise the UK tax system including everything from reporting income to assessments by mandating the use of HMRC (His Majesty’s Customs & Revenue) compatible software.

MTD for VAT first came into effect in 2019 for some businesses and since April 2022 has been mandatory for all VAT-registered businesses.

The following phase of the programme is Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) which comes into effect in April 2026, and Making Tax Digital for corporation tax which is also scheduled to begin in April 2026.

The benefits for the government in digitalising the UK tax system are extensive, including closing the estimated £8.8 billion VAT gap and cutting down on fraud and tax evasion. However, the HMRC’s introduction of Making Tax Digital is also aimed at making tax simpler for all businesses or individuals eligible for MTD.

Software for digital record-keeping and tax returns means that the administration of an individual or organisation’s tax finances happens in one location, offering a simplification of what can be a tricky process and bringing major time savings. This software also allows for much easier collaboration between accountants and their clients, with the instant sharing and updating of accounting information.

Without the need to fill out forms and copy information for quarterly VAT returns, annual income tax assessments, and end-of-year returns, Making Tax Digital reduces the possibilities of making errors, aiding in making accurate returns and the associated benefits.

One of the aims of Making Tax Digital in quarterly assessment of income is to improve the prediction of income tax allowing for better financial planning and more accurate tax bills.

The HMRC requirements for MTD are relatively straightforward and are at present the same for MTD for VAT and MTD for ITSA schemes. Companies, sole traders, partnerships and landlords are either already required or will be required to use HMRC-compatible software to make electronic tax returns by April 2026.

Some businesses or landlords may already be using software to make digital copies of business records such as invoices and receipts, however, Making Tax Digital for Income Tax Self-Assessment and VAT requires the use of certified software that is capable of several very specific functions that include: 

• Maintaining business records as per the HMRC regulations.
• Compiling and dispatching quarterly updates and end-of-period statements based on the data recorded in those records.

• Concluding the assessment of business income and submitting the declaration after the conclusion of the tax year. 

• Engaging in digital communication with HMRC through an Application Programming Interface (API) platform.

MTD registration for all businesses is done through the HMRC website (also called the Government Gateway) but given the different timelines for the distinct MTD programmes, registration procedures may vary in accordance with business type, income and tax liability. 

Who is eligible for MTD?

As of April 2022, all VAT-registered businesses are eligible for MTD for VAT. Registration is carried out automatically when a business becomes VAT-registered. This is something to be very aware of when registering for VAT, as the use of HMRC-compatible software and what it entails will become mandatory.

From April 2026, companies, sole traders, partnerships and landlords with an annual income above £50,000 will be required by law to carry out MTD for Income Tax Self-Assessment, use HMRC-compatible software and follow the rules as stipulated by the HMRC.

The following year, from April 2027, companies, sole traders, partnerships and landlords with an annual income above £30,000 will become eligible for MTD for ITSA.

Prior to the April 2026 date for mandatory participation, businesses may sign up voluntarily as part of the MTD for ITSA trial. The requirements for participation are found on the Gov.uk website and include the implementation of HMRC-compatible software.
 

Eligibility rules for exemption for MTD for VAT or MTD for ITSA are also found on the Gov.uk website, and primarily revolve around objection to the use of computers based on valid grounds.

How to register for MTD

Registration for MTD for VAT is automatic for VAT-registered businesses, having already taken place for businesses that were VAT-registered prior to April 2022 or taking place automatically for businesses that have become VAT-registered since this date.
 

Making Tax Digital for Income Tax Self-Assessment is voluntary until April 2026 and following the HMRC guidelines, registration for the testing phase of the scheme is achieved by signing up through HMRC-compatible software, which may already be used if a business is VAT-registered.

What information is required?

First, to register for MTD for ITSA, one must be registered to file self-assessment tax returns. They will need their business start date or the date they started receiving property income if they are a landlord, and they may be required to give their business name and address for self-employment income sources.

The nature of the business (their trade) for self-employment income sources could be asked for and the Government Gateway user ID and password used for regular self-assessment tax returns will be required too.

What happens after registering?

After registration, the registrant will receive Making Tax Digital reminders (if the preference to being contacted online on the Government Gateway is set) which helps to adjust to the new tax return schedule. Using HMRC-compatible software to keep timely digital records of the relevant business transactions, sending quarterly and end-of-period reports, and making final, end-of-year returns simplifies the process. 

MTD for VAT and MTD for ITSA are both designed around using HMRC-compatible software and there are already hundreds of HMRC-authenticated UK providers offering a wide range of solutions for all levels of business needs. 

A cornerstone element of Making Tax Digital mandates that quarterly updates must be made using the software. The backbone of quarterly reporting is making digital records of the relevant business records as close to the time of transaction as possible.

For VAT-registered businesses, this means digital records of all VAT invoices and for ITSA a record of all income and eligible business expenses is required.

What software is compatible with MTD?

The HMRC has approved hundreds of different software products for MTD use. There are over 500 different HMRC-approved software solutions available for MTD for VAT, including options where existing Excel accounts may be incorporated using bridge software.

The number of approved software for MTD for ITSA is at this point (early 2024) more limited as the program is still in testing, but many more software solutions are in development. The complete list of HMRC-compatible software for both MTD for VAT and ITSA is available on the Gov.uk website. (Find software that’s compatible with MTD for ITSA) 

Something to bear in mind is the cost to taxpayers involved in complying with these new mandates. These costs include added software, hardware, and training costs.  The Institute of Chartered Accountants in England and Wales has put it at £1,250 total, whereas the UK government has estimated transitional costs of £330 and an annual cost of £35 a year for small businesses.

How to access quarterly updates

Given the importance of quarterly updates for MTD, they are integral to the software’s functionality, and the best software makes it easy to access and submit them. If the records are up to date, submitting the quarterly update is a simple process and must be completed within a month of the period’s end.

Understanding the period statement

The end-of-period statement (EOPS) is part of the MTD process where the details submitted for the period are confirmed. However, as MTD for ITSA is cumulative over the year, updates can be made to correct previous submissions on the following quarterly update, and in the UK government's Autumn Statement of 2023, it was announced that period statements would be removed from MTD for ITSA. 

Now fully implemented, MTD for VAT is now mandatory for all VAT-registered businesses, requiring the use of HMRC-approved software.

Understanding the VAT thresholds under MTD

At present, MTD is not compulsory for income tax assessment, which means that if the business is not VAT-registered they will not be using MTD yet. However, if that business reaches the VAT threshold of £85,000 annually, they must register for VAT and start charging VAT. 

Calculating taxable turnover under MTD

It is crucial to calculate taxable turnover accurately by identifying all sales subject to VAT and any possible exemptions, as this will determine both the VAT registration and the need to start with HMRC-compatible software and MTD for VAT.

Making Tax Digital will affect all UK businesses and landlords by 2026 so it makes sense to find out as much as possible about it and get ready. In fact, according to the Gov.uk website, about a quarter of VAT-registered businesses below the VAT threshold have voluntarily chosen to join MTD, suggesting the practicality of the new system and preparation for the inclusion of MTD for ITSA.