Making Tax Digital Explained: All of What UK Businesses Need to Know

You don’t have to use Making Tax Digital for income tax until you have submitted the relevant year’s Self Assessment. Early sign-up is encouraged by the HMRC.

Landlords and business partnerships

Landlords have to follow the above-described timeline based on their rental income. As for business partnerships, HMRC will decide a date later for their joining.

Exemption from Making Tax Digital for income tax

You don’t have to follow MTD for income tax rules in the following cases:

• Your qualifying income is less than £20,000
• You are automatically exempted, i.e., it is not practical to use electronics, or you belong to some religion that does not allow electronic devices
• You requested HMRC for an exemption and they granted it

In these cases, just keep following the standard Self Assessment procedure.

How to Check If You Need to Use MTD for Income Tax

HMRC reviews your Self Assessment returns annually. If your qualifying income goes over the threshold, they’ll inform you via letter. Even if they do not, you’ll have to check for yourself if you are over the threshold. You can sign up for the HMRC service if needed.

What does Making Tax Digital for Business and Individuals entail?

Here are a few key aspects of MTD:

1. Digital Recordkeeping

Either you or your agent must maintain HMRC-compatible software and maintain digital records. Your records must be up-to-date. These include:

• Records of income and expenses from property or self-employment, or both.
• Maintaining records that are correct, up-to-date and in line with MTD rules.
• Fixing potential mistakes right in the software

The software that you select should be able to connect to the systems of HMRC. It should also facilitate the entire reporting process, starting with the quarterly updates and the final submission.

2. Quarterly Updates to HMRC

Rather than making a single yearly tax filing, you will need to:

• Provide updates on the income and expenses quarterly (4 times a year)
• Summarise earnings using your MTD software
• Keep up with your tax requirements during the year, which will enhance precision and minimise shocks

These updates do not replace tax returns but will act as a real-time picture of your financial situation. They will enable HMRC and taxpayers to manage liabilities better.

3. Final Declaration and Payment

At the end of the tax year, by 31 January, you have to:

• Provide a final declaration (also known as the End of Period Statement) using their MTD software
• Ensure that the information is correct from the first to the last year
• Pay whatever tax you owe, just as you would with the old Self Assessment regime.

The government intends to present the legislation that would demand the final tax return to be filed only via the MTD-compatible software. The paper returns or the individual digital uploads will no longer be accepted.

4. Pre-Signup Planning: Key Considerations

Some of the key considerations before filing for Making Tax Digital are:

• Evaluate your business requirements: Find out if you qualify depending on your qualifying income
• Select the appropriate software: Find a provider that HMRC integrates with and helps to sustain your accounting process
• Provide agent details (where applicable): If you are using the services of a tax advisor or accountant, they must have an agent services account and should be authorised to represent you

If you are an agent, pre-registration comprises the following:

• Establishing an agent services account
• Obtaining the client’s authorisation
• Linking software to HMRC as well as to client profiles

5. Ongoing Responsibilities After Signup

The following tasks should be part of your routine once you are enrolled in MTD for income tax:

• Continuously store and maintain digital records
• Submit quarterly updates on time
• File the annual declaration
• Adapt to changing circumstances, such as when you are no longer self-employed or your income is below the threshold.

Making Tax Digital for VAT

As of April 2022,  Making Tax Digital for VAT is a requirement for all VAT-registered businesses, with no turnover exemption. Unless you fall in the exemption category, you’ll have to follow MTD rules.

Who Does MTD for VAT Apply To?

You must comply with MTD for VAT rules if you are any of the following:

• Your business is VAT-registered even if your earnings are below the £85,000 threshold
• You are a sole trader registered for VAT
• You are a sole landlord registered for VAT
• You are a limited company or LLP registered for VAT
• You are either a partnership or a registered society
• You got your business voluntarily registered for VAT

It is important to note that if your earnings fall below £85,000, you can avoid the MTD rules by cancelling your VAT registration. You will still have to submit a final VAT return. HMRC will then confirm it.

Quarterly Digital VAT Returns

Here is what what VAT -VAT-registered businesses are supposed to do under MTD rules:

• They should keep their VAT records by using an MTD-compatible software
• They should submit quarterly returns using that software
• They should retain digital evidence of income and expenses

Your software must track the following:

• Sales and purchases
• VAT amounts (charged and paid)
• Adjustments and VAT schemes
• Time and value of supply
• Reverse charge transactions

Learn more: How do I get a VAT Certificate: A Complete Guide

Common misconceptions of Making Tax Digital

Here are some of the common misconceptions about MTD for VAT:

1. You can still submit VAT manually

This is not true. All your submissions must now go through digital software that is connected directly with the HMRC.

2. You need expensive software

This is also not true. There are many affordable options as well. Some of them (bridging software) are free. These software let you connect spreadsheets with HMRC.

3. You have to scan every receipt

Even though you have to keep digital records, scanning paper receipts is not needed.

4. Only large businesses need to comply.

This, too, is false. As of 2022, all businesses must comply.

Exemption from MTD for VAT

The exemptions are exactly the ones that are applicable in Making Tax Digital for income tax, i.e., you cannot use software due to any of the following reasons:

• Age
• Disability
• Religion
• Practicality
• Location

Applying for exemption

If you want to apply for an exemption, contact HMRC with the following:

• Your VAT number
• Your current filing method
• Why MTD isn’t practical for you
• Written authorisation

Get detailed insights on 2025–26 Tax Year Updates.

Penalties Under the New Points-Based System

Since January 2023, HMRC has implemented a new system for imposing penalties. It is a points-based system, and here is how it works:

• Every time you miss a deadline, you get 1 point.
• Once you get to a threshold (2, 4 or 6 points), you will get a fine of 200 pounds.
• Thereafter, every further missed deadline = an extra 200 pounds fine.

Here are the penalty thresholds: