HMRC Compliance Guide
Making Tax Digital (MTD)
What UK Businesses Must Know
HMRC’s digital tax revolution — deadlines, requirements, and how to get compliant
Making Tax Digital (MTD) is HMRC’s ambitious programme to digitise the UK tax system. Businesses can no longer manage their taxes through traditional paper-based or spreadsheet methods — they must use HMRC-recognised software and submit data digitally. Non-compliance carries automatic financial penalties. This guide explains every phase, every deadline, and exactly what you need to do.
What is Making Tax Digital?
Making Tax Digital is HMRC’s initiative to modernise the UK tax administration system. The goal is to make it “easier for individuals and businesses to get their tax right and keep on top of their affairs.” In practice, this means:
- Maintaining digital records using HMRC-approved software
- Submitting tax information directly to HMRC through software (not manually)
- Providing more frequent updates to HMRC (quarterly rather than annually)
- Eliminating manual data entry errors and reducing the tax gap
MTD is not optional
Making Tax Digital is a legal requirement for businesses within its scope. Continuing to submit returns manually when MTD applies to you will result in automatic penalties under HMRC’s new points-based penalty system.
MTD Rollout — All Three Phases
HMRC is rolling out MTD in phases by tax type. Here’s the current status of each:
Live — Since April 2019
MTD for VAT
All VAT-registered businesses must keep digital records and submit VAT returns through MTD-compatible software. Mandatory since April 2019 for businesses above the £85,000 VAT threshold, and since April 2022 for all VAT-registered businesses regardless of turnover.
👥 Affects: All VAT-registered businesses in the UK
Coming April 2026
MTD for Income Tax Self Assessment (MTD ITSA) — Phase 1
Self-employed individuals and landlords with combined business/property income over £50,000 must use MTD-compatible software to submit quarterly updates to HMRC. Annual Self Assessment returns will still be required to finalise tax liability.
👥 Affects: Self-employed & landlords with income £50,000+
Coming April 2027
MTD for Income Tax Self Assessment — Phase 2
Extended to self-employed individuals and landlords with income over £30,000. Same quarterly reporting requirements as Phase 1.
👥 Affects: Self-employed & landlords with income £30,000+
Future Phase — TBC
MTD for Income Tax Self Assessment — Phase 3
Further expansion to include those with income over £20,000. Date not yet confirmed by HMRC.
👥 Affects: Self-employed & landlords with income £20,000+
Future Phase — TBC
MTD for Corporation Tax
Limited companies will eventually be required to keep digital records and submit Corporation Tax returns via MTD-compatible software. HMRC has indicated this will not be mandated before 2026 at the earliest, with a pilot currently in progress.
👥 Affects: All UK limited companies
MTD for VAT — Are You Compliant?
If you are VAT-registered, MTD for VAT is already mandatory. You must:
1
Keep Digital VAT Records
All records that feed into your VAT return must be kept digitally — including invoices, purchase records, and VAT calculations. Paper records alone are no longer sufficient.
2
Use MTD-Compatible Software
Submit your VAT returns using software that is approved for MTD. The software must connect directly to HMRC’s systems via an API. See the software section below for recommended options.
3
Submit Through the Software
You can no longer manually log into HMRC’s portal to submit VAT returns (unless you have a valid digital exclusion exemption). All submissions must come via your software.
4
Maintain Digital Links
There must be a digital link between all the records that make up your VAT return. Copy-and-paste from one spreadsheet to another does not count as a digital link — you need software that connects them automatically.
Already using accounting software? You may already be compliant
If you use Xero, QuickBooks, Sage, or FreeAgent and file VAT returns through them, you are likely already MTD for VAT compliant. Check that your software is on HMRC’s approved list and that digital links are maintained throughout your record-keeping.
MTD for Income Tax — What’s Coming
From April 2026, self-employed individuals and landlords with gross income above £50,000 must comply with MTD for Income Tax Self Assessment (MTD ITSA). This is a significant change to how self-employed people manage their tax.
What changes under MTD ITSA?
- Quarterly reporting: Instead of one annual Self Assessment return, you must submit four quarterly updates to HMRC reporting your income and expenses
- End-of-year finalisation: After the tax year ends, you submit a final declaration to confirm all income and claim any reliefs
- Digital records: All income and expense records must be maintained digitally using compatible software
- Real-time tax estimates: HMRC will show you an estimate of your tax liability throughout the year based on your quarterly submissions
Quarterly submissions are not quarterly payments
MTD ITSA requires quarterly reporting — but your actual tax payment dates are not changing. You still pay your Income Tax through Self Assessment in January and July payment on account cycles. The quarterly submissions are informational only.
MTD ITSA Quarterly Reporting Periods
| Quarter | Period Covered | Submission Deadline |
|---|---|---|
| Quarter 1 | 6 April – 5 July | 5 August |
| Quarter 2 | 6 July – 5 October | 5 November |
| Quarter 3 | 6 October – 5 January | 5 February |
| Quarter 4 | 6 January – 5 April | 5 May |
| Final Declaration | Full tax year | 31 January (following year) |
Compatible MTD Software
You must use HMRC-recognised software for MTD compliance. Here are the most popular options for UK businesses:
| Software | MTD VAT | MTD ITSA (Coming) | Best For |
|---|---|---|---|
| Xero | ✓ Compliant | In Development | SMEs, growing businesses |
| QuickBooks | ✓ Compliant | In Development | Small businesses, freelancers |
| Sage 50 / Sage Accounting | ✓ Compliant | In Development | Established SMEs |
| FreeAgent | ✓ Compliant | In Development | Sole traders, freelancers |
| Bridging Software | ✓ Compliant | Limited | Spreadsheet users (temporary) |
MTD Penalties — What Happens If You Don’t Comply
HMRC has introduced a new points-based penalty system for MTD failures. Understanding this system is important — penalties can accumulate quickly.
+1
Point for each late submission
Every time you miss a submission deadline, HMRC adds one penalty point to your record.
£200
Penalty at threshold
Once you reach the threshold (2 points for annual, 4 for quarterly filers), HMRC charges a £200 financial penalty.
£200
Every further late submission
Each late submission after reaching the threshold adds another £200 penalty.
+30%
Late payment interest
Late payment of tax also attracts interest plus potential financial penalties on top of points-based penalties.
Your MTD Action Plan
Whether you’re already MTD compliant for VAT or preparing for MTD ITSA, here is a clear action plan:
1
Check Which MTD Phase Applies to You — Now
Are you VAT-registered? Self-employed or a landlord with income over £50,000? Identify your obligations and the deadline that applies to you.
2
Choose and Sign Up to Approved Software
Select an HMRC-approved accounting package. If you already use one, confirm it is on the approved list and properly linked to HMRC’s systems.
3
Review Your Record-Keeping
Ensure all your financial records are being captured digitally. Paper invoices must be scanned or entered digitally. Digital links between records must be maintained.
4
Register for MTD with HMRC
You must formally sign up to MTD before the mandatory deadline. Do not leave this to the last minute — sign up through your Government Gateway account or via your accountant.
5
Appoint an MTD-Ready Accountant
Work with an accountant who uses MTD-compatible software and can handle your quarterly submissions, keeping you compliant and penalty-free throughout the year.
Frequently Asked Questions
Do I need to use accounting software for MTD?
Yes — you must use HMRC-approved software to maintain digital records and submit returns under MTD. Spreadsheets alone are not sufficient, though bridging software that connects your spreadsheet to HMRC is acceptable as a transitional measure.
What if I can’t use digital tools?
HMRC provides digital exclusion exemptions for individuals who genuinely cannot use digital tools — for example due to age, disability, or location (no internet access). However, these exemptions are narrow and must be applied for in advance.
Does MTD apply to partnerships?
MTD ITSA will eventually apply to partnerships, but the mandate timeline for partnerships has not yet been confirmed. HMRC has indicated this will come after the initial phases for individuals are in place.
What is a “digital link”?
A digital link is an automated data transfer between systems — for example, sales data automatically flowing from your invoicing software into your accounting software. Manually rekeying data or copy-and-pasting between systems does not count as a digital link and is non-compliant.
Will I still file a Self Assessment tax return under MTD ITSA?
Yes. Under MTD ITSA, you still file an end-of-year Final Declaration (which replaces the current Self Assessment tax return) by 31 January. The quarterly submissions are updates that feed into this final declaration — they do not replace it.