Making Tax Digital (MTD) in the UK

📘 Introduction: Why Making Tax Digital Matters Now

You may have heard the terms Making Tax Digital, MTD for VAT, MTD for Income Tax (ITSA), or “digital records for tax.” But what exactly is it, who must follow it, and how do you prepare?

In simple words: MTD is about modernising the UK tax system. Instead of waiting until year-end to file, you will keep digital records and submit periodic updates to HMRC. It’s a big shift — akin to moving from paper diaries to a cloud calendar — and it affects many small businesses, landlords, sole traders, and tax professionals (ACCA, CPAs).

In this blog you will learn:

1. What MTD is and its purpose

2. The phases and deadlines (VAT, Income Tax)

3. Who is in scope / eligibility

4. What “digital records” & “compatible software” really mean

5. Practical steps to prepare

6. Common challenges and pitfalls

7. Key benefits

8. FAQs

9. How Finnova Assist can help

Let’s dive in.

---

1. What Is Making Tax Digital?

Making Tax Digital (MTD) is a UK government initiative to transform the tax system by requiring digital record-keeping, digital submission of tax data, and using software that can connect (via APIs) to HMRC. 

In effect, MTD aims to:

• Increase accuracy and reduce errors

• Bring in real-time tax reporting (or closer to real time)

• Reduce tax evasion / the “tax gap”

• Simplify processes in the long run
  

  
  At present, MTD is already mandatory for VAT (for most VAT-registered businesses). MTD is being expanded to Income Tax / Self Assessment (ITSA) for sole traders, landlords, and eventually other categories. In earlier drafts there were proposals for MTD for Corporation Tax, but those plans have been shelved or deferred.

Thus, the main focus now is:

• MTD for VAT (already live)

• MTD for Income Tax (phased rollout upcoming)

2. Phases & Key Dates

Understanding when different taxpayers must comply is crucial. Here’s the timeline:

✅ MTD for VAT (already in place)

• As of April 2019, all VAT-registered businesses with turnover above the VAT threshold had to use MTD-compatible software to keep digital records and submit VAT returns.

• From 1 April 2022, MTD for VAT applies to all VAT-registered businesses, regardless of size, unless exempt.

• Digital linking (i.e. the requirement that the software is digitally linked and no manual copy-paste) became mandatory after a “soft-landing” period.

Thus, if your business is VAT-registered, you should already be compliant.

📅 MTD for Income Tax (MTD for ITSA)

This is the new frontier. The government is phasing it out over a few years. Key upcoming dates (as currently planned / legislated):

• 6 April 2026: MTD for Income Tax becomes mandatory for self-employed individuals and landlords whose qualifying income exceeds £50,000

• 6 April 2027: For those whose qualifying income is over £30,000

• By 2029 or earlier: The target is to bring in those with qualifying income over £20,000
  

  
  Note: “qualifying income” refers to income from self-employment + property sources (gross, before expenses).

Also, you do not immediately become subject to MTD just by having some income — there is a threshold and HMRC may send you a notice. Because the rollout is phased, it's wise to start preparing early.

3. Who Is In Scope & Who Is Exempt

🎯 In Scope

You will need to adopt MTD (for Income Tax) if all the following apply:

• You are a sole trader or landlord (or both) registered for Self Assessment.

• You have qualifying income (from self-employed + property) above the threshold (e.g. £50,000 from 2026)

• You’re not exempt (see below)

  Business partnerships will be included later (future phases). You don’t need to do MTD if your income is under the threshold. You cannot use MTD if you are digitally excluded (e.g. you have no internet, disability, poor connection) — you may apply for an exemption.

Also, some categories are automatically exempt:

• Trustees (including charitable trustees) 

• Those without a National Insurance number in certain tax years

• Those filing as personal representatives of someone deceased

• Lloyd’s members, non-resident companies (re relevant contexts)

If you are exempt, you do not need to sign up or use MTD.

Important caution: Even if you don’t get a notice, it's your responsibility to check whether you are in scope and act accordingly.

---

4. What “Digital Records” & “Compatible Software” Mean

📂 Digital Records — What You Must Keep

Under MTD, your records must be kept in digital form, not just on paper. The rules require you to record specified data (dates, amounts, descriptions, classifications) for each transaction.

You can use:

• Full accounting software

• Simplified accounting packages
  Spreadsheets + bridging software (if they meet HMRC’s “digital links” rules)

  The key is that software, or combination of tools, must connect digitally — no manual copying & pasting / retyping between modules unless you have a digital link. If you have multiple sources (e.g. self-employment + rental), you may need separately tracked digital records for each source. Records must be kept for the appropriate retention period.

🖥️ Compatible Software

Your software must be HMRC-recognised as MTD-compatible (or able to connect to HMRC via the API / bridging). 

It must support:

• Digital recordkeeping of required fields

• Ability to submit quarterly updates to HMRC (for income & expenses)

• An end-of-period statement / final submission to reconcile and claim allowances, reliefs

• Ability to correct previous submissions

• Digital linking between components (no manual retyping)

Many accounting software providers are already updating their products to be MTD-ready. You may already be using software for VAT compliance that can expand to cover Income Tax MTD as well. The HMRC “end-to-end service guide” provides the technical API and integration details for software developers.

5. Practical Steps to Prepare for MTD

You want to be ready well before your compliance date. Here’s a simple roadmap you can follow:

Step 1: Assess Whether You’ll Be In Scope

• Estimate your qualifying income (self-employed + property)

• Compare against upcoming thresholds (£50,000, £30,000, etc.)

• Check if any exemptions apply (digital exclusion, trustee status, etc.)

Step 2: Review Your Current Record-keeping Practices

• Are you using paper ledgers or spreadsheets that aren’t connected?

• Do your records contain all required fields (date, description, amount, nature)?

• Do you have multiple income sources separately tracked?

Step 3: Choose MTD-Compatible Software

• Pick software that is HMRC-recognised or has an API link to HMRC.

• If you already have accounting software (for VAT or bookkeeping), check whether it will be upgraded or already supports Income Tax MTD.

• Decide if bridging software is needed to connect non-compatible tools.

• Test features like submission, correction, linking.

Step 4: Migrate / Digitise Historical Data

• Export or enter your recent transaction data into the new software.

• Check for completeness, accuracy, and reclassifications.

• Reconcile opening balances, bank accounts, etc.

Step 5: Set Up Quarterly Update Workflow

• Decide how often (quarterly updates + one final end-of-period statement).

• Assign roles (you, your accountant, your team) for data input, review, submission.

• Establish timelines for review and submission before due dates.

Step 6: Trial Run Before Mandatory Date

• Use the software now, even before you're required to, to get comfortable.

• If you're eligible, consider joining the HMRC MTD Beta / Pilot program.

• Practice handling corrections, amendments, and unexpected adjustments.

Step 7: Maintain Ongoing Compliance

• Ensure records are updated regularly (don’t leave them till year-end).

• Regularly review your submissions and reconcile with your bank / invoices.

• Stay updated on HMRC guidance changes.

• Train staff or agents on digital workflows and software usage.

  ---

6. Common Challenges & How to Overcome Them

Transitioning to MTD isn’t without its bumps. But many challenges can be managed with early planning. Below are common issues and solutions.

Many businesses that initially struggled with MTD VAT reported that after a few cycles the process became smoother and faster. Also, for accountants, MTD introduces both challenges and opportunities: some firms are positioning themselves as MTD specialists who help clients transition.

---

7. Key Benefits of Making Tax Digital

It’s not just more work — there are real advantages you can capture.

Better Tax Accuracy & Fewer Errors- Because you maintain ongoing digital records, there’s less chance of omissions or mistakes

More Real-Time Visibility- You and your accountant can see your income, expenses, and tax liability throughout the year—not just at year-end.

Smarter Tax Planning- With real-time data, you can make adjustments mid-year (e.g. tax planning, expense timing) rather than being caught by surprise.

Reduced End-of-Year Burden- With quarterly updates, the year-end “crunch” is less intense.

Strengthened Compliance & HMRC Assurance- You stay more compliant, reduce the risk of penalties, and respond faster to any HMRC enquiries.

Competitive Advantage for Advisors- Accounting practices that are MTD-ready can market this as a value-add to clients (especially small businesses).

Transparency & Audit Trail- Because all entries, corrections, and links are digital, you have a stronger audit trail and better documentation.

Over time, these benefits can outweigh the initial setup costs.

8. Frequently Asked Questions (FAQ)

Q1: Do I immediately become subject to MTD when my income exceeds the threshold?
A: Not automatically. HMRC will review your Self Assessment history and send you a notice of when MTD applies. But you also have a duty to monitor your own status. 

Q2: Can I use spreadsheets I already have?
A: Possibly, but only if they are connected via digital links (bridging software) that comply with HMRC rules — you cannot manually retype between systems. 

Q3: What if I have multiple businesses or rental and trading income?
A: Each “income source” often needs separate digital records and quarterly updates. Ensure your software can support multiple streams. 

Q4: What if I’m exempt (digitally excluded)?
A: You can apply for an exemption by proving hardship (e.g. poor connectivity, disability). If approved, you may continue using traditional methods. 

Q5: What happens if I fail to comply with MTD once it’s mandatory?
A: You may face penalties, loss of submission privilege, or HMRC enforcement. Compliance is vital.

Q6: Is MTD coming for Corporation Tax?
A: As of recent updates, the planned MTD for Corporation Tax has been delayed or shelved. 

Q7: Should I join the HMRC Beta testing?
A: If eligible, it gives you early exposure, time to test workflows, and smoother transition. 

---

9. Action Plan & Checklist

Here’s a checklist to help you manage your MTD transition:

Starting this early gives you a buffer for unexpected issues.

---

10. How Finnova Assist Can Help You

Transitioning to MTD may feel daunting, especially if you are a small business owner, landlord, or managing a busy practice. That’s where Finnova Assist steps in as your back-end digital tax support partner.

Here’s how we assist:

Software Selection & Setup: We help you pick and integrate MTD-compatible accounting systems tailored to your business needs.

Data Migration & Clean-up: We migrate your historical transactions, clean up your ledgers, and ensure all records are accurate.

Quarterly Update Management: We handle the quarterly submissions and corrections to HMRC on your behalf.

Ongoing Reconciliations & Monitoring: We keep your digital books reconciled, catch anomalies, and flag issues early.

Training & Support: We train you or your team on using the software, managing workflows, and meeting HMRC rules.

MTD Compliance Assurance: We keep up with HMRC changes and proactively adapt your processes to stay compliant. By partnering with Finnova Assist, you can focus on your core business (or advisory work) while we manage the details and technical compliance.

If you’d like a free consultation, demo, or help assessing your readiness for MTD, feel free to reach out — we're here to simplify tax, not complicate it.

🏁 Conclusion

Making Tax Digital is a transformative initiative — not just another compliance obligation. It represents the future of UK taxation: more accurate, more timely, and more connected. For ACCA/CPA professionals, being MTD-ready enhances your value to clients. For small business owners and landlords, it offers clarity, control, and better planning. Yes, the transition demands effort — new software, new workflows, vigilance — but the long-term benefits (reduced errors, better compliance, real-time insights) make it worthwhile. Don’t wait until the last minute. Begin preparing now, test early, and consider partnering with a specialist like Finnova Assist to ease the load.