Making Tax Digital: A Complete Guide for UK Small Businesses

What is Making Tax Digital?

Making Tax Digital (MTD) is the UK government's programme to modernise how businesses keep tax records and submit returns to HMRC. Instead of manually entering figures into the HMRC website or posting paper returns, businesses must use MTD-compatible software to maintain digital records and submit returns electronically through HMRC's API.

The programme has been rolling out in phases since 2019, starting with VAT. The core principle is straightforward: if your business records are already digital, HMRC wants a direct digital link between your records and their systems — removing the manual step where errors creep in.

MTD currently covers two taxes:

• VAT — already mandatory for all VAT-registered businesses
• Income Tax Self Assessment (ITSA) — becoming mandatory from April 2026 for self-employed individuals and landlords above certain income thresholds

Corporation Tax is expected to follow in due course, but HMRC has not yet confirmed a mandatory date. If you also run payroll, see our guide on how to run payroll for a small business in the UK — payroll records feed into your tax obligations too.

Who needs to comply with Making Tax Digital?

Whether MTD applies to your business depends on which taxes you're registered for and, in the case of income tax, how much you earn.

MTD for VAT — all VAT-registered businesses

If your business is registered for VAT, Making Tax Digital for VAT already applies to you. This has been mandatory for all VAT-registered businesses since April 2022 — regardless of turnover. HMRC has automatically signed up all VAT-registered businesses, so you do not need to opt in separately.

The current VAT registration threshold is £90,000. If your taxable turnover exceeds £90,000 in any rolling 12-month period, you must register for VAT — and once registered, you must comply with MTD for VAT. You can apply to deregister if your turnover falls below £88,000.

Even if your turnover is below £90,000 and you have voluntarily registered for VAT, MTD for VAT still applies to you.

MTD for Income Tax — self-employed and landlords

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is the next phase. It applies to individuals who are registered for Self Assessment and receive income from self-employment, property, or both. The rollout is phased by income:

• From 6 April 2026: Mandatory for those with qualifying income over £50,000
• From 6 April 2027: Extended to those with qualifying income over £30,000
• From 6 April 2028: Extended to those with qualifying income over £20,000

"Qualifying income" means gross income from self-employment and/or property combined — not net profit, and not your total income from all sources. Employment income, dividends, and pension income are excluded from this calculation.

Who is exempt?

HMRC grants exemptions for businesses that cannot comply due to age, disability, remoteness of location (for example, areas with no reliable internet), or religious objections to using electronic communications. If you believe you qualify for an exemption, you must apply directly to HMRC.

Key Making Tax Digital deadlines for 2026

Here are the dates that matter for UK small businesses in 2026:

Date	What happens	Who it affects
Now	MTD for VAT is mandatory	All VAT-registered businesses
6 April 2026	MTD for Income Tax begins	Self-employed/landlords with income over £50,000
6 April 2027	MTD for Income Tax expands	Self-employed/landlords with income over £30,000
6 April 2028	MTD for Income Tax expands further	Self-employed/landlords with income over £20,000
TBC	MTD for Corporation Tax	Limited companies (date not yet confirmed)

For VAT, the submission deadlines haven't changed — you still file quarterly, with each return due one calendar month and seven days after the end of the VAT period. What has changed is how you submit: it must be through MTD-compatible software, not manually via the HMRC website.

What digital records must you keep?

Under MTD for VAT, you must maintain digital records of:

1. Your business name, address, and VAT registration number
2. The VAT accounting scheme you use (standard, cash, flat rate, etc.)
3. The VAT on supplies you make (sales) — including the time of supply, value excluding VAT, and rate of VAT charged
4. The VAT on supplies you receive (purchases) — the same details for goods and services you buy
5. Any adjustments — corrections, reverse charges, or partial exemption calculations
6. Daily gross takings if you use a retail scheme

"Digital" means the records must be created and stored electronically. You cannot keep paper receipts in a shoebox and type the totals into a spreadsheet at the end of each quarter. The records must be maintained digitally as transactions occur.

Critically, if you use more than one piece of software — say a spreadsheet for expenses and accounting software for invoices — there must be a digital link between them. Copy-pasting figures from one system to another does not count. The data must flow electronically.

You must retain these records for at least six years.

How to choose MTD-compatible software

HMRC maintains a list of compatible software on GOV.UK. To be MTD-compatible, software must be able to:

• Store digital records of your transactions as they happen
• Calculate your VAT (or tax) liability from those records
• Submit returns directly to HMRC through their API — no manual re-entry
• Receive information back from HMRC, such as confirmation that your return was accepted

When choosing software, consider these practical factors:

1. Does it handle your specific VAT scheme?

   If you use the flat rate scheme, cash accounting, or partial exemption, make sure the software supports it. Not all MTD software handles every scheme.

2. Does it integrate with your other business tools?

   MTD software that sits in isolation creates extra work. If your invoicing is in one tool, expenses in another, and MTD submission in a third, you're still manually moving data around. The most efficient approach is all-in-one business software that handles your invoicing, expenses, bank reconciliation, and VAT submission in one place — so the data flows naturally from transaction to return without you re-entering anything.

3. Does it connect to your bank?

   Open Banking feeds pull your bank transactions directly into the software, making reconciliation faster and your records more accurate. This isn't an MTD requirement, but it makes compliance significantly easier in practice.

4. Is it genuinely MTD-compatible, or does it just claim to be?

   Check HMRC's official list. Some tools require separate bridging software to submit — which adds cost and complexity. Native submission through the HMRC API, built into the software itself, is simpler and more reliable.

5. Does it grow with your business?

   If you'll need payroll, project tracking, or CRM alongside your accounting, choosing a platform that offers these alongside MTD-compatible finance features avoids switching tools later. See our comparison of Xero alternatives for UK businesses for a detailed breakdown of what each platform includes.

How to file a VAT return under Making Tax Digital: step by step

Once you have MTD-compatible software set up, the process of filing a VAT return is straightforward. Here's how it works:

1. Record your transactions throughout the quarter

   Enter your sales invoices, purchase invoices, expenses, and any other transactions into your software as they happen. If your software connects to your bank via Open Banking, many transactions will be imported automatically.

2. Reconcile your bank account

   Before submitting a return, match your software's records against your bank statements. This catches any missing transactions, duplicates, or errors. With bank feeds, this is usually a quick matching exercise rather than a manual check.

3. Review the VAT return

   Your software calculates the nine boxes of the VAT return automatically from your records. Review the figures to check they look reasonable — compare with previous quarters and flag anything unexpected.

4. Submit to HMRC

   Click submit within your software. The return is sent directly to HMRC through their API. You'll receive a confirmation with a receipt number. No need to log into the HMRC website separately.

5. Pay any VAT owed

   You still need to arrange payment separately — either by direct debit (which HMRC can collect automatically on the due date), bank transfer, or other accepted methods. The return submission and the payment are two separate steps.

Common mistakes to avoid

These are the errors we see most often among small businesses getting to grips with MTD:

• Leaving record-keeping to the last minute. MTD requires digital records maintained as transactions occur — not a quarterly data-entry marathon. If your records are months behind, your return will be inaccurate and you'll be out of compliance even if the final submission is on time.
• Using multiple disconnected tools without digital links. If you track sales in a spreadsheet and expenses in another tool, there must be an automated digital link between them. Manual transfer breaks compliance. The simplest fix is to use a single integrated system.
• Forgetting to submit through software. Even if your records are perfect, you must submit the return through MTD-compatible software. Logging into your HMRC online account and entering the figures manually is no longer permitted for VAT returns (unless you have a formal exemption).
• Confusing VAT collected with your own money. This isn't an MTD-specific problem, but MTD makes it more visible. The VAT you collect from customers belongs to HMRC. Set it aside in a separate bank account and you'll never be caught short at filing time. For more on managing the cash side of your business, see our guide to small business cash flow management.
• Ignoring MTD for Income Tax if you're self-employed. If your qualifying income is over £50,000, MTD for ITSA is mandatory from April 2026, with the £30,000 threshold following in 2027 and £20,000 in 2028. This requires quarterly updates to HMRC — a significant change from the current annual Self Assessment process. Prepare now rather than scrambling at each deadline.

Penalties for non-compliance

HMRC uses a points-based penalty system for late VAT submissions, introduced in January 2023:

• You receive one penalty point for each late submission
• Once you reach the threshold — 4 points for quarterly filers — you receive a £200 penalty
• Every subsequent late submission also triggers a £200 penalty until you bring your compliance up to date
• Points expire after a period of compliance (24 months of on-time submissions for quarterly filers)

Late payments are handled separately. HMRC charges interest on overdue VAT from the due date, and additional penalties accrue if payment is more than 15 days or 30 days late. The interest rate is the Bank of England base rate plus 2.5%.

Beyond financial penalties, persistent non-compliance with MTD requirements — for instance, continuing to submit manually rather than through software — can result in HMRC issuing further sanctions. The simplest way to avoid all of this is to use MTD-compatible software and file on time.

How mybizopz handles Making Tax Digital

mybizopz is MTD-compatible software for VAT. Here's what that means in practice for your business:

• Digital records maintained automatically. Every invoice you create, every expense you record, and every bank transaction you reconcile is stored digitally. No separate record-keeping step required — your day-to-day business activities are your MTD records.
• VAT calculated continuously. Your VAT liability is calculated in real time from your transactions. At any point during the quarter, you can see exactly how much you owe HMRC — no surprises at filing time.
• Direct HMRC submission. Submit your VAT return to HMRC directly from mybizopz through the official HMRC API. You'll receive a confirmation and receipt number within the platform. No bridging software, no separate login to HMRC.
• Open Banking integration. Connect your business bank account for automatic transaction imports and one-click reconciliation. This keeps your records current with minimal manual effort.
• All your business tools in one place. Because mybizopz also handles invoicing, expenses, bank reconciliation, and financial reporting, there are no digital link gaps between separate tools. Everything flows from a single source of truth.

You can explore all the finance features on the Finance & Accounting page, or check our pricing plans to see what's included.

Frequently asked questions about Making Tax Digital

What is Making Tax Digital?

Making Tax Digital (MTD) is an HMRC programme that requires UK businesses to keep digital tax records and submit returns using MTD-compatible software, rather than manually entering figures into the HMRC website. It currently applies to VAT-registered businesses and is expanding to cover income tax self assessment from April 2026.

Do I need to sign up for Making Tax Digital for VAT?

If your business is VAT-registered, you are already required to use Making Tax Digital for VAT. HMRC has automatically signed up all VAT-registered businesses. You must keep digital records and submit your VAT returns through MTD-compatible software.

What is the VAT registration threshold in 2025/26?

The VAT registration threshold is £90,000. If your taxable turnover exceeds £90,000 in any 12-month period, you must register for VAT and comply with Making Tax Digital requirements. You can apply to deregister if your turnover falls below £88,000.

When does Making Tax Digital for Income Tax start?

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) becomes mandatory from 6 April 2026 for self-employed individuals and landlords with qualifying income over £50,000. Those with income over £30,000 follow from April 2027, and those over £20,000 from April 2028.

What does MTD-compatible software need to do?

MTD-compatible software must keep digital records of your transactions, calculate VAT or tax owed, and submit returns directly to HMRC through their API. If you use spreadsheets for record-keeping, you need bridging software to connect your spreadsheets to HMRC's systems. Manual data transfer or copy-pasting between systems is not permitted.

Can I use spreadsheets for Making Tax Digital?

You can use spreadsheets to keep your digital records, but you cannot use them to submit returns directly. You would need bridging software to connect your spreadsheets to HMRC's systems. However, dedicated MTD software is simpler because it handles both record-keeping and submission in one place.

What are the penalties for not complying with MTD?

HMRC applies a points-based penalty system for late submissions. You receive one point for each late return, and once you reach the threshold (4 points for quarterly filers), you receive a £200 penalty. Points expire after a period of compliance. Late payments incur separate interest charges calculated from the due date.

Does mybizopz support Making Tax Digital?

Yes. mybizopz is MTD-compatible software for VAT. It keeps digital records of all your transactions, calculates your VAT liability automatically, and submits VAT returns directly to HMRC through their API — all from within the platform. No bridging software or manual data entry required.