Making Tax Digital (MTD) is the UK Government’s long-term initiative to modernise the tax system. It aims to make tax reporting more accurate, efficient, and easier to manage for individuals and businesses by requiring digital record-keeping and the use of HMRC-compatible software.

Below is the latest, fully updated FAQ based on current rules for MTD for VAT and MTD for Income Tax (ITSA).

1. What is Making Tax Digital (MTD)?

Making Tax Digital is a Government programme designed to transform the UK tax system into one of the most digitally advanced in the world.
Its goals are to:

• Reduce errors caused by manual record-keeping
• Help taxpayers submit accurate information every time
• Improve efficiency for businesses, accountants, and HMRC
• Replace annual tax returns with more frequent digital updates (for Income Tax in 2026+)

MTD requires the use of compatible digital software to maintain business records and submit tax data to HMRC.

2. What is Making Tax Digital (MTD) for VAT?

MTD for VAT requires VAT-registered businesses to:

• Keep digital VAT records
• Use MTD-compatible software
• Submit VAT Returns directly through software, not via the old HMRC portal
• Maintain digital links between different software or spreadsheets

This forms part of HMRC’s efforts to modernise VAT reporting and reduce submission errors.

3. Who Does MTD for VAT Apply To?

All VAT-registered businesses must follow MTD rules – regardless of their turnover.

This has been mandatory since April 2022, even for businesses below the £85,000 VAT threshold.

This includes:

• Limited companies
• Sole traders
• Charities
• Not-for-profit organisations
• Public sector bodies
• Partnerships

Only those who qualify for digital exclusion exemptions may apply to HMRC for exemption.

4. How Does MTD for VAT Work?

To comply with MTD for VAT, businesses must:

1. Keep Digital Records

Digital records must include VAT-related data such as:

• Business name + VAT registration number
• Tax point (date of supply)
• Value of supply
• VAT rate charged
• VAT payable/receivable

2. Use MTD-Compatible Software

Software must connect to HMRC’s API to file returns. Examples include:

• Xero
• QuickBooks
• Sage
• FreeAgent
• BrightBooks
• Or approved bridging software

3. Submit VAT Returns Digitally

Returns must be filed using MTD software every quarter not through the old HMRC portal.

5. What is Bridging Software and When Is It Used?

Bridging software is useful when businesses maintain VAT records in spreadsheets.
It:

• Connects the spreadsheet to HMRC
• Creates a digital link
• Allows VAT returns to be submitted without re-keying data

This meets MTD requirements while keeping costs low.

6. What Is MTD for Income Tax (ITSA)?

MTD for Income Tax Self Assessment (ITSA) will replace the traditional annual Self Assessment process for many individuals.

You will need to:

• Keep digital records of income and expenses
• Send quarterly updates to HMRC
• Send a Final Declaration instead of a Self Assessment tax return

Launch Dates

• April 2026: Mandatory for self-employed individuals + landlords with income over £50,000
• April 2027: Mandatory for those with income between £30,000–£50,000

Partnerships and income below £30,000 will be phased in later.

7. Who Does MTD for ITSA Apply To?

From 2026 onwards, it applies to:

• Self-employed businesses
• Sole traders
• Individual landlords (property income)
• Anyone earning income outside PAYE above the thresholds

Company directors filing Self Assessment are not included yet.
Partnerships will join at a later date.

8. Does HMRC Offer Any Pilot or Testing Schemes?

Yes.
HMRC runs an MTD for ITSA pilot programme where eligible taxpayers can join early to:

• Test digital submissions
• Understand quarterly updates
• Estimate tax liabilities in real-time

This is helpful for accountants preparing clients ahead of 2026.

9. What Software Is Required for MTD?

HMRC requires the use of MTD-compatible software that can:

• Maintain digital records
• Create digital links
• Submit returns directly
• Integrate with HMRC’s systems

This includes full accounting packages or simple bridging solutions.

If unsure, businesses can use free trials offered by many software firms.

10. What Happens If You Don’t Comply with MTD? (Penalties)

HMRC has implemented a new points-based penalty system for late submissions.

Penalties include:

Late Submission

Each missed submission earns points.
Once a threshold is met, a £200 penalty applies.

Late Payment

• Up to 15 days late: No penalty
• 16–30 days late: 2% penalty
• 31+ days late: Additional 2% + daily interest

These penalties apply to VAT now and will apply to ITSA after rollout.

To avoid penalties:

• Keep digital records
• Submit updates on time
• Pay VAT and income tax on time

11. Are There Any Exemptions from MTD?

HMRC may grant exemptions only if a business is:

• Digitally excluded
• Unable to use computers due to age, disability, or location
• Facing insolvency or exceptional circumstances
• Operating in certain public sectors under special VAT rules

Applications must be made directly to HMRC with proper evidence.

Final Thoughts

MTD is reshaping the UK tax landscape. Whether you’re preparing VAT clients or getting ready for MTD for Income Tax in 2026, using the right digital tools will help:

• Reduce errors
• Keep clients compliant
• Save time
• Improve accuracy
• Avoid penalties