Making Tax Digital Guide for UK Businesses

A late VAT return used to be an administrative nuisance. Under Making Tax Digital (MTD), it can also expose gaps in how your business records sales, costs and VAT data. For owner-managed businesses, the change is not simply about submitting figures through different software. It is about building a finance process that produces accurate, current information without creating more work at each filing deadline.

This Making Tax Digital guide explains what MTD requires now, what is changing for landlords and sole traders, and how growing businesses can prepare with confidence.

What Making Tax Digital means in practice

Making Tax Digital is HMRC’s programme to move tax reporting towards digital record keeping and software-based submissions. The policy is intended to reduce avoidable errors by requiring taxpayers to keep prescribed records digitally and send returns to HMRC using compatible software.

For most businesses, MTD currently applies to VAT. MTD for Income Tax Self Assessment, commonly called MTD for ITSA, begins in phases from April 2026. Corporation Tax is not yet within a mandatory MTD regime, despite HMRC’s longer-term plans to digitise more of the tax system.

The practical point is simple: typing a final VAT total into an HMRC portal is no longer sufficient for businesses within MTD for VAT. Your underlying records must meet the digital-record requirements, and the return must be filed through compatible software.

For a growing business, this is an opportunity as well as a compliance obligation. Well-configured bookkeeping can give directors a clearer view of gross margin, VAT exposure, cash flow and available profit throughout the quarter, rather than only after the return is due.

Making Tax Digital guide: who needs to comply?

VAT-registered businesses

All VAT-registered businesses are now required to follow MTD for VAT, regardless of taxable turnover. This includes businesses that registered voluntarily because their turnover is below the VAT threshold.

You must keep relevant VAT records digitally and use compatible software to submit VAT returns. The VAT filing deadlines, payment dates and accounting schemes generally remain the same. MTD changes the method of keeping and transmitting the information, not the underlying VAT rules.

Businesses can use accounting software such as Xero, or spreadsheets connected to HMRC through bridging software. A spreadsheet can still form part of the process, but the required information must be retained digitally and transferred through digital links. Copying and pasting figures between spreadsheets or systems is not normally a compliant digital link.

Sole traders and landlords

MTD for Income Tax will affect individuals with qualifying income from self-employment and property. Qualifying income means gross income before expenses, taken from relevant trading and property sources.

The first phase starts on 6 April 2026 for individuals with qualifying income above £50,000. The threshold falls to more than £30,000 from 6 April 2027, then to more than £20,000 from 6 April 2028. HMRC will generally assess whether you need to join by looking at the relevant income reported on your previous Self Assessment tax return.

Those brought into MTD for ITSA will keep digital records and submit quarterly updates through compatible software. They will also complete an end-of-period process for each business and provide a final declaration covering their overall tax position. This is a significant shift from preparing one Self Assessment return after the tax year end.

A landlord with several properties, for example, will need reliable records of rental income and allowable expenditure during the year. A sole trader with mixed personal and business spending will need clearer separation between the two. The discipline required is often more valuable than the quarterly reporting itself.

Exemptions and special cases

Some taxpayers may be exempt where it is not reasonably practical to use digital tools because of age, disability, remoteness of location or other reasons. Religious beliefs that are incompatible with using electronic communications can also support an exemption. An exemption is not automatic, so it should be considered and applied for properly rather than assumed.

Partnerships, companies and individuals below the applicable MTD for ITSA threshold are not automatically within that phase of the rules. However, businesses should avoid treating this as a reason to postpone better record keeping. Digital finance processes take time to implement well, particularly where several sales channels, currencies or VAT treatments are involved.

The records your business needs to maintain

For VAT, digital records must include key details such as sales and purchase information, VAT account totals and the figures used to complete the VAT return. A software package does not remove the need for judgement. You still need to ensure that transactions are coded correctly and that the VAT treatment reflects what actually happened.

This matters particularly for e-commerce businesses. Marketplace settlement reports are not the same as sales invoices. A settlement may combine sales, refunds, delivery charges, platform fees, advertising costs and currency conversions. Posting only the net payment to the bank can misstate turnover, costs and VAT.

Where a business sells through its own website, Amazon, eBay, Etsy or other marketplaces, the finance process should reconcile source sales data to payment provider and bank receipts. If stock is held overseas or goods are sold internationally, the VAT analysis may need to account for registration obligations, import VAT and the place of supply. The right approach depends on the business model and the territories involved.

Choosing software is only part of the answer

Compatible software is essential, but software alone does not create compliance. A poorly configured system can produce a technically valid submission based on incorrect records.

A sensible MTD setup should cover four areas:

• A clear chart of accounts that separates income, refunds, fees, stock, delivery and operating costs.

• Bank feeds and payment integrations that reduce manual entry while still allowing review and reconciliation.

• VAT settings that reflect the business’s registration status, accounting scheme and trading activity.

• A documented review process before each submission, with responsibility assigned to a named person or adviser.

For many small businesses, cloud accounting software provides a practical starting point. It can make invoice capture, bank reconciliation and VAT reporting faster, while enabling an accountant to review records remotely. The trade-off is that automation must be monitored. Rules that post transactions automatically can save time, but they can also repeat an error at scale if they are not checked.

How to prepare before your next filing deadline

Start by mapping how data moves through the business. Identify where sales begin, how customer payments are collected, where supplier bills are held and how figures reach the accounts. This often reveals manual workarounds that create risk, such as staff downloading reports into separate spreadsheets or reconciling marketplace payments only at year end.

Next, review the quality of the records already in the system. Are bank accounts reconciled promptly? Are VAT codes consistently applied? Have director transactions, loans and expenses been treated correctly? A clean opening position makes every future VAT return easier to review and defend.

Then test the reporting process before a deadline is close. Run a draft VAT return, compare it with sales and purchase records, investigate unusual movements and confirm that digital links operate as intended. If you are moving to MTD for ITSA, test quarterly reporting early rather than waiting until the first compulsory update.

Finally, consider what management information the process should deliver. A business that only prepares records for HMRC will meet a minimum requirement. A business that uses those records to monitor stock commitments, marketing returns, gross margins and cash requirements has a stronger basis for decisions.

Common MTD mistakes that create avoidable risk

The most common issue is assuming that submission equals compliance. HMRC can accept a return that later proves inaccurate, so a filed return should not be treated as evidence that the bookkeeping is correct.

Other problems include treating net marketplace payouts as revenue, failing to retain a proper audit trail for adjustments, using the wrong VAT treatment for international transactions, and leaving reconciliations until the quarter end. These errors can lead to underpaid or overpaid VAT, disrupted cash flow and time-consuming corrections.

For directors, there is also a wider commercial cost. If accounts are behind, the business may be making pricing, purchasing or recruitment decisions using incomplete information. Digital reporting works best when it is integrated into regular financial management rather than treated as a quarterly compliance task.

Fortis Accounting supports businesses that need both reliable MTD compliance and a finance process capable of supporting growth. The objective is not merely to file on time, but to create accurate financial visibility that gives directors greater control.

A well-run MTD process should leave you with more than a submitted return. It should leave you with figures you can trust when the next commercial decision needs to be made.