Milly Fox-Jones
George Harrison
Making tax digital (MTD) is a government initiative to remove all the paperwork linked to tax over the next few years.
By April 2027, all self-employed workers and landlords earning over £30,000 will have to keep digital tax records and submit their tax return online. If you have an annual business or property income over £50,000, the deadline is 6 April 2026.
The hope is that MTD will make it easier for businesses and individuals to keep on top of their taxes and also to make tax bills more accurate, as well as reduce the so-called ‘tax gap’ (the difference between the amount of tax owed and the actual amount paid to HM Revenue & Customs (HMRC).
MTD is part of the government’s Tax Administration Strategy and is being phased in at various stages over the next few years.
Below, we’ll tell you more about what Making Tax Digital is and what it means for you.
What do I need to know about MTD?
The government, which introduced the first phase of MTD in April 2019, aims for it to be completed by April 2027. Depending on your status as a business owner, MTD is being phased in at different times and there are different deadlines by which time you need to comply.
The main difference is between whether your business is VAT-registered or not.
All VAT-registered businesses should already be signed up for MTD, unless they are currently exempt or have applied for an exemption.
If you are about to start a VAT-registered business, HMRC will automatically sign you up for Making Tax Digital. This means that as soon as you start trading you’ll have to keep digital records and submit your tax return online.
If you are not VAT-registered, or if you are a sole trader or a landlord, you still have time before MTD becomes compulsory. However, it is probably a good idea to start getting ready so you can get ahead of the game.
When does MTD happen?
As mentioned above, MTD is already in force for VAT-registered businesses.
Below are the deadlines for digitising your taxes for non-VAT-registered businesses, including sole traders and landlords:
- April 2026: MTD rules around income tax come into effect for sole traders and landlords earning over £50,000.
- April 2027: MTD rules around income tax come into effect for sole traders and landlords earning over £30,000.
» MORE: Business tax in the UK
How does MTD work?
In theory, digitising your taxes should be fairly straightforward. All you need to do is use compatible accounting software or bridging software to submit your tax returns.
Compatible accounting software
If you already use accounting software, there is a good chance it is already compatible with MTD, but it’s essential to confirm this. You can do this either by checking the details of your package on your provider’s website, or using the government’s MTD for VAT software search tool. There are over 500 brands of compatible software listed in this search, and each has been through HMRC’s recognition process.
If you don’t currently use accounting software, you can also use this tool to find the most suitable program for you. It’s important to note that most accounting software programs will have a fee structure, but there are over 20 free versions listed.
Once you have your MTD-compatible software, it’s fairly straightforward to make your tax digital for VAT. You’ll need your:
- Government Gateway user ID and password – if you don’t have them, you can sign up or retrieve them on the Gov.uk website)
- VAT registration number
The process may vary slightly between providers, but you’ll just need to follow the instructions for setting up MTD for VAT in your software. During this process, you’ll be connected to the HMRC website where you’ll be prompted to enter your Government Gateway ID. This will connect your accounting software to HMRC and will allow you to directly submit your VAT return from your accounting software to HMRC. Generally, you’ll need to submit your VAT return every three months.
Bridging software
If you currently use something like Excel or Google sheets for your accounting instead of dedicated software, you don’t have to migrate all of your accounting to compatible software. Instead, you can use something called bridging software. This is a program that will connect non-compatible systems, such as spreadsheets or other digital bookkeeping products, to the HMRC system. It does this by creating ‘digital links’, which allow data to move between programs or applications.
There are almost 200 brands of bridging software listed on Gov.uk’s software search. Again, most of these will have fees but there are a few free options.
It’s important to note that while bridging software can help you to send information digitally to HMRC in the required format, it won’t help with digital record keeping or maintaining digital links, and you’ll still need to use your own spreadsheets or bookkeeping software.
» MORE: How to reduce your tax bill if you’re self employed
What do I need to do to get MTD ready?
Whether you are just starting out as a business or want to get ahead of the April 2027 deadline, below are four easy steps to get yourself MTD ready:
- Check the HMRC guidelines for when MTD comes into effect for your type of business.
- Choose your preferred software – either bridging software to submit your existing records or MTD-compatible software.
- Start keeping digital records.
- If using compatible software, connect your software to HMRC.
How do I submit my tax return?
If you’re a VAT-registered business, it is most likely that you are already keeping digital VAT records and submitting your VAT returns using compatible software. There are two ways of doing this:
- Use a compatible software package that can keep digital records and submit VAT returns.
- Use bridging software to connect non-compatible software such as spreadsheets to HMRC systems.
What records do I need to keep digitally?
However you choose to maintain your digital records, unless you are exempt from MTD, you must keep a digital record of the following information:
- VAT on the goods and services you supply
- VAT on goods and services you receive
- the ‘time of supply’ and ‘value of supply’ (excluding VAT) for everything you buy and sell
- any adjustments to make to a return
- reverse charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
- any VAT accounting schemes you use
For those using specific schemes, you will also need to keep a digital record of:
- your total daily gross takings (if you use a retail scheme)
- items you can reclaim VAT on (if you use the Flat Rate Scheme)
- your total sales, and the VAT on those sales (if you trade in gold and use the Gold Accounting Scheme)
Can you be exempt from MTD for VAT?
Applicable businesses can get an exemption from MTD. You may be automatically exempt if you’re already exempt from filing VAT returns online or if you or your business are subject to an insolvency procedure.
If neither of these is applicable, but you believe it’s not reasonable or practical for you to use computers, software or the internet to be MTD for VAT compliant, you can apply for an exemption.
To do this, you’ll have to call or write to HMRC, and you’ll need to have the following information to hand:
- your VAT number
- your business name and address
- details of how you currently file your VAT return
- the reason you believe you are exempt from MTD
- authorisation from the business (if applying on someone else’s behalf)
Each application for exemption from MTD is considered by HMRC on a case-by-case basis.
Image source: Getty Images
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