Making Tax Digital (MTD) is HMRC’s quiet revolution. If you run a UK business that handles VAT — or income from self-employment or property — you’re legally required to keep digital records and submit to HMRC through compatible software. Here’s exactly what MTD means in 2026, what’s changing, and how to stay on the right side of the rules without burning a weekend on it.
The 30-second version
- If you’re VAT-registered (any threshold), MTD for VAT already applies — keep digital records, file via API.
- From April 2026, MTD for Income Tax Self Assessment (MTD ITSA) is rolling out for sole traders and landlords earning over £50,000.
- From April 2027, the threshold drops to £30,000.
- Spreadsheets are still legal — but only if linked digitally to bridging or accounting software.
- Penalties run from £200 per failure plus daily charges; HMRC also operates a points-based late-filing system.
What is Making Tax Digital, and why should you care?
Making Tax Digital is HMRC’s long-running programme to drag the UK tax system into the 21st century. The core idea is simple: instead of filling in tax returns once a year from a shoebox of receipts, businesses keep their records in real time using approved digital software and submit to HMRC quarterly through an API.
The benefits HMRC promises are fewer errors, faster refunds, and better visibility for business owners. The reality, for most UK SMEs, is a one-time setup effort followed by smoother monthly operations — provided you’ve chosen the right software and the right accountant to wire it up.
When did MTD actually start?
MTD for VAT became mandatory for businesses over the £85,000 threshold in April 2019, then rolled down to all VAT-registered businesses (regardless of turnover) in April 2022. So if you’re VAT-registered today, you’re already in MTD whether you realised it or not.
MTD for Income Tax Self Assessment was repeatedly delayed but is now confirmed for April 2026 for sole traders and landlords with combined gross income over £50,000, with the threshold dropping to £30,000 in April 2027 and likely £20,000 by 2029.
Who has to comply?
- Every VAT-registered business — including voluntarily registered businesses below the £90,000 threshold (the threshold rose from £85,000 to £90,000 on 1 April 2024).
- Sole traders and landlords earning combined gross income over £50,000 from April 2026.
- Limited companies are not currently in scope for MTD ITSA — they’ll be brought in via a separate MTD for Corporation Tax programme, with no firm date yet.
Three things MTD requires you to do
1. Keep digital records
Every transaction must be recorded digitally — date, value, VAT (if applicable), and a description. Paper receipts can still exist (for the moment), but the data has to live in software, not in a notebook or a desk drawer.
This is where most non-compliance happens, especially among landlords and sole traders who’ve quietly run their books on paper or in Excel for decades. Spreadsheets are not banned — but they must be connected to the rest of your record-keeping via “digital links”.
2. Use functional compatible software
You need software that can submit returns to HMRC’s API. The mainstream options for UK SMEs are:
- Xero — strong all-rounder, great app marketplace, our most-recommended for limited companies.
- QuickBooks Online — robust accounting features, excellent for sole traders and ecommerce.
- FreeAgent — free for NatWest/RBS business banking customers; ideal for freelancers.
- Sage Accounting — popular with established small businesses.
HMRC publishes a full list of MTD-compliant software if you want to verify your current tool.
3. Maintain digital links
This is the rule that catches most businesses out. If your data flows from one place to another (e.g., from a sales platform into your accounting software, or from one spreadsheet to another), the transfer must happen digitally — no manual copy-paste, no retyping numbers.
Acceptable digital links include:
- API integrations between systems (e.g., Shopify → Xero)
- CSV imports/exports
- Linked cells in spreadsheets
- “Bridging software” that submits spreadsheet data to HMRC
Not sure if your current setup is MTD-compliant?
We do free 15-minute MTD reviews for UK businesses. We’ll tell you straight whether your software, links, and processes will pass an HMRC check — and exactly what to fix if they won’t.
What’s changing in 2026 (and how to prepare)
The headline change is MTD for Income Tax Self Assessment (MTD ITSA), kicking in from 6 April 2026. If you’re a sole trader or landlord with combined annual gross income (turnover before expenses) over £50,000, you’ll need to:
- Sign up for MTD ITSA via your HMRC online account.
- Use MTD-compliant software for all business and rental records.
- Submit quarterly updates to HMRC (instead of one annual return).
- Submit a final declaration each year that confirms total income and any adjustments.
This is a significant operational change. Your single annual Self Assessment becomes five submissions per year. The good news: most quarterly updates are simple summaries pulled automatically from your software — they take minutes, not hours, if your records are tidy.
What about partnerships and limited companies?
General partnerships were originally going to join in April 2025, but HMRC has paused that timeline indefinitely. Limited companies are not in scope for MTD ITSA at all — they’ll move via a future MTD for Corporation Tax programme, with no confirmed date but unlikely before 2028.
Penalties for non-compliance
HMRC moved to a points-based system for late VAT submissions in January 2023, and the same model applies to MTD ITSA from April 2026. Each missed deadline earns one point, and once you hit a threshold (4 points for quarterly filers), a £200 fixed penalty is triggered. Subsequent failures while at threshold trigger another £200 each time.
On top of that, late payment attracts:
- Up to 15 days late: no penalty if paid in full or a Time to Pay arrangement is agreed.
- 16–30 days late: 3% of outstanding tax.
- 31+ days late: 3% on the day after, plus daily 10% annualised charge thereafter.
Plus interest on unpaid tax at HMRC’s prevailing rate (currently around 7.75% — see HMRC’s published rates).
Your 5-step MTD readiness checklist
- Audit your current records. Can you produce a digital, transaction-level record of the last 12 months in under 10 minutes? If yes, you’re probably ready. If no, you’ve got work to do.
- Pick (and license) MTD-compliant software. Don’t pick on price alone — pick what your accountant uses, because that’s the system they can actually fix problems in.
- Connect your bank feed. Open Banking integration means transactions flow automatically — this is the single biggest time-saver in modern bookkeeping.
- Replace manual data transfer with digital links. Anywhere you currently copy-paste between systems, find an integration or use bridging software.
- Sign up for MTD with HMRC and authorise your accountant. Your accountant can submit on your behalf once you’ve granted access via your HMRC business tax account.
Frequently asked questions
Do I need to comply with MTD if I’m under the VAT threshold?
If you’re voluntarily VAT-registered (so you’re below the £90,000 threshold but registered anyway), yes — MTD for VAT applies to all VAT-registered businesses regardless of turnover. If you’re not VAT-registered at all, MTD for VAT doesn’t apply, but MTD for ITSA may apply from April 2026 if your gross self-employment or property income exceeds £50,000.
Are Xero and QuickBooks both MTD-compliant?
Yes — both are on HMRC’s approved list and have been for years. They handle VAT submissions automatically once you’ve connected your HMRC account. If you’re choosing between them, the answer usually depends on your business model: Xero is stronger for service businesses and limited companies; QuickBooks edges ahead for ecommerce and inventory-heavy operations.
Can I still use spreadsheets under MTD?
Yes, but with conditions. Your spreadsheet must be linked to “bridging software” that submits the figures to HMRC’s API on your behalf. Most accountants now consider spreadsheet-only setups risky for anything beyond a single-source-of-income sole trader — once you’ve got two or more revenue streams, dedicated software pays for itself in saved hours.
What’s the deadline for signing up to MTD ITSA?
The first quarterly period under MTD ITSA runs from 6 April 2026 to 5 July 2026, with the first quarterly update due by 5 August 2026. You should sign up well in advance — ideally by January 2026 — so you’ve got time to set up software, connect bank feeds, and run a parallel test quarter.
Can my accountant handle all of this for me?
Yes — and most should. A qualified accountant will register you for MTD, set up your software, connect your bank feeds, configure digital links, and submit your returns under their agent authorisation. You stay in control of approvals; they do the operational lift.
The bottom line
MTD isn’t going away, and the timeline isn’t going to slip again — HMRC has been consistent on the April 2026 ITSA date for two years now. The businesses that move early get smoother software, cleaner books, and a quieter year-end. The ones that wait get a scramble in spring 2026 and a higher chance of missing that first quarterly deadline.
If you’re still on spreadsheets, paper, or a pre-MTD bookkeeping setup, the time to fix it is the next 60 days, not next March. We do this for businesses across the UK every week — see our accounting and bookkeeping service or pricing for what monthly support looks like.
