Understanding making tax digital by HMRC

Making Tax Digital for VAT is now compulsory for businesses with taxable turnovers of over £85,000. VAT-registered businesses below the VAT threshold of £85,000 can sign up for MTD voluntarily. If you are not sure when and how to register for VAT, we have an article explaining this topic in more detail.​

These businesses must sign up to Making Tax Digital (MTD) and use compatible software to keep VAT records and file VAT Returns.​

For example, Xero is a MTD compatible software and you can read about how to set up MTD for VAT in Xero here. ​

MTD for VAT requires you to keep records digitally, including:​

Self-employed businesses (sole traders) and landlords with income above £10,000 per annum will need to follow the rules for Making Tax Digital for income tax from 6 April 2026.​

The best way you can prepare for Making Tax Digital for income tax is to start using a MTD-compatible software such as Xero. Keeping digital records of your businesses finances is the first step towards MTD. ​

Maintaining digital records using software such as Xero is always a great idea regardless of MTD since it allows you to track your business’s performance better. ​

If you are a self-employed business or landlord you can voluntarily use software (e.g., Xero) to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return. This is voluntary up until 6 April 2026 at which point keeping digital records and sending income tax updates to HMRC will be compulsory. ​

In respect of MTD for income tax, taxpayers will need to send to HMRC:​

Making Tax Digital for corporation tax applies to companies and is still in the development stage. ​

HMRC has not yet set a timeframe for when MTD will be mandatory.​

Making Tax Digital is an ever evolving initiative and it is your responsibility to ensure that you are ready for MTD and compliant when it comes along. ​

If you engage an accountant, such as Beany, they can take away this burden. It’s their job to keep on top of the MTD updates and requirements, knowing what’s required and when. ​

If you have an accountant they can help get you set up and prepared for MTD and keep you compliant. ​

In short, Making Tax Digital (MTD) is a government initiative aimed at helping individuals and businesses get their tax right. HMRC estimates that billions of pounds are lost every year as a result of individuals and businesses not paying the right amount of tax and MTD is an initiative to address this.  ​

The frequency of reporting to HMRC will increase under MTD, however this is not necessarily a bad thing. More frequent reporting means that there is a need to keep more on top of your finances throughout the year, rather than leave it all to the last minute.​

MTD is a great opportunity to get on top of your day to day bookkeeping, or engage an accountant to do this for you, this means that when it comes to reporting to HMRC you will already be most of the way there. ​

A key benefit of MTD to you as an individual and business owner is that you will know throughout the year an estimate of your tax liability, which will be calculated based on the information you submit to HMRC. This will help you budget and save for your tax bill and will avoid any surprises come the end of the year. ​

As mentioned above, MTD also means there will be less stress at year end as you frantically try to collate all the information needed to submit your tax return, as you will have already reported this to HMRC and will have all the information stored in your MTD-compatible bookkeeping software. ​

Yes. MTD requires submission of information via MTD-compatible software. Xero is an example of bookkeeping software that is compatible for MTD for VAT and income tax. ​

It’s too early on for software to be developed for MTD for corporation tax yet. ​

Here is a list of all software that is compatible with MTD for VAT.​

Here is a list of al software that is compatible for MTD for income tax. ​

HMRC do not provide free MTD software. If you’re unsure about what software to get then speak to your accountant or bookkeeper. ​

MTD is compulsory for all VAT-registered businesses, regardless of their turnover. ​

MTD will be compulsory for income tax purposes in April 2026 for self-employed businesses (sole traders) and landlords with income above £10,000 per annum. ​

MTD for corporation tax is expected to come into force no earlier than 2026, although a date has not yet been determined.​

HMRC grants exemption from MTD if it’s not practical for you to use software to maintain digital records and submit data to HMRC. ​

It may not be practical due to your age, disability, location, religion or another justifiable reason. ​

You will need to explain your reason to HMRC and if exemption is granted an alternative solution will be found. ​

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