Making Tax Digital, or MTD, is HMRC's programme to move tax record-keeping and filing to digital platforms. It's been phased in over several years and it affects different businesses at different times. This guide explains what it actually means for a small business owner, without the jargon.
What Making Tax Digital actually means
The core idea is straightforward: HMRC wants your tax records kept digitally and your returns submitted directly from software, rather than being typed into the HMRC portal by hand. The goal is to reduce errors, make it easier to spot unpaid tax, and give businesses a clearer, more up-to-date picture of their own finances.
It doesn't mean everything changes overnight, and it doesn't mean you need expensive software. But it does mean that if you're still keeping records in a paper ledger or a spreadsheet that you then manually transfer to HMRC, you'll need to change how you work.
HMRC estimates that avoidable tax errors cost the UK billions each year. MTD is partly about closing that gap through better record-keeping rather than more enforcement, which is why the focus is on process rather than penalties for most small businesses.
MTD for VAT: the bit that is already live
If your business is VAT registered, you're already required to follow MTD rules. That's been the case since April 2019 for most businesses above the VAT threshold, and April 2022 for those who were previously exempt.
In practice this means you need to keep your VAT records in MTD-compatible software and submit your VAT return from that software, not directly through the HMRC website. Bridging software that links a spreadsheet to HMRC technically qualifies, but purpose-built accounting software is more reliable and less prone to errors.
MTD for Income Tax: what is coming for sole traders and landlords
MTD for Income Tax Self Assessment, often shortened to MTD for ITSA, is being rolled out from April 2026 for sole traders and landlords with income over £50,000 per year. Those earning between £30,000 and £50,000 will follow in April 2027.
Under this system, instead of filing one annual Self Assessment return, you'll submit quarterly updates to HMRC throughout the year, plus a final declaration. The quarterly updates are summaries rather than detailed returns, but they need to come from MTD-compatible software.
Businesses and landlords below £30,000 per year don't currently have a confirmed rollout date, though HMRC has indicated they will be included eventually.
What you need to do now
If you're VAT registered and not already using MTD-compatible software, you're already non-compliant. Get that sorted first.
If you're a sole trader or landlord above the income thresholds, start thinking about your software now rather than waiting until March 2026. Switching software mid-year is awkward. Getting comfortable with a new system before the deadline is significantly less stressful.
Choosing MTD-compatible software
HMRC maintains a list of approved software providers on its website. For a small business, you want something that handles both your day-to-day bookkeeping and your MTD submissions in one tool, not two separate systems.
The main options range from dedicated accounting packages to platforms like WeekOne that include financial record-keeping as part of a broader business management system. The right choice depends on whether you want standalone accounts software or something that connects your invoicing, expenses, and accounting in one place.
Working with your accountant
Many small businesses handle day-to-day bookkeeping themselves and use an accountant for year-end work. MTD doesn't change that arrangement, but it does mean your accountant needs to be able to connect to your software.
Most MTD platforms have an accountant access feature. Give your accountant read-only access so they can pull what they need without you having to export files. It saves everyone time and reduces the chance of errors from exporting and re-importing data.
The honest timeline
MTD is genuinely coming. HMRC has delayed it several times, which has made some businesses complacent. But the VAT mandates are fully in force, the ITSA mandates are confirmed for 2026 and 2027, and the trend is clearly towards digital-only compliance.
Getting your record-keeping onto a proper digital system now, while there's no deadline pressure, is significantly easier than scrambling to do it when you have to.