What Is Making Tax Digital? A Complete Guide for UK Businesses

Author : Proficient Tax | Published On : 22 Oct 2026

If you are a UK business owner, you may have heard the question, What Is Making Tax Digital and whether it applies to your business. Making Tax Digital (MTD) is HMRC's programme for moving tax administration towards digital record keeping and online reporting. It is designed to make it easier for taxpayers to keep accurate records, report information and manage their tax obligations.

Making Tax Digital already applies to VAT-registered businesses, while Making Tax Digital for Income Tax is being introduced in stages for sole traders and landlords. From 6 April 2026, individuals with qualifying income above £50,000 from self-employment and property are required to use MTD for Income Tax, subject to the relevant rules and exemptions.

Understanding the requirements early can help business owners choose compatible software, organise their records and avoid unnecessary compliance problems.

What Is Making Tax Digital?

Making Tax Digital is HMRC's approach to modernising the UK's tax system.

Instead of relying primarily on paper records and manual tax processes, eligible taxpayers use compatible software to maintain digital records and submit relevant information to HMRC.

For Income Tax, MTD requires eligible sole traders and landlords to keep digital records, send quarterly updates and submit their tax return through compatible software.

It is important to understand that MTD does not mean that every UK taxpayer has to use the same software or submit a tax return every three months. The exact requirements depend on the type of MTD service that applies to the taxpayer.

Who Needs to Use Making Tax Digital?

The answer depends on the tax involved.

Making Tax Digital for VAT

MTD for VAT applies to VAT-registered businesses. HMRC states that all VAT-registered businesses should now be signed up for MTD for VAT unless they are exempt or have successfully applied for an exemption. VAT records must be maintained digitally and VAT Returns submitted using compatible software.

Making Tax Digital for Income Tax

MTD for Income Tax applies to qualifying sole traders and landlords in stages.

For the 2026–27 tax year, individuals generally need to use MTD for Income Tax if they are within Self Assessment, have self-employment or property income and had qualifying income of more than £50,000 for the 2024–25 tax year.

The planned thresholds then reduce:

• More than £50,000 qualifying income — from 6 April 2026

• More than £30,000 — from 6 April 2027

• More than £20,000 — from 6 April 2028

These rules are subject to the applicable eligibility requirements and exemptions.

How Does Making Tax Digital Work?

The process varies according to the MTD service.

For eligible sole traders and landlords using MTD for Income Tax, the main process involves:

1. Keeping digital records of relevant income and expenses.

2. Using compatible software.

3. Sending quarterly updates to HMRC.

4. Making any required adjustments.

5. Submitting the annual tax return.

6. Paying the tax due by the relevant deadline.

Quarterly updates are summaries of income and expenses rather than four separate annual tax returns. HMRC still requires the annual tax return to be submitted.

What Records Need to Be Kept Digitally?

For MTD for Income Tax, eligible taxpayers need to create and store digital records covering relevant self-employment and property income and expenses.

Digital records can help businesses maintain a clearer audit trail and make financial information easier to review.

Typical records may include:

• Sales and income

• Business expenses

• Property income

• Allowable expenses

• Bank transactions

• Invoices

• Receipts

• Other information required by the relevant tax rules

The exact records required depend on the taxpayer's circumstances.

What Software Is Needed for Making Tax Digital?

MTD requires compatible software rather than simply using a spreadsheet or word-processing document as a replacement for accounting software.

The software should support the relevant MTD requirements and be capable of communicating with HMRC where required.

Before choosing software, a business should consider:

• Whether it supports the relevant MTD service

• Bookkeeping features

• Bank-feed integration

• VAT functionality

• Invoice management

• Expense tracking

• Reporting capabilities

• Accountant access

• Security and user permissions

A business should confirm that its chosen software is compatible with the specific MTD obligations that apply to it.

What Are the Benefits of Making Tax Digital?

MTD is intended to modernise tax administration and help taxpayers maintain more accurate digital records.

Better Record Keeping

Digital records can make it easier to organise income and expenses throughout the year rather than gathering information immediately before a tax deadline.

Easier Access to Financial Information

Cloud-based accounting systems can allow business owners and accountants to review financial information remotely, subject to the software and access permissions.

Reduced Manual Administration

Some accounting software can automate tasks such as importing bank transactions, creating invoices and categorising recurring transactions.

Automation does not eliminate the need for human review, however. Business owners should still check that records are accurate.

Improved Financial Visibility

Regularly updated financial records can help business owners understand revenue, expenses and cash flow.

This information can support better business planning as well as tax compliance.

What Is the Difference Between MTD for VAT and MTD for Income Tax?

Although both are part of Making Tax Digital, they apply to different taxes and have different requirements.

This distinction is important because a taxpayer may be affected by one MTD service without being affected by another.

How to Register for VAT in the UK

Understanding How to Register for VAT in the UK is particularly important for businesses approaching the VAT registration threshold.

A business generally must register for VAT if its taxable turnover for the previous 12 months exceeds £90,000, or if it expects its taxable turnover to exceed £90,000 in the next 30 days. Certain other situations can also create a registration requirement.

Businesses can usually register online through GOV.UK.

Information Needed for VAT Registration

The information required depends on the type of business.

For example, a limited company generally needs information such as:

• Company registration number

• Business bank account details

• Unique Taxpayer Reference

• Annual turnover

• Estimated taxable turnover for the next 12 months

• Relevant Self Assessment, Corporation Tax and PAYE information

Individuals and partnerships have different information requirements.

What Happens After VAT Registration?

After registering, HMRC provides the business with a VAT registration number and confirms its effective date of registration.

The business then needs to understand its VAT obligations, including when VAT should be charged, how records should be maintained and when VAT Returns and payments are due.

HMRC also automatically signs newly VAT-registered businesses up for Making Tax Digital for VAT unless they are exempt or have applied successfully for an exemption.

Businesses should therefore consider their accounting software and digital record-keeping processes as part of the VAT registration process.

Can an Accountant Help With Making Tax Digital?

Yes. Businesses can appoint an accountant or tax agent to assist with relevant tax administration.

An accountant can help with areas such as:

• Choosing suitable accounting software

• Setting up digital bookkeeping

• VAT registration

• VAT Returns

• MTD compliance

• Quarterly updates

• Tax return preparation

• Record-keeping processes

• Understanding relevant deadlines

HMRC confirms that businesses can appoint an agent to submit VAT Returns and deal with HMRC on their behalf.

Professional support can be particularly useful for businesses moving from manual bookkeeping to a fully digital accounting process.

Common Making Tax Digital Mistakes to Avoid

Waiting Until the Deadline

Businesses should not wait until a filing deadline to establish their digital accounting system.

Choosing Incompatible Software

Not every accounting platform supports every MTD service. Check compatibility before committing to software.

Assuming Software Guarantees Compliance

Accounting software is a tool. Incorrect categorisation, missing records or inaccurate information can still create compliance problems.

Mixing Personal and Business Transactions

Separating business and personal transactions can make digital bookkeeping much easier to manage.

Ignoring HMRC Updates

MTD rules and implementation dates can change. Businesses should check current HMRC guidance rather than relying on old articles or social media posts.

How Businesses Can Prepare for Making Tax Digital

A practical preparation process can include:

Step 1: Check whether MTD applies to you.

Determine which tax and income thresholds are relevant to your business.

Step 2: Review your current records.

Identify how income, expenses, invoices and receipts are currently recorded.

Step 3: Choose compatible software.

Select software that supports the relevant MTD requirements.

Step 4: Move to digital records.

Start maintaining accurate financial records electronically.

Step 5: Connect with your accountant.

If you use an accountant, provide appropriate access and agree on responsibilities.

Step 6: Review records regularly.

Do not wait until a quarterly or annual deadline to identify errors.

Conclusion

So, What Is Making Tax Digital? It is HMRC's move towards digital record keeping and online tax reporting for eligible taxpayers and businesses. MTD for VAT is already established, while MTD for Income Tax is being introduced in stages for qualifying sole traders and landlords.

Businesses approaching VAT registration should also understand How to Register for VAT in the UK, including the current £90,000 taxable turnover threshold and the information required during registration.

The best approach is to prepare early, use compatible software, maintain accurate digital records and seek professional advice where the rules are unclear. Businesses should also check current HMRC guidance regularly because tax requirements and implementation timelines can change.

Frequently Asked Questions

What is Making Tax Digital in simple terms?

Making Tax Digital is HMRC's programme for using digital records and compatible software to manage and report certain taxes. Different rules apply to VAT and Income Tax.

Does Making Tax Digital apply to every business?

No. The requirements depend on the type of tax, business structure and relevant eligibility criteria. MTD for VAT applies to VAT-registered businesses, while MTD for Income Tax is being introduced in stages for qualifying sole traders and landlords.

When did Making Tax Digital for Income Tax start?

The first mandatory phase started on 6 April 2026 for qualifying individuals with more than £50,000 of qualifying income from self-employment and property, subject to the relevant rules and exemptions.

What is the VAT registration threshold in the UK?

The current compulsory VAT registration threshold is £90,000 of taxable turnover over the relevant 12-month period, or when a business expects to exceed £90,000 in the next 30 days.

How do I register for VAT in the UK?

Businesses can usually register online through GOV.UK. The information required depends on the business structure and circumstances.

Do VAT-registered businesses need Making Tax Digital?

Yes. VAT-registered businesses are generally required to keep digital VAT records and submit VAT Returns using compatible software, unless an exemption applies.

Do I still submit an annual tax return under MTD for Income Tax?

Yes. MTD for Income Tax introduces digital records and quarterly updates, but eligible taxpayers still submit an annual tax return and pay their tax by the applicable deadline.

Can an accountant manage Making Tax Digital for me?

An accountant or authorised tax agent can assist with relevant MTD and tax administration. Businesses should agree clearly which responsibilities remain with the business owner and which are handled by the agent.