MAKING TAX DIGITAL (MTD) FOR VAT & INCOME TAX

Discover how Making Tax Digital affects you and your business

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) has been introduced by HMRC to help individuals and businesses to get their tax right. It means many people are leaving their spreadsheets or paper records behind and moving over to a new system.

At the moment, Making Tax Digital is all about VAT submissions. But over the coming months and years it will include Income Tax and Corporation Tax too.

Making Tax Digital, or MTD, is HMRC’s solution to simplifying tax. By digitising the process the UK government wants to transform the way we do our taxes, making it more effective, more efficient and easier to get it right.

MTD FOR VAT

Making Tax Digital for VAT is now compulsory for all VAT-registered businesses.

To comply with Making Tax Digital for VAT, businesses have to keep digital records. This must be done using what HMRC calls 'compatible software’. In other words, it must be able to connect directly to HMRC and send your details to them using digital links.

MTD FOR INCOME TAX

MTD will apply to some landlords and self-employed traders whose gross income exceeds certain thresholds from 6th April 2026. Gross income means your total rental income received or your sole trader sales before any expenses or allowances are deducted.

Making Tax Digital compliance for VAT

As of April 2022, HMRC’s Making Tax Digital for VAT applies to all businesses, regardless of turnover.

If you’re not already set up, don’t panic. Just follow these rules to make sure you’re on the right track.

1. Register for an online Government Gateway account

The Government Gateway lets you use many national and local online government services safely and securely. Once it’s set up you can use it to pay taxes, check your tax account status and receive updates and alerts from HMRC.

If you haven’t already created one, you can set up your account at www.gateway.gov.uk. Make sure you have the following info at hand:

Your name
Date of birth
National Insurance number
Email address

You’ll be asked to create a password. Once the process is complete you’ll get a user ID, which you can use to access the services you want (such as MTD for VAT).

HMRC will send you an activation code in the post and you’ll only be able to progress to the next steps once you enter the code.

Sign up for making tax digital for VAT here: https://www.gov.uk/vat-record-keeping/sign-up-for-making-tax-digital-for-vat.

2. Find out when you need to make your first MTD submission

From April 2022, all VAT-registered businesses, regardless of their income, must follow Making Tax Digital rules for their VAT returns. This means using a MTD-functional compatible accounting software that connects directly to HMRC, pulling in digital records in real-time.

There are some exceptions. You won’t have to follow the MTD rules if:

Your business is run entirely by practising members of a religious society whose beliefs are incompatible with the regulation’s requirements (for instance, using computers is not allowed).
You are undergoing bankruptcy procedures.
You can’t easily use digital tools to keep your business records or submit your returns - for instance due to age, disability or remoteness of location.

If you think you meet one of these exceptions, contact the VAT Helpline to get confirmation by calling 0300 200 3700.

3. Decide if you need an accountant or bookkeeper

Accountants and bookkeepers are often just seen by business owners as a means to an end - a necessary step to make sure all tax obligations are met. But a good relationship with an accounting professional can help your business grow.

Here some questions you can ask yourself to help decide if you need an accountant or bookkeeper and, if so, which one might be right for you:

Do they have knowledge about my industry that can help me navigate complicated tax laws and tax deductibles?
Will I benefit from the additional services an accounting professional can bring (e.g. business insights and cashflow solutions)?
Would I rather concentrate on the business side of things or the finances?

4. Decide how you’ll digitally record transactions

HMRC’s MTD rules state that all VAT registered businesses must “keep and preserve” their income and outgoings within “functional compatible software”. This means you need to:

Record and store your financial records using software or apps
Be able to send this financial data to HMRC using HMRC-recognised software or apps (in technical language, software that can link via HMRC’s API)

It’s possible to use different software to do these two things. And there’s also what’s called “bridging software”, which allows you to “bridge” programmes like Excel or Google Sheets - which are not MTD compatible - with HMRC’s platform. QuickBooks offers a bridging solution, but longer term, these routes can get complicated, so you’re better off with our all-in-one solution which is MTD compatible.

Making Tax Digital compliance for Income Tax

MTD will apply to some landlords and self-employed traders whose gross income exceeds certain thresholds. Gross income means your total rental income received or your sole trader sales before any expenses or allowances are deducted.

If you own property jointly, only your share of the rent counts towards the threshold. If you are both self-employed and a landlord, your gross property and business income will be combined to determine when MTD applies.

Your qualifying income is this combined figure, but it does not include employment income, pensions or dividends.

A non-resident or domiciled individual will also have to join MTD if they have UK self-employment or UK property and meet the qualifying income threshold.

MTD for Income Tax does not affect companies, so if you run your business or rentals through a company then they are not affected. MTD also does not apply to partnerships or partners in a partnership unless they have their own rental business or sole trade.

What Will Change Under MTD?

Once you fall within MTD, you will have to:

Keep digital records
Submit quarterly updates
File a final annual digital tax return

1. Digital record keeping

You must keep digital records of your income and expenses using HMRC-approved software. This could be a cloud accounting system or a spreadsheet linked to bridging software.

Your digital records must include:

Date of transaction
Amount received or paid
Category (e.g. rent, insurance, repairs)

You don’t have to keep digital copies of receipts and invoices as long as the information is recorded in the digital records. Note that MTD does not remove the usual requirements to keep records supporting a tax return.

2. Quarterly updates

Instead of one annual return, landlords and sole traders will send a summary of income and expenses to HMRC every three months:

If you have rental income and sole-trader income, you must submit separate quarterly updates for both income sources (making 8 quarterly updates each year). Overseas rental income must also be reported separately.

You can start your quarters from 1 April instead if this makes your administration easier, but the submission deadline remains the same.

If you are a new sole trade or landlord starting in 2025 with an income of over £50,000, the rental income or sole trade business needs to be reported on a self-assessment return prior to it entering MTD. You will file your first return for tax year 2025/26, so the earliest you will enter MTD is April 2027.

When will MTD affect me?

MTD was introduced for nearly all VAT-registered businesses with a taxable turnover above £85,000 in April 2019. They have to use Making Tax Digital software to keep digital records and make VAT submissions to HMRC.

From April 2022, this was extended to all VAT-registered businesses in the UK.

MTD for Income Tax is the second phase of digitising tax record keeping.

For 2024-25 and 2025-26: individuals can volunteer to participate in the MTD for Income Tax pilot program.

From 6 April 2026: MTD ITSA will be mandated for self-employed businesses and landlords with turnover above £50,000 in 2024-25.

From: 6 April 2027: MTD ITSA will be mandated for self-employed businesses and landlords with turnover above £30,000 in 2025-26.

From 6 April 2028: MTD ITSA will be mandated for self-employed businesses and landlords with turnover above £20,000 in 2026-27.

How will MTD change the way I do business?

As the calendar flips over to April 2025, VAT-registered UK businesses of all shapes and sizes will need to be ready to follow the new Making Tax Digital rules. In order to stay compliant with Government legislation you’ll need to:

Say goodbye to paper VAT record keeping, or copying and pasting from spreadsheets, as the switch to digitally-linked copies takes place
Store a digital copy of your business records
Make sure that you have a clear digital audit trail that can be accessed at any time
Use compatible MTD for VAT software to send VAT reports directly to HMRC

When the next phase of MTD for VAT is up and running, you’ll need to record all your financial information online instead of on spreadsheets or handwritten notes. The software you use will need to be compatible with HMRC’s so that your VAT returns become seamless.

A bridging solution can be used to import the final values of your VAT return (the 9 boxes) from a comma-separated values, or CVS file into Making Tax Digital-compatible software. From there it can be submitted to HMRC in a compliant way.

Business owners can use the bridging software independently or with an accountant.

At Northfield Accountancy and Tax Services, we can help you navigate the changes to Making Tax Digital, to ensure that you and your business are prepared and able to ensure compliance with HMRC regulations in all aspects of VAT and tax reporting.