Making Tax Digital (MTD) is an HMRC initiative requiring UK businesses to maintain digital tax records and submit returns through compatible software. The programme replaces paper-based and manual tax filing with a fully digital system. HMRC’s stated goal is to make the UK tax system more efficient, accurate, and transparent.
As an ICAEW Registered Member Firm based in Newcastle upon Tyne, Aqua Accounting has guided North East businesses through MTD compliance for over 13 years. This guide explains what MTD is, who it affects, the deadlines, software requirements, penalties, and how to prepare.
What Is Making Tax Digital (MTD)?
Making Tax Digital is a government programme introduced by HMRC to move UK tax administration to fully digital record-keeping and reporting. Under MTD, businesses keep digital records of income and expenses and submit tax updates to HMRC using recognised software rather than manual forms or spreadsheets alone.
HMRC estimates that avoidable errors in tax records cost the UK economy over £9 billion annually in lost revenue. MTD reduces these errors by requiring software to calculate and validate figures before submission. The programme covers four tax types:
- MTD for VAT — mandatory since April 2022 for all VAT-registered businesses
- MTD for Income Tax Self Assessment (ITSA) — phased rollout starting April 2026
- MTD for Corporation Tax — begins April 2026 for the largest companies
- Future phases — additional tax types under development
Each phase has specific thresholds, deadlines, and requirements. The core principle remains consistent: digital records, digital submission, and quarterly reporting to HMRC.
Who Does Making Tax Digital Apply To?
Making Tax Digital applies to all UK businesses and individuals meeting HMRC’s registration thresholds for VAT, Income Tax Self Assessment, or Corporation Tax. The scope expands in stages.
Currently affected:
- All VAT-registered businesses regardless of turnover (mandatory since 1 April 2022)
- Businesses voluntarily registered for VAT
Affected from 6 April 2026:
- Self-employed individuals with gross income above £50,000
- Landlords with rental income above £50,000
Affected from 6 April 2027:
- Self-employed individuals with gross income between £30,000 and £50,000
- Landlords with rental income between £30,000 and £50,000
- General partnerships with income above £30,000
HMRC confirmed in December 2024 that the £30,000 threshold would apply from April 2027, extending coverage to an estimated 900,000 additional businesses and landlords.
Limited companies and partnerships with complex structures fall under later phases. Companies already registered for VAT comply with MTD for VAT now and will face MTD for Corporation Tax from April 2026 onward. Businesses voluntarily registered for VAT must comply regardless of turnover level.
What Are the MTD Deadlines for UK Businesses?
The MTD deadlines for UK businesses are phased by tax type and income threshold, with VAT already mandatory and Income Tax rolling out from April 2026.
| Tax Type | Deadline | Threshold |
|---|---|---|
| MTD for VAT | 1 April 2022 | All VAT-registered |
| MTD for ITSA (higher) | 6 April 2026 | Income above £50,000 |
| MTD for ITSA (lower) | 6 April 2027 | Income above £30,000 |
| MTD for Corporation Tax | April 2026 (phased) | Profits above £20 million first |
The table above summarises confirmed HMRC implementation dates. Each deadline marks the start of the first tax period a business must file digitally.
Businesses below the £30,000 income threshold for ITSA are not currently required to join MTD for Income Tax. HMRC reviews thresholds annually and may extend coverage further. The April 2026 Corporation Tax phase applies initially to companies with profits exceeding £20 million. Smaller companies join in subsequent phases, with full implementation expected by April 2028.
What Software Do I Need for Making Tax Digital?
You need HMRC-recognised MTD-compatible software to maintain digital records and submit tax returns directly to HMRC’s API platform. The software must connect to HMRC’s Application Programming Interface and transmit data in structured formats without manual rekeying.
Recognised MTD software includes six main categories:
- Xero — cloud accounting with full MTD for VAT and ITSA support
- QuickBooks Online — Intuit’s platform covering VAT and Income Tax submissions
- Sage 50cloud and Sage Business Cloud — desktop and cloud versions
- FreeAgent — designed for small businesses and sole traders
- FreshBooks — cloud platform with MTD for VAT capability
- Bridging software — connects spreadsheets to HMRC’s API
HMRC publishes a full list of recognised software on gov.uk. Businesses using spreadsheets must add bridging software to create an MTD-compliant digital link between records and HMRC’s API.
Digital links are a specific MTD requirement. Copying figures manually from a spreadsheet into HMRC’s portal does not satisfy MTD rules. Data must transfer electronically end-to-end without human rekeying.
Our Bookkeeping Services include MTD software setup, digital record configuration, and quarterly submission management for businesses across Newcastle and the wider North East.
What Happens If I Do Not Comply with Making Tax Digital?
Non-compliance with MTD results in penalties under HMRC’s points-based system, with financial charges accumulating for each missed or late digital submission.
Penalty structure:
- Each late or missed quarterly submission incurs one point
- Reaching the threshold triggers a £200 fixed penalty
- Every subsequent late submission adds another £200
- Continued non-compliance leads to tax-geared penalties of 5% of the tax due
The points threshold varies by submission frequency. Quarterly submissions allow 4 points before the £200 penalty triggers. Monthly submissions allow 5 points.
Points expire after 24 months if no further late submissions occur. A full reset happens when a business submits on time consistently. However, the £200 penalties are payable immediately and are not refunded.
HMRC charges interest on late tax payments separately from MTD penalties. Businesses filing paper returns when MTD applies receive an automatic non-compliance flag. HMRC issues warning letters before applying penalties in most cases. Voluntary disclosure and correction of submission errors reduce penalty severity.
How Does MTD for VAT Work?
MTD for VAT works by requiring VAT-registered businesses to keep digital records and submit VAT returns through HMRC-recognised software using digital links, replacing manual portal entry entirely. Every VAT-registered business has complied with this system since 1 April 2022.
The MTD for VAT process involves four steps:
- Record digitally — every sales and purchase transaction enters the accounting software with VAT amounts tagged correctly
- Maintain digital links — data flows between software stages without manual rekeying, from invoice generation to return submission
- Calculate digitally — the software computes the VAT return figures using the recorded transaction data
- Submit via API — the return transmits directly to HMRC through the software’s API connection
Businesses no longer log into HMRC’s portal to submit VAT returns manually. The software handles the entire submission. HMRC acknowledges receipt electronically, and the confirmation appears in the accounting platform.
VAT-registered businesses with turnover above £90,000 must register for VAT and comply with MTD. Businesses voluntarily registered below the threshold also comply with MTD for VAT if they choose to remain registered.
Our VAT Services cover MTD-compliant VAT registration, return preparation, and digital submission for Newcastle businesses.
How Does MTD for Income Tax Work?
MTD for Income Tax works by requiring self-employed individuals and landlords to submit quarterly income and expense updates to HMRC through digital software, followed by an annual final declaration. This replaces the traditional annual Self Assessment tax return for those within scope.
The MTD ITSA process involves five stages:
- Digital record-keeping — income and expenses recorded in MTD-compatible software daily or weekly
- Quarterly updates — four submissions per year to HMRC showing cumulative income and expenses
- End of Period Statement — final figures confirmed after the tax year ends
- Final declaration — a single submission consolidating all income sources by 31 January
- Tax calculation — HMRC calculates the tax owed based on submitted data
Quarterly updates are information submissions, not tax payments. They allow HMRC to provide running tax estimates throughout the year. The actual tax liability is settled through the final declaration on the standard 31 January and 31 July payment dates.
Businesses with multiple income sources submit separate quarterly updates for each trade or property. A sole trader running two businesses and renting out one property submits three quarterly update sets per quarter.
Sole traders and landlords needing help with digital record setup can use our Tax Returns / Taxation service, which covers MTD ITSA preparation, quarterly submission, and final declaration filing.
How Can an Accountant Help with Making Tax Digital Compliance?
An accountant helps with MTD compliance by providing software selection guidance, setting up digital record systems, managing quarterly submissions, and ensuring all deadlines are met without penalty. As ICAEW Chartered Accountants, we deliver MTD compliance services backed by professional standards and regulatory oversight.
Six specific ways an accountant supports MTD compliance:
- Software selection — matching the right MTD-compatible platform to business size and complexity
- Digital record setup — configuring chart of accounts, VAT categories, and income tags
- Quarterly submission management — preparing and filing updates on schedule
- Error checking — reviewing figures before submission to prevent penalties
- Liaison with HMRC — handling queries, penalty appeals, and technical issues
- Tax planning — using quarterly data to identify savings opportunities throughout the year
Aqua Accounting is an ICAEW Registered Member Firm with 13 years of experience serving North East businesses from our Newcastle upon Tyne office. Our team is fully MTD compliant and works with Xero, QuickBooks, Sage, and FreeAgent to keep clients’ digital records accurate and submission-ready.
We also support businesses forming new companies through our Limited Company Formations service, ensuring MTD-compliant setup from day one. For companies managing payroll alongside MTD, our Payroll Services integrate directly with digital accounting platforms. Businesses needing broader strategic guidance can access our Business Accounting Advisory for forward-looking tax and growth planning. Limited companies also benefit from our Corporation Tax and Company Accounts services as MTD for Corporation Tax approaches.
Frequently Asked Questions
Do I need MTD-compatible software?
Yes, MTD-compatible software is mandatory for all businesses required to comply with Making Tax Digital. HMRC defines compatible software as any product that connects to its API platform and maintains digital records end-to-end. Businesses using spreadsheets must add bridging software to create the required digital link. Our Bookkeeping Services include software setup and configuration.
Is Making Tax Digital mandatory for all businesses?
Making Tax Digital is mandatory for all VAT-registered businesses now and for self-employed individuals and landlords with income above £30,000 from April 2027. Businesses below the £30,000 ITSA threshold are not yet required to join MTD for Income Tax but must comply if VAT-registered. HMRC reviews thresholds annually and may lower them further.
What are the penalties for MTD non-compliance?
MTD non-compliance penalties follow a points-based system where each late submission adds a point, and reaching the threshold triggers a £200 fixed penalty per further late submission. Quarterly filers reach the penalty threshold at 4 points. Points expire after 24 months of on-time submissions, but paid penalties are not refunded.
Can I use spreadsheets for MTD?
Spreadsheets are permitted for MTD only when combined with bridging software that creates a digital link to HMRC’s API platform. Copying and pasting figures manually between spreadsheets or into HMRC’s portal does not satisfy MTD rules. Bridging tools such as BTCSoftware, TaxCalc, and Sage provide compliant connections. Our VAT Services team advises on spreadsheet-to-MTD solutions.
Do I need an accountant for MTD?
An accountant is not legally required for MTD, but professional support significantly reduces the risk of penalties, software errors, and missed deadlines. As an ICAEW Registered Member Firm in Newcastle, we manage MTD compliance for sole traders, landlords, and limited companies across the North East. Contact Aqua Accounting today to discuss your Making Tax Digital requirements.
Disclaimer:
The information provided in this blog is for general informational purposes only and does not constitute professional advice. While every effort is made to ensure accuracy, Aqua Accounting accepts no responsibility for any actions taken based on this content. You should seek professional advice tailored to your individual circumstances.
Omar Ahmed is an ICAEW Chartered Accountant and the Director of Aqua Accounting, a UK-based accountancy practice providing expert accounting and tax services to individuals, sole traders, and small to medium-sized businesses. As a trusted accountant in Newcastle, he offers expertise in annual accounts, self-assessment tax returns, company accounts, VAT, payroll, bookkeeping, and company formation.
With a strong focus on delivering clear and practical financial advice, Omar helps clients stay compliant while improving their understanding of their finances. Through Aqua Accounting, he works closely with business owners to simplify accounting processes, meet tax obligations, and support informed financial decision-making.