Making Tax Digital (MTD) is a key part of the Government’s plans to ‘digitally’ transform the UK’s tax system and, in doing so, reduce the tax gap.

Since April 2022, it has been mandatory for all VAT-registered businesses (regardless of turnover) to comply with the requirements of the MTD for VAT initiative; namely to keep digital records and file VAT returns using compatible software.

MTD for Income Tax Self-Assessment (MTD for ITSA) will be mandated from April 2026, requiring sole traders, freelancers and landlords with qualifying income over £50,000 to keep digital records, to file quarterly updates with HMRC,  and to submit a final year-end declaration using compatible software.

MTD for ITSA will then be extended to include those with qualifying income exceeding £30,000 from April 2027, and those with income exceeding £20,000 from April 2028.

Beyond this, HMRC are continuing to review potential solutions for those below the £20,000 threshold.

MTD for Corporation Tax will not be implemented before April 2026 and, as it stands, there is no indication of when this phase will be mandated.

MTD: Choosing the right software for compliance and growth

MTD will force businesses and individuals to replace manual records with the digital equivalent.

These digital records must be preserved in what is defined as ‘functional compatible software’ – broadly, software or spreadsheets (or a combination thereof) which can connect to HMRC via an Application Programming Interface (API).

Knowing where to start, when it comes to choosing and implementing a software, can be daunting, and particularly if this your first experience of introducing any kind of ‘digital’ infrastructure in your business.

Picking the right platform from the outset, that will help you to achieve compliance, but also to realise wider benefits, and that will grow with your business, is essential.

Assess your current situation

Assess your current situation in order to understand what steps you need to take to meet your obligations. The likelihood is, you will find that one of the following three categories applies to you, as follows:

  • Currently using accounting software
    If you already use software, then meeting your obligations may be a little easier but that doesn’t mean you should be complacent. The software that you are using must be MTD-compatible, and needs to be able to facilitate the submissions required of you. If this is not the case, you need to consider whether an upgrade or switch is necessary.
  • Currently using spreadsheets
    HMRC has said that businesses can continue to use spreadsheets for record keeping but these must be combined with compatible software, capable of connecting to HMRC systems via an API, when making submissions.
  • Not using spreadsheets or software
    If you fall into this category, you really must prioritise your preparations as a matter of urgency to ensure you are ready to comply ahead of any relevant mandation dates.

MTD-compatible software: The selection process

When choosing accounting software for your business, beyond the ‘must-haves’ for the purposes of complying with MTD, you should consider factors such as ease of use, pricing and key features.

Distinguish between features you cannot go without and those that you might consider a ‘luxury’; it’s essential that the software meets the fundamental needs of your business.

Procrastination leads to penalties

Penalties will be issued for both late filing and late payment as follows:

Late filing

Penalty points will accrue based on how overdue the filing is and the number of filings that have been submitted late. Worth noting is that points will accrue separately for VAT and Income Tax.

If you receive sufficient points to exceed the relevant penalty threshold (dependent on the frequency of your submissions), you will be liable for a £200 fine.

Individual penalty points will have a lifetime of 2 years; after which they will expire. This will be calculated from the month after the month in which the failure occurred. Different expiration rules apply where the upper points limit has been reached.

Late payment

Late payment penalties for VAT and MTD for ITSA have increased to incentivise taxpayers to pay on time.

From April 2025 for VAT purposes, and April 2026 for MTD for ITSA, where tax is unpaid after 15 days, a 3% penalty will apply, and where the tax remains unpaid after 30 days, a further 3% penalty will be added.

Where tax is unpaid after 31 days, a further 10% penalty per annum will be charged accruing on a daily basis, based on amounts outstanding.

How can we help?

If you know that you are going to be impacted by the upcoming MTD for ITSA mandation dates, you should be starting to prepare.

The first step is to recognise the ‘why’ behind the changes, then to map out your obligations, review your current processes and systems, and decide what actions you need to take to be ready for transition.

We have already been successful in supporting our clients with meeting their obligations under MTD for VAT, by helping them to view the changes as an opportunity to improve wider business operations, and assisting them to implement the right systems, and we are ready to do the same for those affected by this next phase.

We can help you to build a robust digital infrastructure for your business, matched to your requirements and plans for growth and, with the efficiencies afforded to us as a result of these new systems, we can focus on our role as advisory partners.  .

Our specialists work confidently with a wide range of online accounting software so, when it comes time to take the leap, we have trained advisers on hand to provide as much or as little assistance as you require.

To discuss your circumstances in more detail with one of our experts, contact us today, or explore the MTD page on our website here.