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Making Tax Digital (MTD): A Simple Guide for UK Businesses

By Own Boss | September 30, 2025
Making Tax Digital (MTD): A Simple Guide for UK Businesses

Making Tax Digital (MTD) is a fundamental change to the UK tax system, introduced by HMRC to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. The core principle is the move away from paper-based records to a fully digital system where businesses must use compatible software to keep records and submit tax returns.

This guide breaks down what MTD means for you and your business.

Who Does MTD Apply To?

MTD is being rolled out in phases. Currently, its main impact is on:

  • VAT-Registered Businesses: Since April 2022, all VAT-registered businesses, regardless of turnover, must follow MTD rules. This means keeping digital VAT records and filing VAT returns using MTD-compatible software.
  • Self-Employed Individuals and Landlords: MTD for Income Tax Self Assessment (ITSA) is the next major phase. From April 2026, self-employed people and landlords with an annual business or property income above £50,000 will need to follow MTD rules. This will be extended to those with income above £30,000 from April 2027.

What Do You Actually Need to Do?

Complying with MTD involves two key steps:

  1. Keep Digital Records: You can no longer rely on a shoebox of receipts or a simple paper ledger. Your financial records must be stored digitally.
  2. Use MTD-Compatible Software: You must use software that is recognised by HMRC to submit your tax information directly. You can no longer file your VAT return by logging into the HMRC government gateway and typing in the numbers.

What is MTD-Compatible Software?

This is software that can connect directly to HMRC's systems via an API. Most modern cloud accounting packages are compatible. Popular choices in the UK include:

  • Xero
  • QuickBooks Online
  • FreeAgent
  • Sage Business Cloud Accounting

If you use spreadsheets, you can still be MTD-compliant, but you must use 'bridging software' that can take the data from your spreadsheet and send it to HMRC in the correct digital format.

The Future: MTD for ITSA

For those affected by MTD for Income Tax, the biggest change will be the end of the single annual tax return. Instead, you will need to send quarterly updates of your income and expenses to HMRC via your software, followed by a final declaration at the end of the year. This is designed to give you a more real-time view of your tax position.

Get Ready: MTD is not optional. If it applies to you, you must comply to avoid penalties. The best first step is to choose a compatible software package and get comfortable using it for your day-to-day bookkeeping.