Understanding Making Tax Digital MTD: Key Rules, Requirements and Exemptions
- Brian Pusser
- Feb 21
- 4 min read
Making Tax Digital (MTD) is transforming how UK taxpayers manage their tax affairs. This government initiative aims to make tax administration simpler, more accurate, and less time-consuming by moving tax records and submissions into a fully digital environment. Whether you run a small business, work as a sole trader, or manage rental income, understanding MTD is essential to stay compliant and avoid penalties.
This guide explains what Making Tax Digital means, who must register, the key requirements, exemptions, and what happens if you don’t comply. By the end, you will have a clear picture of how MTD affects you and what steps to take next.
What is Making Tax Digital?
Making Tax Digital is HMRC’s plan to modernize the UK tax system by requiring taxpayers to keep digital records and submit tax returns using software compatible with MTD standards. The goal is to reduce errors caused by manual entry, speed up tax processing, and make it easier for taxpayers to manage their tax affairs.
The rollout began in April 2019, starting with VAT returns. Since then, it has expanded to include Income Tax Self Assessment (ITSA) for self-employed individuals and landlords, with further phases planned.
Key Features of MTD
Digital record keeping: Businesses and individuals must keep records of income and expenses digitally.
Use of MTD-compatible software: Tax returns must be submitted through software that connects directly to HMRC.
Linked digital records: Data must be transferred digitally between software systems without manual re-typing.
This means spreadsheets or paper records alone no longer meet the requirements. Instead, taxpayers need software that can send data directly to HMRC.
Who Must Register for Making Tax Digital?
MTD for VAT
MTD for VAT is already mandatory for most VAT-registered businesses. You must register if:
Your VAT taxable turnover exceeds £85,000 (the VAT registration threshold).
You are already VAT-registered, regardless of turnover, since April 2022.
This applies to:
Sole traders
Partnerships
Limited companies
Any other VAT-registered businesses
If your business meets these criteria, you must keep digital VAT records and submit VAT returns using MTD-compatible software.
MTD for Income Tax
MTD for Income Tax Self Assessment is rolling out gradually. From April 2026, self-employed individuals and landlords with gross income over £50,000 per year must register. This threshold was increased from £10,000 to reduce the burden on smaller businesses.
This means:
Sole traders and landlords with income above £50,000 must keep digital records and submit quarterly updates digitally.
Those below this threshold can continue with the current system for now.
Do Limited Companies Need to Register?
For VAT: Yes, if your limited company is VAT-registered, it must comply with MTD for VAT.
For Income Tax: No, MTD for ITSA does not apply to limited companies. They file Corporation Tax returns separately, which are not yet part of MTD.
What Are the Key Requirements for MTD?
To comply with MTD, taxpayers must:
Keep digital records of all income and expenses related to the tax being reported.
Use software that is MTD-compatible to submit returns directly to HMRC.
Ensure digital links between software systems, meaning data must flow electronically without manual input.
For example, if you use accounting software to track sales and expenses, it should connect directly to your tax submission software or HMRC portal. Copying figures manually from one system to another is not allowed.
Who is Exempt or Can Get a Deferral?
Certain taxpayers can apply for exemptions or deferrals from MTD requirements. Common reasons include:
Religious objections: If digital record keeping conflicts with your religious beliefs, you can apply for an exemption.
Age or disability: Some individuals may qualify for deferrals if they cannot use digital tools due to age or disability.
Other reasonable excuses: HMRC may consider other cases on an individual basis.
If you believe you qualify for exemption or deferral, you must contact HMRC and provide evidence to support your claim.
What Happens if You Don’t Comply?
Failing to comply with MTD rules can lead to penalties, including:
Fines for late or incorrect submissions.
Interest on unpaid tax.
Possible loss of certain tax reliefs or allowances.
HMRC encourages taxpayers to register and comply early to avoid these consequences. If you struggle with digital tools, seek help from an accountant or tax advisor experienced with MTD.
Practical Steps to Prepare for MTD
Check if you must register: Review your turnover and income against the thresholds.
Choose MTD-compatible software: Many providers offer affordable options tailored to small businesses and landlords.
Digitize your records: Start keeping all tax-related documents in digital form.
Train yourself or your staff: Learn how to use the software and understand the submission process.
Apply for exemptions if needed: Contact HMRC early if you believe you qualify.
Examples of MTD in Action
A sole trader with a turnover of £90,000 registered for VAT must submit VAT returns quarterly using software like QuickBooks or Xero.
A landlord earning £55,000 annually from rental properties must keep digital records and submit quarterly income tax updates starting April 2026.
A limited company with VAT registration submits VAT returns digitally but files Corporation Tax returns separately, outside MTD.
Making Tax Digital is reshaping tax management in the UK. By understanding the rules and preparing early, you can avoid penalties and make tax time less stressful. Start by checking your eligibility, choosing the right software, and keeping digital records today.
If you need help, consult a tax professional who understands MTD requirements and can guide you through the process.
