What is Making Tax Digital: Complete Guide to HMRC’s Digital Tax System

Last Updated on: August 21, 2025

Making Tax Digital (MTD) is HMRC’s initiative requiring UK businesses to keep digital records and submit tax returns using compatible software. The system aims to modernise tax administration, reduce errors, and make tax reporting more efficient for businesses and individuals.

What Is Making Tax Digital?

Making Tax Digital is a UK government programme that mandates digital record-keeping and electronic submission of tax information to HMRC. Businesses must use MTD-compatible software to maintain financial records and submit quarterly returns instead of annual paper submissions.

Key Requirements:

Digital record-keeping using approved software
Quarterly online submissions to HMRC
Electronic filing of tax returns
Real-time data sharing with HMRC
Compatible software for all tax calculations

Who Must Use Making Tax Digital?

VAT (Already Mandatory)

Compulsory Since April 2019:

All VAT-registered businesses with turnover above £85,000
Voluntary for businesses below VAT threshold
Quarterly VAT return submissions required
Digital links between all software systems

Income Tax (Rolling Out)

Mandatory Dates:

Self-employed with income over £10,000: April 2026
Rental property income over £10,000: April 2026
Partnerships: April 2027
All other self-employed: Date to be confirmed

Corporation Tax

Future Implementation:

Large companies first (assets over £20 million or turnover over £200 million)
Smaller companies to follow in later phases
Dates not yet confirmed by HMRC

MTD-Compatible Software Options

Popular Accounting Software

Cloud-Based Solutions:

Xero: Full MTD compliance with automatic submissions
QuickBooks: Integrated VAT and future income tax support
Sage: Comprehensive MTD suite for all business sizes
FreeAgent: Designed specifically for small businesses and contractors
Wave: Free option with basic MTD functionality

Specialist MTD Software

Dedicated Tools:

BridgerPay: VAT-focused MTD solution
TaxCalc: Professional tax software with MTD integration
VT Transaction+: Entry-level accounting with MTD compliance
Kashflow: Simple bookkeeping with automatic MTD submissions

Making Tax Digital Requirements

Digital Record-Keeping

Mandatory Elements:

All business income and expenses recorded digitally
VAT transactions tracked electronically
Digital receipts and invoices stored
Automated calculations using software
Regular backup of financial data

Digital Links

Connection Requirements:

Software must connect digitally to submit returns
No manual data re-entry between systems
Electronic transfer of information to HMRC
Real-time synchronisation where possible

Quarterly Submissions

Reporting Schedule:

VAT returns: Every quarter
Income tax updates: Quarterly summaries required
Annual reconciliation: Final submission by 31st January
Penalty charges for late or incorrect submissions

Benefits of Making Tax Digital

For Businesses

Operational Advantages:

Reduced paperwork and manual processes
Automatic calculations prevent errors
Real-time view of tax liabilities
Improved cash flow planning
Integrated business and tax management

For HMRC

Administrative Benefits:

Reduced processing time and costs
More accurate tax collection
Earlier detection of discrepancies
Better data for policy decisions
Reduced need for investigations

Common MTD Challenges

Software Selection

Decision Factors:

Business size and complexity requirements
Integration with existing systems
Cost and ongoing subscription fees
Support and training availability
Scalability for future growth

Implementation Issues

Typical Problems:

Data migration from existing systems
Staff training on new software
Integration with banking systems
Understanding digital link requirements
Managing quarterly submission deadlines

Compliance Concerns

Key Risks:

Penalties for late submissions
Software compatibility problems
Digital link requirement failures
Inadequate record-keeping standards
Missing quarterly update deadlines

Preparing for Making Tax Digital

Immediate Actions Required

Essential Steps:

Choose MTD-compatible software
Digitise existing financial records
Set up automatic bank feeds
Train staff on new systems
Test submission processes

Professional Support

Getting Help:

Accountant guidance on software selection
Training courses for business owners
HMRC webinars and guidance materials
Software provider support services
Professional implementation assistance

Meta Description: Making Tax Digital (MTD) requires UK businesses to keep digital records and submit quarterly returns using HMRC-compatible software. Learn requirements, deadlines, and best software options for 2025.