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Start a conversationMaking Tax Digital is revolutionising the way businesses report their financial information to the UK tax authority, HM Revenue & Customs (HMRC).
Digital record keeping and reporting is intended to make tax submissions more frequent and easier, although it also allows HMRC to more easily check those submissions and levy penalties. It is also a step towards real-time reporting and more frequent tax payments by businesses.
Implementation of the project has been subject to many delays, and further delays are possible due to design and project management issues.
It means that you will need to consider suitable software (or a spreadsheet) and training in order to comply with the regime. As this can be time-consuming and costly, it is advisable to start the transition as soon as practicable, but bearing in mind that further (and likely) delays in the MTD project could prevent it from happening when expected.
MTD for VAT purposes began in 2019 for businesses with a taxable turnover above the VAT threshold (currently £90,000 per annum). VAT-registered businesses with taxable turnover below the threshold needed to join MTD by 1 April 2022.
See our Insight on HMRC MTD VAT compliance checks
MTD for Income Tax Self Assessment is meant to start in the tax year 2026/27.
Businesses, self-employed people and landlords will be required:
Which means that from April 2028 all sole traders and landlords will be caught in the MTD regime if their qualifying income is over £20,000 a year. Any income outside of self-employment or rental business still goes in the usual tax return.
As regards the gross income (turnover) threshold, this is ascertained by adding together income sources. So, for example, if a person has £20,000 of rental income and £34,000 of sole trader turnover, this exceeds the £50,000 threshold and that person will have to join MTD for ITSA from April 2026.
Once joined, a person cannot leave MTD unless their qualifying income falls below £30,000 for three consecutive tax years.
HMRC has not announced when it will introduce digital record keeping for general partnerships, but is likely to be delayed until well after 2026..
NOTE: Although the frequency of reporting will change, the timing of tax payments will not and the current system of payments on account and balancing payment by 31 January after the tax year is expected to remain in place for the foreseeable future.
Read our Insight on Making Tax Digital for Income Tax.
You can apply for an exemption from MTD ITSA
Businesses within MTD for VAT (from April 2022) and joining MTD for ITSA from April 2026 should ensure their software developer has a compatible product.
HMRC has launched an interactive tool: Check if you need to use MTD for income tax
See HMRC's software packages compatible with Making Tax Digital for Income Tax
It was originally intended that MTD for Corporation Tax (CT) would be introduced at some stage, but has now been abandoned.
In its Transformation Roadmap published in July 2025, HMRC says it will modernise services for CT, but does not intend to introduce MTD for CT and instead will develop an approach to the future administration of CT that is more suited to the varying needs of the diverse CT population.
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Since April 2019 for VAT and from April 2026 for personal tax, unincorporated businesses and landlords will be enrolled into keeping digital accounting records and will have to file quarterly figures with HMRC.
Some taxpayers will be exempt, such as charities, community amateur sports clubs (CASCs); and taxpayers who can’t use digital equipment due to disability, age or remoteness of location.
Free software with limited functionality may be available for taxpayers with straightforward tax affairs, though commercial accounting software with more functionality will be preferable for many. Businesses will also be able to use spreadsheets if they wish, but will have to ensure they meet the necessary requirements.
Eligibility for free software will apply where a business meets all these conditions:
HMRC will not require free software to link or integrate with an agent’s product.
The cash basis will be the default accounting method under MTD, as long as gross income does not exceed £150,000. This allows for certain adjustments such as for debtors, creditors etc. to be ignored.
Unincorporated landlords will be able to use the cash basis, so will only need to declare rental income they have actually received. Conversely, only payments actually made in the tax year would be allowable. Relief for the costs of buying furniture etc. would be give on a replacement basis.
There is a £150,000 turnover limit for landlords who wish to use cash accounting, as their businesses do not necessarily become more complex as they grow. The cash basis would, as is already the case for individual landlords, operate by reference to the tax year (from 6 April to following 5 April).
Optional easements will apply to jointly let property, with landlords able to choose to only report their income (and not expenses) on quarterly updates and keep simpler digital records.
Businesses will be able to make voluntary payments on a pay-as-you-go basis via their digital accounts. Any voluntary payments made will appear in the digital account of the taxpayer or business as a credit and will be allocated against liabilities as they become due, across their range of taxes. Any unused credits will be carried forward for future use. Taxpayers will be able to choose how and when to pay.
Businesses will send details of their income and expenditure to HMRC once a quarter. New businesses will have to submit their first update within four months of commencement. Businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data (income, expenses and profit).
Autumn Statement 2023 announced that quarterly updates will move to a cumulative basis, allowing errors to be corrected as part of the following update and removing the need to resubmit previous quarters.
It was originally intended that MTD for Corporation Tax (CT) would be introduced at some stage, but has now been abandoned.
In its Transformation Roadmap published in July 2025, HMRC says it will modernise services for CT, but does not intend to introduce MTD for CT. It says it will instead develop an approach to the future administration of CT that is suited to the varying needs of the diverse CT population.
A nominated partner in a partnership will file updates on behalf of all partners. These updates would feed directly into each partner’s digital tax account. As a result, each partner will not need software, nor need maintain their own digital records, unless they have other business interests.
It is proposed that limited liability partnerships (LLPs) and mixed partnerships will not be exempt from quarterly reporting, whatever their level of income.
At the 2025 Autumn Budget, it was confirmed that the government will not apply late submission penalties for quarterly updates during the 2026/27 tax year for taxpayers required to join Making Tax Digital for income tax. The government will apply the new penalty regime for late submission and late payment to all taxpayers not already due to join the new system from 6 April 2027. (Budget 2025 Report, para 4.158: Penalty reform)
Under MTD, late submission penalties follow a new points-based system. A penalty point is issued each time a required submission is missed, and once a taxpayer reaches the threshold, a £200 penalty applies.
During the testing phase, no points apply to late quarterly updates, and once a taxpayer is fully mandated, points only apply to mandatory submissions.
Penalty points can be reset to zero if the taxpayer meets all deadlines for a set compliance period – 24 months for annual filers and 12 months for quarterly filers – and any outstanding returns are brought up to date.
Importantly, MTD penalty points are separate for income tax and VAT, and are only triggered after repeated non-compliance.
Under MTD, penalties for late tax payments are tougher and apply sooner.
A 3% penalty is charged if tax remains unpaid 15 days after the deadline, with a further 3% applied after 30 days. Daily penalties then accrue at 10% per year until the outstanding tax is settled.
These penalties are charged in addition to late payment interest. However, taxpayers can avoid late payment penalties by arranging a Time to Pay agreement with HMRC before the penalty trigger dates.
The new rules apply only to MTD income tax liabilities; earlier self assessment tax years remain subject to the existing late payment penalty regime.
Appeals can be made against a penalty and also against penalty points.
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