What Is Making Tax Digital And Does It Affect My Business?

Making Tax Digital (MTD) is one of the most common questions UK business owners ask - usually right after hearing something like:

“You’ll soon have to keep digital records or HMRC won’t accept your tax return.”

or

“MTD is coming in 2026, you need special software.”

Understandably, this creates confusion, worry, and a lot of Googling.

This blog is your complete, plain-English explainer.

What is Making Tax Digital, when it starts, who it affects, what you need to do, and what it will cost.

No jargon. No scare tactics. Just clear facts.

1. What exactly is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a government initiative that aims to modernise the UK tax system by requiring businesses and individuals to:

✔ Keep financial records digitally
✔ Use approved software
✔ Submit tax information quarterly, not yearly
✔ File returns directly from software to HMRC

The goal is to reduce errors and give HMRC more frequent, real-time data.

Think of it as HMRC moving away from:

• spreadsheets
• paper receipts
• annual data dumps

…towards continuous digital reporting.

2. When is MTD happening? Key dates (as of 2025)

MTD for VAT

Already mandatory for all VAT-registered businesses.

MTD for Income Tax (MTD ITSA)

This is the big one - and it’s coming soon.

If your total combined income from self-employment and/or property exceeds these thresholds, MTD will apply to you.

3. Does Making Tax Digital affect my business?

Let’s break it down based on what type of business you run.

If you are a VAT-registered business:

You are already under MTD rules.
Nothing changes - you must:

✔ Keep digital VAT records
✔ File through MTD-compatible software (like Xero)

This applies to:

• Limited companies
• Sole trades
• LLPs
• partnerships

If you are a non-VAT registered sole trader:

You are affected if your total income is:

• £50,000+ from April 2026, or
• £30,000+ from April 2027

Property income counts toward this total.

If you are a director of a limited company:

You are not affected by MTD for Income Tax.
You’ll continue filing:

✔ Payroll
✔ VAT (if applicable)
✔ CT600
✔ Year-end statutory accounts

Companies will move to MTD eventually, but HMRC has not announced a date.

If you are a landlord:

If you earn rental income of £50,000+ (2026) or £30,000+ (2027):

✔ MTD ITSA applies
✔ Quarterly submissions are required
✔ You must use approved software

4. What will I have to do under MTD?

Here’s the simple version.

You must:

✔ Keep digital records

No more paper-only systems.
No more manual spreadsheets (in most cases).

✔ Submit quarterly updates to HMRC

These are not full tax returns - more like real-time summaries.

✔ Send an End of Period Statement (EOPS) once a year

This finalises your figures.

✔ Submit a Final Declaration

This replaces your usual self-assessment tax return.

✔ Use MTD-compatible software

For example:

• Xero
• QuickBooks
• FreeAgent
• Sage

5. What will MTD cost me? (Honest breakdown)

Software costs

Most small businesses will need full bookkeeping software.

Typical price: £12–£45/month.

Bookkeeper support (optional, but very likely needed)

Quarterly submissions mean more work.

Expect a monthly fee increase of: £20–£75/month depending on complexity.

DIY option?

Yes, you can file yourself using software… But most business owners find quarterly reporting time-consuming and risky.

6. What happens if I don’t comply with MTD?

HMRC will introduce:

• Penalty points
• Financial penalties
• Interest charges
• Compliance reviews

 They are slowly phasing this in, but non-compliance won’t be an option long term.

7. Can I stay on spreadsheets?

Technically, yes - but only with bridging software.

However:

• Bridging solutions often fail VAT audits
• They are NOT recommended for MTD ITSA
• HMRC wants all businesses to go fully digital

If your goal is to stay compliant with minimum stress, software is the safer route.

8. Why is HMRC doing this?

Real reason: error reduction.

HMRC estimates:

• Over £9 billion lost annually due to mistakes 
• A large percentage caused by manual bookkeeping
• MTD will allow them to cross-check data in real time

Whether we love it or not, the shift to digital is happening - and businesses that adopt early will benefit.

9. Should I switch to digital bookkeeping now?

Short answer: yes - ideally before MTD becomes mandatory.

Switching early gives you:

✔ time to get used to software
✔ cleaner records
✔ better reports
✔ smoother quarterly filing
✔ no deadline panic

It’s far easier to set up MTD calmly than in a rush.

10. Quick FAQ

Is MTD mandatory for all businesses? 

MTD for VAT: yes

MTD for Income Tax: only for sole traders/landlords over income thresholds.

Will limited companies be included?

Yes, but not yet - HMRC hasn’t set a date.

Do I still need to do a Self Assessment return?

No - under MTD ITSA it becomes the Final Declaration.

Do I have to send receipts?

No - you must keep them digitally, but you do not send them.

Does cash basis or accruals matter?

Yes - your chosen method affects submissions, but both are allowed under MTD.

11. What should I do now if MTD will affect me?

If you’re a sole trader or landlord earning over £30k–£50k, the smartest steps are:

Move to digital bookkeeping now

Choose MTD-compliant software (Xero recommended)

Get your Chart of Accounts correctly set up

Avoid messy DIY quarterly filing

Let your bookkeeper prepare the submissions

At Emerald Sky, we help clients transition smoothly, set everything up correctly, and handle all quarterly MTD filing so you don’t have to worry.

If you’re unsure whether MTD applies to you - or you’d like help preparing - get in touch and I’ll guide you through it.