In this guide (12)
- What is Making Tax Digital?
- What does MTD for VAT require right now?
- What does "compatible software" mean in practice?
- What counts as a digital link?
- How is "qualifying income" worked out for MTD for Income Tax?
- What do you send to HMRC under MTD for Income Tax?
- Can you be exempt?
- Where do small businesses usually break the rules?
- What should you do now? A checklist
- How EasyTaskr helps
- Questions people ask
- Sources
Key takeaways
- Every VAT-registered business must already keep digital records and file VAT returns through compatible software.
- MTD for Income Tax starts by qualifying income: over £50,000 from April 2026, £30,000 from April 2027, £20,000 from April 2028.
- Qualifying income is turnover before expenses, not profit.
- Copy and paste between programs is not a digital link; formulas, file imports and software connections are.
- Bridging software can send figures from spreadsheets or other records to HMRC.
What is Making Tax Digital?
Making Tax Digital (MTD) is HMRC's rule that you keep certain tax records in software and send figures to HMRC from software. It has two parts: MTD for VAT, which already applies to every VAT-registered business, and MTD for Income Tax, which is being phased in for sole traders and landlords from April 2026.
| Part | Who it covers | From when |
|---|---|---|
| MTD for VAT | Every VAT-registered business | Since April 2022 |
| MTD for Income Tax, phase 1 | Sole traders and landlords with qualifying income over £50,000 in 2024–25 | 6 April 2026 |
| MTD for Income Tax, phase 2 | Qualifying income over £30,000 in 2025–26 | 6 April 2027 |
| MTD for Income Tax, phase 3 | Qualifying income over £20,000 in 2026–27 | 6 April 2028 |
Partnerships come in later. MTD for Income Tax covers sole traders and landlords who are registered for Self Assessment.
What does MTD for VAT require right now?
If you are VAT registered, you must keep your VAT records digitally and send your VAT return through software that can talk to HMRC.
VAT Notice 700/22 sets out the records that must be digital:
| Record | What it includes |
|---|---|
| Business details | Business name, main address, VAT number, any VAT schemes you use |
| Each sale | Time of supply (tax point), value excluding VAT, VAT rate charged |
| Each purchase | Time of supply, value, VAT you will reclaim |
| Summary | Total VAT owed on sales, total VAT reclaimable on purchases, and adjustments |
Shops using a retail scheme must keep a digital record of their daily gross takings. They do not have to record every single item sold within those takings in the software.
Flat Rate Scheme users do not need a digital record of every purchase, except capital items on which they reclaim VAT.
For VAT deadlines, rates and schemes, see the VAT guide for small businesses.
What does "compatible software" mean in practice?
Compatible software is any program, or set of programs, that can keep your digital records, send information to HMRC through its connection (an API) and receive information back from HMRC. It does not have to be one product.
There are three common set-ups:
| Set-up | How it works | Who it suits |
|---|---|---|
| Accounting software | Records and filing in one product | Most businesses with an accountant or bookkeeper |
| Spreadsheet plus bridging software | You keep records in a spreadsheet; bridging software reads the totals and sends them to HMRC | Small businesses that already work in spreadsheets |
| Several systems linked together | Till or sales system, then accounting or bridging software, then HMRC | Shops and wholesalers whose sales live in a separate system |
Bridging software is a tool that connects records kept elsewhere, usually a spreadsheet, to HMRC. An API-enabled spreadsheet does the same job from inside the spreadsheet.
What counts as a digital link?
A digital link is a transfer of data between programs that happens electronically, without anyone re-typing or copying it. Once data is in your records, it must flow digitally all the way to the return.
HMRC accepts, for example:
- formulas that link cells in a spreadsheet
- exporting a file (such as CSV) from one program and importing it into another
- an automated transfer between two systems through their connections
- uploading a file of records into the filing software
HMRC does not accept "cut and paste" or "copy and paste" as a digital link, and re-typing figures from one screen into another breaks the chain.
A worked example. A wholesaler's sales system records 2,140 invoice lines in the quarter, with £96,400 of sales excluding VAT and £15,880 of VAT charged. At the end of the quarter it exports a CSV of those lines and the bookkeeper imports it into the accounting software, which adds £41,200 of purchases and £7,950 of reclaimable VAT. The return shows £15,880 − £7,950 = £7,930 to pay. Every step is digital, so the chain holds. If the bookkeeper had read £15,880 off a screen and typed it into a spreadsheet, that step would not count as a digital link.
How is "qualifying income" worked out for MTD for Income Tax?
Qualifying income is your total income from self-employment and property before expenses: your turnover, not your profit. Each phase looks at a specific earlier tax year.
Example 1: a market-stall trader. Sales in 2024–25 were £52,000. Profit after stock and costs was £14,000. Qualifying income is £52,000, which is over £50,000, so MTD for Income Tax applies from 6 April 2026, even though the profit is modest.
Example 2: a sole-trader café owner who also lets a flat. In 2025–26 the café takes £24,000 and the flat brings in £9,000 of rent. Qualifying income is £24,000 + £9,000 = £33,000. That is over £30,000, so MTD for Income Tax applies from 6 April 2027.
| Counts towards qualifying income | Does not count |
|---|---|
| Self-employment turnover | Wages taxed through PAYE |
| Rental income (your share if jointly owned) | Dividends, including from your own company |
| Your share of a partnership's profit | |
| State and private pensions |
You still send a Self Assessment tax return for the tax year before you start using MTD for Income Tax.
What do you send to HMRC under MTD for Income Tax?
You send quarterly updates of your income and expenses from compatible software, then a tax return after the year ends. Each update gives totals for each income and expense category; HMRC does not receive individual receipts or invoices. Each update covers the period from the start of the tax year to the end of that quarter.
| Standard update period | Deadline |
|---|---|
| 6 April to 5 July | 7 August |
| 6 April to 5 October | 7 November |
| 6 April to 5 January | 7 February |
| 6 April to 5 April | 7 May (following tax year) |
You can choose calendar periods instead (1 April to 30 June, and so on). The deadlines stay the same.
Can you be exempt?
Some people can. HMRC can grant an exemption where it is not practical for you to use digital tools, for example because of disability, location or religious beliefs. Exemption is not automatic; you have to apply.
Where do small businesses usually break the rules?
Most gaps are in the step between the till and the filing software, not in the return itself.
| Weak point | Why it is a problem | Better |
|---|---|---|
| Typing the day's till total from a printed Z-read into a spreadsheet | Re-typing is not a digital link | Bring the daily total across as a file export or through a software connection |
| Purchase invoices kept only on paper | Each purchase you reclaim VAT on must be recorded digitally | Enter or scan purchases into your software as they arrive |
| Copying totals from one spreadsheet tab to another | Copy and paste is not a digital link | Use a formula that links the cells |
| Sales from a catalogue link or sales reps kept outside the main records | Those sales are missing from your digital records | Make sure every sales channel ends up in the same records |
| Deleting old files after a system change | VAT records must be kept for at least 6 years | Export and keep your history before you switch |
A quick test. Pick one sale from last quarter and follow it to the return. If at any point a person read a number and typed it again, that step needs fixing.
What should you do now? A checklist
Work through this list once, then review it each April.
| Step | Done? |
|---|---|
| Check whether you are VAT registered, and when your next VAT period ends | ☐ |
| For Income Tax, add up self-employment and property turnover for 2024–25, 2025–26 and 2026–27 and compare with £50,000, £30,000 and £20,000 | ☐ |
| List every place a sale is first recorded: till, invoice book, online shop, sales rep orders | ☐ |
| Make sure each of those ends up in software as a digital record, not on paper | ☐ |
| Map how figures move from your sales system to the software that files; remove any re-typing or copy and paste | ☐ |
| Choose filing software: accounting software or bridging software | ☐ |
| Agree with your accountant who files and from which system | ☐ |
| Keep records for at least 6 years | ☐ |
This guide is general information, not tax advice. Rules change, so check GOV.UK or ask an accountant.
Questions people ask
Do I need Making Tax Digital if I am not VAT registered?
Not for VAT. You may still need it for Income Tax if you are a sole trader or landlord whose qualifying income is over the threshold for that year.
Does qualifying income for MTD mean profit?
No. It is your total income from self-employment and property before expenses. PAYE wages, dividends and your share of partnership profit do not count.
Can I keep using spreadsheets under Making Tax Digital?
Yes, if the spreadsheet is linked to HMRC through bridging software and data moves between programs by digital links rather than copy and paste.
Can I be exempt from Making Tax Digital?
HMRC can grant an exemption where it is not practical for you to use digital tools, for example because of disability, location or religious beliefs. You have to apply.
Sources
- Making Tax Digital for VAT — GOV.UK
- Making Tax Digital for VAT (VAT Notice 700/22) — GOV.UK
- Check if you're eligible for Making Tax Digital for Income Tax — GOV.UK
- Work out your qualifying income for Making Tax Digital for Income Tax — GOV.UK
- Use Making Tax Digital for Income Tax: send quarterly updates — GOV.UK
- Record keeping (VAT Notice 700/21) — GOV.UK
Written by the EasyTaskr editorial team from the sources above. First published .
