Making Tax Digital for businesses: Who needs to comply and when

Making Tax Digital (MTD) is often described as a single change to the UK tax system. In reality, it’s a phased programme, introduced gradually and applied differently depending on the type of business and the tax involved. MTD is a UK government initiative aimed at modernising tax reporting by requiring businesses to keep digital records and submit tax information electronically as part of a broader strategy to streamline tax compliance.

So who actually needs to comply? When do the rules apply? And how urgent is it, really? MTD is designed to reduce tax errors and simplify tax compliance for both businesses and tax authorities.

What does Making Tax Digital actually mean?

At its simplest, Making Tax Digital is about how businesses interact with HMRC. Making Tax Digital requirements include the obligation to maintain digital records, use compatible software, and submit tax information directly to HMRC systems.

What it doesn’t do is change tax rates, allowances, or how much tax is due. Income tax, VAT rules and corporation tax calculations remain exactly as they are. The difference lies in record keeping, reporting, and how data is transferred.

That distinction matters. Many businesses hear “MTD” and assume an entirely new tax regime. It isn’t. It’s a new way of managing existing obligations.

Maintaining digital records does not mean you have to scan and store invoices or receipts digitally; you can continue to keep these documents in paper form if you prefer.

MTD for VAT – who must comply now?

If your business is VAT registered, MTD already applies. It no longer matters whether your taxable turnover is above or below the VAT threshold. Once you have a VAT registration number, you are within scope of MTD for VAT.

HMRC now signs up VAT-registered businesses for Making Tax Digital for VAT automatically, so you do not need to register manually unless you are exempt.

That means VAT registered businesses must maintain digital VAT records and submit VAT returns using MTD compliant software. An existing spreadsheet alone is not sufficient for MTD compliance; it must be digitally linked to HMRC-recognised MTD for VAT software or bridging tools to transfer data to HMRC.

Compliance with MTD has been mandatory for VAT-registered businesses since April 2022.

Still using the old VAT portal? That option has gone.

MTD for income tax – who’s next?

MTD for income tax affects sole traders and landlords who currently submit an income tax self assessment tax return. Annual gross income from self employment, rental income from rental property, and other income sources is used to determine who must comply with tax digital for income tax.

The key factor is the income threshold, which includes self employment income and property business income, measured as gross income, not profit. Rental property income is considered separately as a property business for MTD purposes. Other income, such as trading or rent a room income, may be included or excluded when calculating qualifying income. PAYE income alone does not count towards the threshold.

So when does it apply?

Individuals with annual gross income of more than £50,000 from self-employment and/or property must use Making Tax Digital for Income Tax from April 2026. From April 2027, the income threshold will lower to £30,000, and from April 2028, it will lower to £20,000. Those with annual gross income of £20,000 or less from self-employment and property are not in scope of Making Tax Digital under current rules. The first phase of Making Tax Digital income tax starts on 6 April 2026, with the first quarterly updates due on 7 August 2026. You can check your eligibility and start dates using the official GOV.UK MTD checker tool. Individuals can choose to use Making Tax Digital voluntarily even if not required. Certain groups, such as those with income from trusts or estates, or those completing residence/remittance basis pages, are exempt until at least April 2027, and exemptions may need to be claimed.

What will sole traders and landlords actually need to do?

Under MTD for income tax, affected taxpayers must submit a summary of their income and expenses to HMRC every three months, known as quarterly updates under MTD for Income Tax, with specific quarterly update deadlines. For the 2026/27 tax year, the quarterly update deadlines are 7 August 2026, 7 November 2026, 7 February 2027, and 7 May 2027. These quarterly updates are required for standard tax year quarters, irrespective of a business’s accounting period. Businesses must submit separate quarterly updates for each trade or property business they operate.

Does that mean four tax bills a year? No.

Quarterly updates are simple summaries of income and expenses and do not require detailed tax or accounting adjustments. Small businesses benefit from simplified reporting obligations under MTD. Taxpayers will not receive penalty points for late submission of initial quarterly updates, providing some leniency during the transition period.

Income tax is still finalised after the end of the tax year, through a final digital declaration, which must be submitted by 31 January following the tax year, much like today’s annual tax return.

Businesses must ensure their accounting or ERP platforms support MTD-compatible accounting software to manage multiple income streams and automate calculations. Training teams on new processes and quarterly updates is essential for MTD compliance.

The structure changes, but the fundamentals remain familiar.

What about limited companies and corporation tax?

Corporation tax is not yet within scope of Making Tax Digital.

Limited companies must already keep electronic records and file tax returns digitally, but they are not required to submit quarterly updates under MTD. HMRC has signalled that corporation tax may be included in future phases, but no mandatory start date has been confirmed.

For now, MTD primarily affects VAT registered businesses, sole traders and landlords.

Digital records, software and penalties

MTD compliance requires maintaining accurate tax records in digital form. MTD relies on digital record keeping and digital links. Manual re-keying between systems breaks the rules, even if the figures are correct. Taxpayers within scope of Making Tax Digital will be required to acquire a suitable commercial software product or appoint an agent to submit information to HMRC on their behalf. Businesses should start transitioning their records to digital formats before MTD becomes mandatory. It is also important for businesses to perform internal readiness assessments to identify changes needed for MTD compliance, including whether they need Making Tax Digital software for small businesses, sole traders and landlords. Businesses must use HMRC recognised software – whether that’s full accounting software or bridging software – to submit data directly to HMRC.

Miss a deadline? HMRC now uses a points-based penalty system, rather than immediate fines. But penalty points still add up, and repeated late submissions can lead to financial penalties. Failure to comply with MTD deadlines can lead to a points-based penalty system and a £200 fine once a points threshold is reached.

Is it worth leaving preparation until the last minute? For most businesses, probably not. For further guidance on MTD requirements, exemptions, and when to start, visit the detailed pages on our website, including our Making Tax Digital software and guidance hub and our wider Making Tax Digital support resources.

A gradual shift, not a cliff edge

Making Tax Digital is not a one-off event. It’s a long-term change to tax administration, rolled out in stages and designed to become part of everyday business record keeping.

The earlier businesses, sole traders, and landlords understand where they sit – and when the rules apply – the easier the transition tends to be.

Supporting businesses, sole traders and landlords through Making Tax Digital

Whether you’re already filing VAT returns under MTD or preparing for income tax changes ahead, the right software makes all the difference, especially for practices using Making Tax Digital for accountants platforms.

Capium’s MTD compliant software supports VAT, income tax self assessment, quarterly updates and final declarations – all in one place, using the same software across tax types, and can be complemented by tools such as an MTD readiness checklist for preparation.