Making Tax Digital for VAT and Income Tax: who, when, how

What Making Tax Digital requires

Making Tax Digital is HMRC’s programme to move tax records and returns into software. It works the same way for VAT and for Income Tax: you keep your business records digitally, in software HMRC recognises, and you send figures to HMRC from that software through HMRC’s API platform. Paper ledgers and typing figures into an online form are no longer enough.

This article covers the two regimes that affect most small businesses today: MTD for VAT, which is already universal for VAT-registered businesses, and MTD for Income Tax, which began in April 2026 for the largest sole traders and landlords and is being extended in two further steps.

MTD for VAT: every VAT-registered business

Since 1 April 2022, HMRC requires all VAT-registered businesses to use MTD for VAT for their first VAT return starting on or after that date. Before then, many businesses with taxable turnover below £85,000 had joined voluntarily; HMRC’s press release at the time said around a third of them had already signed up. HMRC’s software guidance now states that all VAT-registered businesses should be signed up, and that HMRC signs up any remaining businesses automatically.

VAT Notice 700/21 sets out what that means in practice. Your electronic account must be kept in “functional compatible software”: a program, or a set of programs, that can record and preserve digital records, send returns to HMRC through the API platform and receive information back. A spreadsheet can be part of it, combined with bridging software that does the submission.

For each sale, your digital records must hold at least the time of supply, the net value and the VAT rate charged. You must still keep original invoices where the digital record is not a copy of the invoice, for example when you only type selected data into your software.

Digital links: the rule with the force of law

Once data is in your software, any further transfer between programs must be done by digital link. HMRC accepts linked spreadsheet cells, emailing a spreadsheet for import, a memory stick handed over for import, XML or CSV import and export, automated transfer and APIs. It does not accept “cut and paste” or “copy and paste”, nor noting figures by hand and typing them in again.

Some businesses can be exempt, for example where it is not practical to keep digital records because of location (no reasonable internet access) or disability, or for religious reasons. You must ask HMRC for an exemption; age or unfamiliarity with software alone may not be enough.

MTD for Income Tax: thresholds and start dates

MTD for Income Tax applies to you if you are a sole trader or landlord registered for Self Assessment, you have self-employment or property income (or both), and your qualifying income is above the threshold for the relevant tax year. HMRC sets the timetable like this:

Qualifying income is your total self-employment and property income before expenses, in other words turnover, taken from the tax return for the year HMRC assesses. A sole trader with £27,000 of self-employment turnover and £25,000 of rent has £52,000 of qualifying income, even if their profit is much lower. Employment income, your share of partnership profit, dividends and pensions do not count.

HMRC reviews each Self Assessment return and writes to people above the threshold. If you do not receive a letter, it remains your responsibility to check and sign up. Partnerships will join later; HMRC says it will set out that timeline at a later date.

Quarterly updates and deadlines

Every three months, your software adds up your digital records for each self-employment and property business and sends HMRC a quarterly update: totals by income and expense category, not individual invoices. Each update is cumulative, covering the tax year from 6 April to the end of the period, so you can correct earlier figures in the next update. You must send one even if you had no income or expenses in the period.

If your accounting period runs from 1 April to 31 March, you can choose calendar update periods instead; the deadlines are the same. You must choose before sending your first update of the year. After the year ends, you still submit a tax return through your software by 31 January.

Penalties: points, not fixed fines

Both regimes use points-based late submission penalties. Each late submission earns a point; at the threshold you pay £200, and another £200 for each further late submission while you stay there.

For the 2026 to 2027 tax year, HMRC will not apply penalty points for late quarterly updates, although you must still send them before you can submit your return, and late returns still earn points. VAT points and Income Tax points are counted separately.

Late payment penalties for MTD for Income Tax are separate and not points-based. For 2026 to 2027, nothing is charged for payments up to 15 days late; after that, HMRC applies 3% of the tax owed at day 15, a further 3% of what is still owed at day 30, then 10% a year from day 31. In your first year, HMRC gives you 30 days before penalties start. Paying on time is easier when your own customers pay you on time: see our guide on statutory late payment interest.

Choosing compatible software

HMRC lists recognised products in finder tools for VAT and for Income Tax. Check that a product covers every income source you have and works with your update periods. You can only use one product for each separate submission to HMRC.

MTD governs what you report, not how you invoice: your invoices still need the details in our guide to what a VAT invoice must include. If your sales invoices are created in a separate tool, that tool does not have to be digitally linked unless it is part of your electronic account.

Frequently asked questions

Sources

1. HMRC, Find out if and when you need to use Making Tax Digital for Income Tax (gov.uk)
2. HMRC, Work out your qualifying income for Making Tax Digital for Income Tax (gov.uk)
3. HMRC, Use Making Tax Digital for Income Tax: send quarterly updates (gov.uk)
4. HMRC, Penalties for Making Tax Digital for Income Tax (gov.uk)
5. HMRC, Record keeping (VAT Notice 700/21) (gov.uk)
6. HMRC, Penalty points and penalties if you submit your VAT Return late (gov.uk)
7. HMRC press release, Less than one week to go for MTD (March 2022) (gov.uk)
8. HMRC, Find software that’s compatible with Making Tax Digital for VAT (gov.uk)

This article summarises the official texts to help you get organised. It is not a substitute for personalised advice from your accountant.