With the introduction of Making Tax Digital (MTD) the government is aiming to make taxes simpler for businesses. Reporting more regularly to HMRC than the normal once a year annual tax return. Hence, the death of the annual tax return.
MTD will change the way in which both taxpayers and accountants interact with HMRC.
- MTD for VAT has been in operation since April 2019, and for all VAT registered business since April 2022.
- MTD for Income Tax and Self Assessment (MTD for ITSA) is to operate from April 2026.
- MTD for general partnerships (only those with individuals as partners so, not LLP’s or ‘complex’ partnerships) will not go ahead in 2025 as originally planned.
- MTD for corporation tax will not be mandated before April 2026.
The MTD phases
April 2019 – MTD VAT mandatory for VAT registered businesses (sole traders, partnerships, limited companies, non-UK businesses registered for VAT, trusts and charities) with turnover above the VAT threshold.
April 2022 – MTD VAT mandatory for all VAT registered businesses and organisations regardless of turnover.
April 2026 – MTD ITSA mandatory for self employed and those with rental income where total gross income from self employment and rental income totals in excess of £50,000.
April 2027 – MTD ITSA mandatory for self employed and those with rental income where total gross income from self employment and rental income totals in excess of £30,000.
Expand the sections below to read more about what each phase entails and the issues you need to be aware of.
MTD for VAT has been part of the tax system since 2019 and VAT registered businesses with a turnover in excess of £85,000 will be familiar with the requirements.
Since April 2022 the net was widened to include all VAT registered businesses regardless of turnover.
Under MTD for VAT, businesses must:
- Keep digital records
- Use API enabled software to submit their quarterly VAT returns to HMRC; and
- Use some form of digital link between the two above if separate pieces of software are used.
Enrolling into MTD for VAT
For new VAT registrations, HMRC’s current online VAT registration service automatically signs up businesses for MTD for VAT. All other businesses must sign up manually.
Once signed up HMRC expect all VAT returns to be filed through MTD software. This includes all previous periods that may not have been submitted yet.
It is the government’s initiative to implement a fully digital tax system in the UK.
From 6 April 2026, self-employed businesses and rental income businesses will be required to keep digital records.
Making Tax Digital for Income Tax is also known as MTD for Income Tax Self Assessment because it is designed to replace the current system of filing annual Self Assessment tax returns.
From 6 April 2026, businesses need to use software that works with HMRC’s MTD for IT platform. HMRC have confirmed that they will not be providing free software to do this. Businesses will need to purchase or subscribe to 3rd party software for a solution.
The software must allow you to:
- Create and store digital records of each of your business transactions
- Send updates of the totals of your business income and expenses every 3 months (quarterly updates)
- Submit end of period statements (EOPS)
A final declaration will also be required which is to include all other sources of income not included within MTD (dividend income for example). This will be possible either through compatible software or your HMRC online services account.
If your total gross income from self-employment and rental income is in excess of £50,000 in the tax year ended 5 April 2025, your digital start date is 6 April 2026.
The £50,000 income limit is not applied separately to self-employed and rental income. For example, if your gross self-employed income is £38,000 and your gross rental income is £13,000 then you will be required to meet the MTD regulations for both sources because your gross businesses total is in excess of £50,000.
If your total gross income from self-employment and rental income is in excess of £30,000 in the tax year ended 5 April 2026, your digital start date is 6 April 2027.
More than one business
If you are self-employed and a landlord or have more than one self-employment, you will be required to keep separate digital records for each business and make separate quarterly/EOPS submissions for each business.
MTD for Partnerships will not be mandated in 2025 but instead will be introduced at a later date.
The requirements for digital record keeping, quarterly filing and the use of MTD compatible software will be the same as for MTD for VAT & MTD for ITSA.
Limited liability partnerships (LLP’s) are specifically excluded and will be required to join MTD at a future date which is yet to be confirmed.
Similarly, large and complex partnerships will also be mandated at a later date. These will include those partnerships that have a corporate partner or other ‘non-natural’ partner.