Making Tax Digital: The Thresholds and Deadlines Every UK Business Owner Must Know

HMRC's Making Tax Digital (MTD) initiative has been rolling out for several years now, fundamentally changing how businesses report their tax affairs. Yet despite the headlines and government announcements, many business owners remain confused about when these rules apply to them, what they need to do, and crucially – what happens if they don't comply.

If you're running a business in the UK, understanding MTD isn't optional anymore. Miss the thresholds or ignore the requirements, and you could face penalties that make the cost of compliance look like pocket change. Get it right, though, and you might find your business becomes more efficient and better organised than ever before.

What Actually Is Making Tax Digital?

Making Tax Digital represents HMRC's ambitious plan to digitise the entire UK tax system by 2026. Rather than the traditional approach of keeping records throughout the year and then filing an annual return, MTD requires businesses to maintain digital records and submit regular updates to HMRC throughout the tax year.

The system works through compatible software that connects directly with HMRC's systems, allowing real-time submission of financial information. Think of it as moving from sending letters once a year to having an ongoing digital conversation with the taxman.

But MTD isn't being introduced all at once. HMRC is implementing it in phases, with different rules applying to different types of businesses at different times. This phased approach means understanding exactly when and how the rules apply to your situation is absolutely crucial.

VAT: The First Domino to Fall

Current Position MTD for VAT has been mandatory since April 2019 for VAT-registered businesses with taxable turnover above the VAT registration threshold (currently £85,000). If you're VAT registered and above this threshold, you're already required to keep digital VAT records and submit your returns using compatible software.

Who's Affected Right Now

• All VAT-registered businesses with turnover exceeding £85,000

• Businesses that voluntarily register for VAT below this threshold (they can currently choose whether to use MTD, but this exemption ends in April 2026)

The Records You Must Keep Digitally Under MTD for VAT, you must maintain digital records of:

• All sales and purchases

• VAT charged on sales

• VAT paid on purchases

• Imports and exports

• Any VAT adjustments

These records must be kept in compatible software that can directly submit your VAT return to HMRC. Spreadsheets like Excel can work, but only if they're connected to HMRC through bridging software or add-ins that enable digital submission.

Income Tax Self Assessment: The Big Change Coming

The Current Situation MTD for Income Tax Self Assessment (ITSA) is the next major phase, and it's where many sole traders and partnerships will first encounter these requirements.

Key Thresholds for MTD ITSA The rules will apply to:

• Sole traders with business income over £50,000 per year

• Partnerships where the partnership's total income exceeds £50,000 annually

• Landlords with property rental income above £50,000 per year

Timeline for Implementation

• April 2026: MTD for ITSA becomes mandatory for businesses meeting the income thresholds

• April 2027: The threshold may be reduced (HMRC has indicated it could fall to £30,000, though this isn't confirmed)

What You'll Need to Do Once MTD for ITSA applies to you, you'll be required to:

• Keep digital records of all business income and expenses

• Submit quarterly updates to HMRC (by the 5th of the month following each quarter end)

• File an annual declaration

• Use compatible software for all submissions

Corporation Tax: Still on the Horizon

Current Status MTD for Corporation Tax remains in development, with pilot schemes running but no confirmed mandatory implementation date yet announced.

Expected Requirements When implemented, MTD for Corporation Tax will likely require companies to:

• Maintain digital accounting records

• Submit quarterly updates of their financial position

• File annual returns through compatible software

Who Will Be Affected All UK companies liable for Corporation Tax are expected to be included when MTD for Corporation Tax launches, regardless of size or turnover.

The Software Requirements: What Counts as 'Digital'?

Approved Software Options HMRC maintains a list of approved MTD software, ranging from free basic packages to comprehensive accounting systems. Popular options include:

• Cloud-based accounting software (Xero, QuickBooks, Sage, etc.)

• Desktop accounting packages with MTD functionality

• Spreadsheet programs with approved bridging software

• Specialist MTD apps for simpler businesses

What Doesn't Count

• Standard Excel or Google Sheets without bridging software

• Paper records (even if scanned)

• Manual data entry into HMRC's online services

• PDF documents or Word files

Bridging Software Explained If you prefer working with spreadsheets, bridging software can make your existing Excel files MTD-compliant. These programs extract data from your spreadsheets and format it for submission to HMRC, maintaining the digital link that MTD requires.

Record-Keeping Requirements Under MTD

What Records Must Be Digital Under MTD, you must keep digital records of:

• All business income from different sources

• All business expenses and purchases

• Assets and liabilities

• Grants, subsidies, and other income

• Goods taken for personal use

• VAT information (if registered)

How Long to Keep Records Digital records must be retained for:

• 6 years for Income Tax and VAT purposes

• 6 years from the end of the accounting period for Corporation Tax

Backup and Security Your digital records must be:

• Regularly backed up (preferably to cloud storage)

• Secure and password protected

• Accessible for inspection by HMRC if requested

• Maintained in a format that preserves their integrity

Penalties and Compliance

Late Submission Penalties Missing MTD submission deadlines can result in:

• Initial penalty: £200 for late submission

• Further penalties: £200 for each additional month the submission remains outstanding

• Daily penalties: £10 per day (after 6 months) up to a maximum of £900

• Serious penalties: Up to 100% of the tax due in extreme cases

Record-Keeping Penalties Failing to maintain adequate digital records can result in penalties of up to £3,000 per tax year.

The Good News HMRC has indicated they'll take a supportive approach during the early phases of MTD implementation, focusing on education rather than penalties for genuine attempts to comply.

Practical Steps to Prepare

Assess Your Position First, determine whether and when MTD will apply to your business:

1. Calculate your annual business income across all sources

2. Check if you're already caught by MTD for VAT

3. Identify your likely MTD for ITSA start date

Choose Your Software Research MTD-compatible software options that suit your business needs and budget. Consider:

• Your technical comfort level

• Integration with existing systems

• Cost and ongoing subscription fees

• Features you actually need versus bells and whistles

Start Practising Now Even if MTD doesn't apply to you yet, getting familiar with digital record-keeping now will make the transition smoother. Many accounting software providers offer free trials or basic versions.

Get Professional Help If the prospect of MTD feels overwhelming, consider working with an accountant or bookkeeper who specialises in MTD compliance. They can handle the technical requirements while you focus on running your business.

Common Misconceptions About MTD

Myth: "I'm too small to worry about MTD" Reality: If your income exceeds the thresholds, size doesn't matter. Even single-person consultancies earning over £50,000 will need to comply with MTD for ITSA.

Myth: "I can just use Excel like I always have" Reality: Standard Excel files won't comply with MTD requirements unless you use approved bridging software to submit the data.

Myth: "MTD means HMRC can access my accounts whenever they want" Reality: MTD doesn't give HMRC automatic access to your accounting software. You still submit specific information at designated times, just digitally rather than on paper.

Myth: "Digital record-keeping is more expensive" Reality: While there may be software costs, many businesses find digital systems actually save money through improved efficiency and reduced accountancy fees.

The Exemptions Worth Knowing

Digital Exclusion If you cannot use digital tools due to age, disability, or lack of internet access, you may be able to apply for exemption from MTD requirements.

Religious Beliefs Some religious groups whose beliefs prevent them from using digital technology may qualify for exemption.

Temporary Technical Difficulties If your software fails just before a submission deadline, HMRC may accept a reasonable excuse for late submission if you can demonstrate you tried to comply.

Looking Ahead: What's Coming Next

Reduced Thresholds HMRC has suggested that MTD thresholds may be lowered over time, bringing more businesses into the digital tax system. The £50,000 threshold for MTD ITSA could potentially fall to £30,000 or lower in future years.

Real-Time Reporting The ultimate goal is real-time tax reporting, where HMRC receives information about your business transactions as they happen, rather than quarterly updates.

Integration with Other Systems Future developments may see MTD integrate more closely with banking systems, payroll software, and other business tools to create a seamless digital tax ecosystem.

Making MTD Work for Your Business

View It as an Opportunity Rather than seeing MTD as a burden, consider how digital record-keeping might benefit your business:

• Better financial visibility and control

• Reduced year-end surprises

• More accurate budgeting and forecasting

• Easier collaboration with accountants

Start Simple You don't need the most sophisticated software to comply with MTD. Start with a basic system that meets the requirements, and upgrade later if your needs become more complex.

Plan for Cashflow Quarterly reporting means quarterly tax calculations. Ensure you're setting aside money regularly for tax payments rather than scrambling once a year.

The Bottom Line

Making Tax Digital isn't going away, and the thresholds mean it will affect far more businesses than many realise. Whether you're a sole trader approaching £50,000 in annual income, a partnership looking at growth, or already caught by MTD for VAT, understanding these requirements isn't just about compliance – it's about running your business effectively in the digital age.

The penalties for getting it wrong can be substantial, but the benefits of getting it right extend far beyond simply keeping HMRC happy. Digital record-keeping, when done properly, gives you better insight into your business performance, improves your financial control, and often saves time in the long run.

Don't wait until the deadline looms. Start exploring your options now, get comfortable with digital tools, and consider professional guidance if needed. Your future self – and your accountant – will thank you for taking action early rather than scrambling to comply at the last minute.

Remember, MTD is designed to make tax administration more efficient for everyone, including you. Embrace the change, prepare properly, and you might find that going digital transforms more than just your tax reporting – it could revolutionise how you run your entire business.