What Is Making Tax Digital? Beginner’s Guide for UK Businesses and Landlords

For many business owners, landlords, and accountants across the United Kingdom, handling tax returns has always been a stressful process. Missed deadlines, calculation mistakes, and disorganised paperwork often led to penalties and wasted hours that could have been better spent growing a business. To address these long-standing problems, HM Revenue & Customs (HMRC) introduced Making Tax Digital (MTD), a government initiative designed to move tax reporting into a fully digital system. The aim is to reduce errors, make compliance easier, and ensure that individuals and businesses have a clear, real-time view of their tax position.

At its core, Making Tax Digital requires taxpayers to use HMRC-recognised software to keep digital records and submit returns online. For VAT-registered businesses, this is already compulsory, and future phases will extend the rules to income tax and corporation tax. While this shift may feel challenging at first, it ultimately offers a simpler and more reliable way to manage taxes. With the right preparation and compatible software, businesses can cut down on admin time, avoid costly penalties, and focus more on running their operations efficiently.

The History & Evolution of Making Tax Digital

The move towards Making Tax Digital (MTD) began as the UK government aimed to modernise tax administration and reduce the errors that commonly occur with manual submissions. Before MTD, businesses and landlords often relied on paper records or spreadsheets, which led to mistakes and delays in reporting. The initiative was designed to create a system where tax records are maintained digitally, ensuring greater accuracy and efficiency for both taxpayers and HMRC. MTD has gradually evolved to cover more areas of taxation, reflecting lessons learned from early adoption and feedback from businesses and accounting professionals.

MTD for VAT: How and When It Began

MTD was first introduced for Value Added Tax (VAT) in April 2019. Initially, it applied to VAT-registered businesses with a turnover above the VAT threshold of £85,000 per year. Businesses had to start keeping digital records and submit VAT returns using HMRC-recognised software. The goal was to reduce errors in VAT submissions and make the process more transparent, allowing HMRC to spot discrepancies earlier. Over time, the rules were refined to ensure that smaller businesses could also adopt digital reporting when required.

Extension of MTD to All VAT-Registered Businesses

Following the initial rollout, HMRC gradually extended MTD for VAT to all VAT-registered businesses, including those below the £85,000 turnover threshold, offering them the opportunity to join voluntarily. This step allowed smaller businesses to familiarise themselves with the digital systems and take advantage of automated record keeping, invoice tracking, and reporting features. It also helped prepare these businesses for future phases of MTD, where other taxes such as income tax and corporation tax would be included.

Progress, Adoption, Successes & Challenges So Far

The adoption of MTD has steadily increased. Many businesses have reported that maintaining digital records reduces errors and simplifies submission processes. Automation and integration with accounting software allow real-time updates and quicker access to financial insights. However, challenges remain. Some businesses struggled with software selection, data migration from spreadsheets, or understanding the compliance requirements. Early adopters often needed support and training to fully benefit from MTD, and these lessons have informed HMRC’s guidance for upcoming phases.

Upcoming Phases: Expanding MTD Beyond VAT

MTD is not limited to VAT. HMRC plans to expand the initiative to cover other key taxes, ensuring that more taxpayers benefit from accurate digital reporting.

Making Tax Digital for Income Tax / Self Assessment (ITSA)

The next major phase is MTD for Income Tax, also called ITSA. It will apply to self-employed individuals and landlords with income above a certain threshold, requiring quarterly submissions of income and expenses through compatible software. The aim is to reduce errors and give taxpayers a clear picture of their tax liability throughout the year, rather than waiting for an annual return.

Making Tax Digital for Corporation Tax

Corporation tax is also expected to fall under MTD rules. Large companies will be required to maintain digital records and submit regular updates on profits, expenses, and tax owed. This will simplify HMRC’s oversight and make the reporting process more efficient for corporations, reducing the likelihood of miscalculations or late submissions.

Potential Further Expansions & Government Plans

Looking ahead, HMRC may extend MTD principles to other forms of taxation, including certain property-related taxes or additional business levies. The government has expressed interest in integrating MTD with broader digital services to make tax compliance more straightforward and consistent for businesses of all sizes. These future expansions reinforce the importance of preparing early and using compatible software systems.

Why MTD Matters (and What It Demands)

MTD requires digital record keeping, using HMRC-approved software to maintain all relevant tax information. Records must be digitally linked, meaning spreadsheets, apps, and software must connect without manual transfer errors. The aim is to reduce the “tax gap”, the difference between taxes owed and taxes collected- by minimising mistakes and enabling real-time reporting. Businesses benefit from fewer errors, faster submissions, and instant access to financial insights. Key requirements include maintaining accurate digital records, using compliant software, and submitting returns digitally. Adopting these practices ensures MTD compliance, reliable digital tax records in the UK, and smooth integration with HMRC MTD software systems.

How You Can Prepare for Making Tax Digital

Preparing for MTD involves careful planning and the adoption of digital tools. Start by assessing your current accounting and tax workflows, identifying areas where records are still kept manually. Next, choose MTD-compatible software that meets your business needs and integrates with existing systems. Train your staff or users so everyone understands how to input and maintain digital records correctly. Begin digitising all historical and current records to ensure nothing is missed, and plan for quarterly updates and submissions.

A practical checklist before deadlines could include:

• Confirm all income and expense records are digital

• Ensure software is HMRC-approved and linked correctly

• Test data submission to HMRC using trial runs

• Schedule staff training sessions

• Verify reporting templates meet HMRC requirements

By following these steps, businesses, landlords, and accountants can adopt MTD smoothly, reduce errors, and maintain full compliance as the system expands.

Common Challenges & How to Overcome Them

Adopting Making Tax Digital (MTD) can bring efficiency, but many businesses face challenges during the transition. One major hurdle is resistance to change. Staff or accountants accustomed to paper-based or spreadsheet systems may hesitate to adopt digital tools. To overcome this, offer clear training, demonstrate benefits, and involve them early in the transition process.

Technical issues and software integration are another concern. Some businesses struggle to connect their accounting software with HMRC’s systems or with existing tools like invoicing platforms. Selecting HMRC-approved, compatible software and testing it thoroughly before full implementation reduces these risks.

Costs and budgeting can also pose challenges, especially for small businesses or landlords. Subscription fees, training, and onboarding can add up. Planning and evaluating software options with transparent pricing helps control costs.

Handling legacy paper records requires careful digitisation. Businesses should scan historical documents and ensure all past transactions are captured accurately. Finally, understand exemptions, transitional rules, and deadlines. Some small businesses or certain types of transactions may be temporarily exempt. Failing to comply can lead to penalties, so staying informed of HMRC guidance is essential.

Real World Examples & Lessons Learned

Several UK businesses have successfully adopted MTD, offering lessons for others. For example, a small accounting firm in Manchester transitioned its clients to MTD-compliant software over three months. Initially, staff struggled with quarterly digital submissions, but once training was complete, error rates dropped by 40% and reporting became more efficient.

A landlord managing multiple rental properties in Birmingham faced difficulties scanning and digitising records. After implementing Property Store with integrated MTD support, the landlord streamlined bookkeeping and automated quarterly submissions, saving hours per month.

These examples show that while challenges exist, proper planning, training, and the right software can ensure a smooth transition. Feedback from early adopters highlights the importance of staff involvement, system testing, and maintaining accurate digital records.

FAQs

Who must follow Making Tax Digital?

Businesses and landlords above certain thresholds must comply. Currently, all VAT-registered businesses must follow MTD for VAT, while self-employed individuals and landlords with higher income will eventually need to comply under MTD for Income Tax.

When does MTD for Income Tax become mandatory?

MTD for Income Tax is being phased in from April 2026 for eligible businesses and landlords. HMRC will provide guidance to ensure smooth adoption.

Can small landlords or sole traders be exempt?

Some small businesses and landlords may qualify for temporary exemptions if they cannot use digital tools for health, age, or practical reasons. HMRC updates guidance on these exemptions regularly.

What qualifies as “compatible software”?

Software must be HMRC-approved, able to maintain digital records, and support submission via digital links. Popular options include cloud accounting platforms and certain property management tools.

What penalties exist for non-compliance?

Failing to comply can result in penalties, fines, or additional administrative requirements. Timely preparation, using approved software, and regular submissions help avoid these issues.

Looking Ahead: The Future of Making Tax Digital

MTD is expected to expand further, covering additional taxes and business sectors. Digital tax systems may increasingly incorporate real-time reporting, automated calculations, and AI-driven checks to reduce errors. Integration with property, investment, and CRM systems will help businesses maintain accurate records effortlessly. Staying ahead involves adopting flexible software solutions, keeping staff trained, and monitoring HMRC updates. Early preparation ensures compliance and reduces the risk of penalties as the system evolves.