What is Making Tax Digital (MTD)?
Making Tax Digital is HMRC's initiative requiring businesses to keep digital records and submit tax returns using compatible software.
Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system by requiring businesses to keep digital records and file returns through MTD-compatible software rather than manual submissions.
MTD timeline: - April 2019: MTD for VAT — mandatory for VAT-registered businesses with turnover above £85,000 - April 2022: MTD for VAT extended to all VAT-registered businesses regardless of turnover - April 2026: MTD for Income Tax Self Assessment (ITSA) — mandatory for self-employed individuals and landlords with income over £50,000 - April 2027: MTD for ITSA extended to those with income over £30,000
What MTD requires: 1. Digital record keeping — you must store your business records digitally using MTD-compatible software 2. Digital submission — VAT returns (and eventually tax returns) must be filed through software, not the HMRC website 3. Digital links — data must flow digitally between software packages (no manual re-typing between systems)
What counts as "digital records": - Business name, address, and VAT registration number - VAT accounting scheme used - For each supply made and received: date, net value, VAT rate, and VAT amount - You do not need to digitise historical paper records
Penalties for non-compliance: HMRC uses a points-based penalty system. You receive a point for each late submission, and a £200 penalty is triggered when you reach the threshold (e.g. 4 points for quarterly returns). Late payment penalties are charged as a percentage of the outstanding tax.
What MTD means for freelancers: You need MTD-compatible software for your VAT returns (and soon for income tax). Spreadsheets alone are no longer sufficient unless they are connected to filing software via digital links.
Examples
A VAT-registered freelancer uses cloud accounting software to submit quarterly VAT returns digitally under MTD
A self-employed landlord with £55,000 rental income must comply with MTD for ITSA from April 2026
A small business moves from spreadsheets to compatible software to meet the digital links requirement
Related Terms
Digital Records for Tax
Digital records are electronically stored business and financial records that meet HMRC requirements under Making Tax Digital.
Flat Rate VAT Scheme
The Flat Rate VAT Scheme lets eligible small businesses pay a fixed percentage of gross turnover as VAT, simplifying their VAT accounting.
Invoice
An invoice is a commercial document issued by a seller to a buyer, listing the products or services provided and requesting payment.
VAT Reverse Charge
The VAT reverse charge is a mechanism where the customer, rather than the supplier, accounts for VAT on a transaction. It is mandatory for most B2B construction services in the UK.