Think HMRC will accept your neatly typed-up spreadsheet of VAT figures? Not anymore. Making Tax Digital (MTD) is the government's mandate that forces most VAT-registered businesses to keep digital records and file returns using HMRC-approved software. Paper records and manual spreadsheet entries are effectively dead for anyone above the threshold.
MTD for VAT became compulsory in April 2019 for businesses whose taxable turnover exceeds the VAT registration threshold, which has stood at £90,000 since April 2024. If your business is over that line, you cannot simply log into the HMRC portal and type in your boxes. Your accounting software must be MTD-compatible and submit the return directly via HMRC's API. The common trap here is that standard spreadsheet templates, even if beautifully maintained, do not count unless you use bridging software to connect them. Cloud packages such as Xero, QuickBooks, or FreeAgent handle this automatically, but you must check that your specific package has the MTD flag enabled.
What does this mean day to day? You must maintain a digital record of every sale, purchase, and VAT amount. No more keeping a paper invoice file and typing totals in at quarter end. The software tracks each transaction in real time, calculates the VAT due, and submits the quarterly return. For businesses below the £90,000 threshold, voluntary registration is available and some professional services firms and e-commerce sellers choose this route to digitise their bookkeeping early.
The next big change lands in April 2026, when MTD expands to income tax self-assessment. This will affect sole traders and landlords with annual income over £50,000. Instead of one annual self-assessment return, they will need to send quarterly digital updates of income and expenses to HMRC, with an end-of-year finalisation. Limited company directors and partnerships are not yet in scope for MTD for income tax, but HMRC has signalled that extension is a matter of when, not if.
For business owners, the upside is fewer transcription errors, automatic VAT calculations, and a live view of cash flow rather than a quarterly surprise. The cost is the software subscription, typically £10 to £30 per month. Bridging software exists for those who prefer spreadsheets, but in practice most independent retailers, construction subcontractors, and healthcare practices find a full cloud accounting package simpler and less risky.
When this matters for your business: If your VAT-taxable turnover exceeds £90,000, MTD compliance is non-negotiable now. If you are a sole trader or landlord with income over £50,000, you need to be MTD-ready for income tax by April 2026. Even below these thresholds, moving to MTD-compatible software early removes a future admin headache and reduces the chance of penalties from manual filing errors.