Making Tax Digital, or MTD, is not a future requirement. It is here, and it is already changing how businesses across the UK keep records and submit tax returns. While some deadlines have been phased in over time, the direction is clear. HMRC expects businesses to maintain digital records and use approved software to file directly. If your business is VAT registered, or will be in the near future, MTD compliance is not optional. In this blog, we explain what MTD means, who it applies to, how to stay compliant, and why getting this right now protects your business from future disruption.
Making Tax Digital is a government initiative to modernise the UK tax system. It is designed to reduce errors, improve accuracy, and make tax administration more efficient for businesses and HMRC. Under MTD, businesses must keep digital records of income and expenses and submit tax returns through compatible software. MTD was first introduced for VAT in April 2019. Since then, the scope has expanded, and further phases are planned. Eventually, MTD will apply to Income Tax and Corporation Tax as well. The goal is for all business tax submissions to move to digital systems.
As of now, all VAT registered businesses with a taxable turnover above the VAT threshold of £85,000 are required to follow MTD rules. That includes keeping digital records and submitting VAT returns using MTD-compatible software. Since April 2022, this has also applied to VAT registered businesses with turnover below the threshold who voluntarily registered for VAT. In the next phase, from April 2026, MTD for Income Tax Self Assessment will apply to self-employed individuals and landlords with income over £50,000. Those with income over £30,000 will follow from April 2027. Dates for Corporation Tax are still to be confirmed, but they are expected to follow in the coming years. If your business falls into any of the categories currently under MTD, compliance is no longer optional. You must use software that links directly to HMRC’s systems.
Under MTD, keeping records digitally means using software that stores your sales and purchase data in a structured format. That software must be able to link to HMRC directly. This could be cloud accounting software like Xero, QuickBooks, or Sage, or a spreadsheet that uses approved bridging software. What is not acceptable is keeping manual records on paper, or using spreadsheets with no link to HMRC. Your software must be able to store data such as your business name, VAT number, VAT accounting scheme, the time and value of each supply, and the rate of VAT charged. These details must be kept up to date and must be preserved for at least six years.
If you do not follow MTD rules, you risk penalties from HMRC. These include financial fines, warnings, and possible audits. HMRC’s new points-based penalty system means that repeated non-compliance leads to more serious consequences. Missing deadlines, failing to use the right software, or submitting incorrect information can all trigger penalties. More importantly, falling behind on MTD creates long-term problems. As the system expands to cover more taxes, businesses that have not adjusted will face disruption when their obligations change. Fixing a broken system under pressure is more expensive and more stressful than setting it up properly in advance.
The most common issues are not usually about the rules themselves but about implementation. Many businesses still rely on paper records or use basic spreadsheets without knowing that these are no longer acceptable under MTD. Others purchase software but do not set it up correctly. This leads to duplicated entries, incorrect VAT calculations, or failed submissions. Some use multiple systems that do not talk to each other, which creates errors in the return. Another common issue is assuming that because you have software, you are compliant. In reality, the way you use the software matters. If your VAT data is not accurate, or if returns are submitted outside the system, you are still in breach.
To stay compliant, your accounting software must meet several criteria. It must allow you to record and preserve digital records, calculate VAT accurately, and submit returns directly to HMRC through a secure connection. It should also provide audit trails, summaries, and reporting that matches your VAT periods. Many of the well-known platforms offer this, but the setup must match your VAT scheme. For example, if you use the Flat Rate Scheme, Cash Accounting Scheme, or the Annual Accounting Scheme, the software must be configured accordingly. Bridging software is available if you use spreadsheets, but this must still meet MTD requirements, and the process must be seamless. If there is a break in the digital link between record keeping and submission, the system is not compliant.
At Allied Financial Group, we work with businesses across sectors to ensure they meet their MTD obligations without stress or disruption. Our support starts with a full review of your current systems. We look at how your records are kept, what software you use, and how your VAT returns are submitted. If changes are needed, we advise on the most suitable accounting software for your business. We provide setup and training, making sure the system is tailored to your VAT scheme and reporting needs. For businesses using spreadsheets, we implement and test bridging solutions that meet HMRC’s requirements. We also prepare and submit VAT returns on your behalf, ensuring accuracy, timely submission, and a complete audit trail. Beyond VAT, we help you prepare for MTD for Income Tax and Corporation Tax. That means aligning your accounting records with your broader financial planning and setting up processes that scale with your business.
While MTD for VAT is already in place, the next phases are coming. MTD for Income Tax Self Assessment will change how landlords and self-employed individuals report their earnings. Instead of an annual return, affected individuals must submit quarterly updates to HMRC, along with a final end-of-year statement. This changes the entire flow of reporting. Businesses and individuals who are not yet affected will still benefit from preparing early. Moving to digital record keeping now gives you time to choose the right tools, build good habits, and avoid a rushed setup when the rules change. It also improves financial visibility and reduces year-end surprises.
While MTD is framed as a compliance requirement, it brings other advantages. Businesses with digital systems tend to have better financial control, faster reporting, and clearer records. Cloud accounting software makes it easier to issue invoices, track expenses, reconcile bank accounts, and forecast cash flow. It also allows you to collaborate with your accountant in real time, reducing delays and improving accuracy. In practice, many of the businesses we help adopt MTD systems find that the benefits go beyond avoiding penalties. They gain more confidence in their numbers and more time to focus on growth.
Compliance should not be complicated. But it does need to be done properly. At AFG, we remove the guesswork. Whether you need a full software setup, a review of your existing system, or someone to handle your VAT returns directly, we provide support that is practical and clear. We help you meet the rules, but also set up systems that actually help your business. With more changes on the horizon, now is the time to make sure your business is ready.
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