Making Tax Digital (MTD) is the most substantial change to UK tax compliance for small businesses since the introduction of Self Assessment. It moves record-keeping from spreadsheets to digital, replaces annual returns with quarterly cumulative submissions for ITSA, and changes the penalty system to a points-based regime. For sole traders and landlords above £50,000, MTD ITSA went live on 6 April 2026. For VAT-registered businesses, MTD has been mandatory since 2019.
This guide covers MTD across both regimes. The ITSA mechanics and timing. The VAT compliance checklist. Software options compared. The bridging-software approach for businesses keeping their existing spreadsheet workflow. The digital record-keeping rules. The transition planning from spreadsheets to cloud accounting. And the narrow exemptions available.
MTD is mandatory, not optional, above the threshold
Unlike many tax administrative changes, MTD is enforced. Failure to file quarterly under the points-based penalty system accumulates points; four points trigger a £200 penalty. Persistent non-compliance compounds. There is no "I will submit annually" workaround above the threshold.
MTD ITSA thresholds and timeline
- 16 April 2026: MTD ITSA mandatory for sole traders and landlords with combined gross trading + rental income above £50,000.
- 26 April 2027: threshold drops to £30,000.
- 36 April 2028 onwards: thresholds and partnership inclusion to be confirmed.
The threshold tests gross income, not net profit. A landlord with £40,000 of rental income and £20,000 of trading income is in scope from 2026 even where net profit after expenses is much lower.
What MTD ITSA actually requires
- Records kept digitally in HMRC-recognised software, not in spreadsheets without bridging tools.
- Quarterly cumulative submissions to HMRC: 7 August (Q1), 7 November (Q2), 7 February (Q3), 7 May (Q4).
- End-of-period statement at year end consolidating the four quarters.
- Final declaration replacing the annual Self Assessment for the relevant trades.
- Points-based penalties for late submissions.
MTD for VAT compliance checklist
MTD for VAT has been mandatory for all VAT-registered businesses since April 2022. The compliance requirements:
- 1Records kept digitally in MTD-compliant software (not spreadsheets without bridging).
- 2Digital links between systems where data flows between them — no manual re-keying.
- 3Submissions through software via the HMRC API — no manual entry into the HMRC portal.
- 4Records retained for 6 years.
HMRC-recognised software comparison
MTD software for UK small businesses
| Software | Best for | Approximate cost |
|---|---|---|
| FreeAgent | Sole traders, especially via NatWest/Mettle/RBS bank accounts (often free with eligible accounts) | £0 to £20/month |
| QuickBooks Online | Sole traders to growing businesses | £10 to £55/month |
| Xero | Multi-property landlords, growing businesses, multi-user firms | £15 to £55/month |
| Sage Business Cloud | Established small businesses | £15 to £45/month |
| Spreadsheet + bridging | Simple sole traders comfortable with Excel + add-on | £0 to £100/year |
The points-based penalty system
MTD introduces points for missed submissions: each missed quarterly submission is one point, no immediate fine. After 4 points (for quarterly filers), a £200 penalty is triggered. Points reset after a clean run plus a compliance period. More lenient than the old £100 immediate fine but persistent non-compliance still costs.
Transition from spreadsheets to cloud accounting
For businesses currently running on spreadsheets, the transition needs structure:
- 1Choose the software based on income types, complexity, integration needs, budget.
- 2Set up the chart of accounts to mirror current spreadsheet categories.
- 3Connect bank feeds (almost all UK banks support direct feeds).
- 4Import historic data via CSV upload for at least the current tax year.
- 5Run parallel for one quarter to verify accuracy.
- 6Switch over fully and decommission the spreadsheet.
Exemptions from MTD
A small number of taxpayers can apply for exemption. The grounds:
- Religious objection to digital communication.
- Disability or age that makes digital tools genuinely impractical.
- Remote location with no reasonable broadband access.
- Business in liquidation or shortly to cease.
Exemption is granted by HMRC on application; not automatic. Most exemptions cover a defined period and require renewal.
MTD transition or compliance issue?
A Harrow bookkeeping specialist will set up the right software, import historic data, and handle the quarterly submissions. Free initial assessment.