Making Tax Digital for VAT, limited companies, and partnerships
Last editedDec 20254 min read
Making Tax Digital (MTD) is HMRC’s move to modernise the UK tax system. It replaces paper records and annual filing with a fully digital process for real-time record-keeping and quarterly updates. The UK government aims to simplify compliance, reduce common taxpayer errors, and give you a clearer, near-real-time view of your tax position throughout the year.
The biggest change is the phased introduction of Making Tax Digital for Income Tax Self Assessment (MTD ITSA) in 2026. This will fundamentally replace the traditional annual Self Assessment tax return for millions of self-employed people and landlords.
Start dates and key requirements
When does Making Tax Digital for Income Tax start?
Following multiple postponements and a comprehensive review, the initial start date is now confirmed as 6th April 2026. This is when the new changes come into effect for the first group of taxpayers. See which phase you fall into below.
It’s important to note, the current official status is that no further deadline extensions have been granted beyond the confirmed 2026 and 2027 start dates. So you’ll need to make sure you’re compliant by the time your phase starts.Three core requirements
Digital record keeping: Paper records are no longer sufficient. You must create and store income and expenses digitally using Making Tax Digital-compatible software or a spreadsheet combined with bridging software (this software automatically and digitally collects data from your spreadsheet into the HMRC systems).
Quarterly updates: Instead of one annual tax return, you’ll now need to submit a summary of your business or property income and expenses to HMRC every three months.
End of Period Statement (EOPS) and Final Declaration: After the tax year ends (5th April), you must submit your End of Period Statement for each business or property source to confirm the information from the accounting year and that your income is correct, including any final adjustments and allowances. Then your Final Declaration combines all your income sources (including PAYE wages, dividends, etc.) to calculate your final tax liability, replacing the current Self Assessment form.
Schedule for the phased rollout
Making Tax Digital will be introduced in three main phases based on your qualifying income - your gross income or turnover, before you deduct your expenses, which includes money from self-employment and rental income. Knowing which phase you fall into is the first step to compliance.
| Phase | Making Tax Digital start date | Qualifying income threshold (gross turnover) | Tax year used to assess income |
|---|---|---|---|
| Phase one | 6th April 2026 | Over £50,000 | 2024/2025 tax year |
| Phase two | 6th April 2027 | Over £30,000 | 2025/2026 tax year |
| Phase three | 6th April 2028 | Over £20,000 | 2026/2027 tax year |
Calculating your qualifying income
It is critical to calculate your total gross income correctly to determine your start date:
What counts: Combined gross income (turnover or rent received) from all self-employment sources and property rental businesses (UK and overseas).
What is excluded: Other income, such as wages from PAYE employment, investment income, dividends, and pensions, do not count towards your Making Tax Digital threshold.
Important deadlines and new penalties
Quarterly deadlines
You’ll need to report to the HMRC about your income every three months, based on the tax year (e.g. 6th April 2026 - 5th April 2027). These deadlines are uniform, regardless of your accounting year-end. Missing one of these deadlines will result in penalties.
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| Set-up | Customer authorises a one-time mandate to allow future collection. | Customer provides card details or uses their existing PayPal account/balance. |
The annual finalisation deadline
The deadline for submitting the End of Period Statement (EOPS) and the Final Declaration is 31st January following the end of the tax year.
New penalty system
A new points-based system for late submissions will apply to people who don’t comply - replacing the current fixed fines.
Late submissions: Every missed quarterly update or `Final Declaration deadline earns one penalty point. A fine of £200 will be issued once the threshold of four points is reached. Points expire after 12 months of compliance.
Late payments: Penalties for late payment of tax liabilities are now tiered and start accruing from day 16 after the payment due date. This escalates if the payment remains unpaid after 30 days.
What this means for landlords and sole traders
Rules for landlords
If a landlord's gross rental income (or combined rental and self-employment income before expenses) exceeds the relevant threshold (see the table above), they must comply. For example, if your rental income for the tax year 2024/2025 was £27,000 and your self-employed income was £25,000, you’d have a total of £52,000 gross income for the tax year. This means you’ll fall into Phase one of the Making Tax Digital rollout - starting in April 2026.
Rules for sole traders
Self-employed individuals, such as taxi drivers, freelance designers, tradespeople, or anyone who normally completes a Self Assessment, are included in the Making Tax Digital rollout if their gross income from their trade meets the thresholds. For example, a taxi driver who makes £57,000 in gross income (before expenses) in the tax year 2024/2025, will need to start using the new system for Making Tax Digital in April 2026, as they fall into Phase One of the rollout.
Exemptions
Certain groups are automatically exempt or can apply for an exemption from Making Tax Digital for Income Tax, including:
Trusts, estates, and non-resident companies.
Individuals with a lack of internet access or religious objections to digital filing.
Those who are considered "digitally excluded" due to age or disability, where using digital tools is not reasonably practical.
VAT and Corporation Tax
What if I’m VAT-registered?
Making Tax Digital for VAT is now fully operational and has been mandatory for all VAT-registered businesses since 2022.Â
What about Corporation Tax?
For the foreseeable future, the HMRC has scrapped the plans for Making Tax Digital for Corporation Tax. They confirmed that they do not intend to introduce a mandatory Making Tax Digital for Corporation Tax rollout following policy reviews, but do intend to develop an approach that is suited to the diverse needs of the Corporation Tax population.
How to prepare for Making Tax Digital for Income Tax
To make sure you’re ready for a smooth transition and compliant with the rules, here’s how you can prepare:.
Verify your start date: Check your 2024/2025 gross income (income before expenses) now to confirm if your mandatory start date is in 2026 or 2027.
Choose compatible software: Identify and begin testing different compatible software to see what suits your needs. This ranges from dedicated accounting packages (Xero and QuickBooks) to specialist bridging software designed to link your existing spreadsheets with HMRC’s systems.
Voluntary sign-up: If your income is below the mandatory threshold, you can choose to join the Making Tax Digital pilot scheme voluntarily. This offers an excellent low-risk opportunity to familiarise yourself with the digital requirements before they become compulsory.
