How to Comply with Making Tax Digital

Find out the four steps your small business can take to comply with the tax legislation, and where you can find compatible software.

The Making Tax Digital for VAT deadline has already passed. Since April 2022, VAT-registered businesses have been required by law to follow the new rules, including using compatible software to submit your VAT returns. You may face penalties from HMRC if you don’t meet MTD requirements.

Don’t worry – at the Federation of Small Businesses, we're supporting small businesses and the self-employed to get to grips with new Making Tax Digital rules and stay compliant through our FSB Making Tax Digital app.

What is Making Tax Digital?

Making Tax Digital (MTD) aims to make it easier and more efficient for businesses and individuals to record and declare tax to HMRC. Under these rules, HMRC legally requires all VAT registered businesses to record transactions digitally and submit returns to HMRC using Making Tax Digital compatible software, unless they have specifically been granted exemption from these requirements by HMRC.

The new rules don't change your normal VAT return deadlines or the information you need to send. You can check when your next return is due on your online VAT account.  

A very small number of businesses can request exemption from MTD requirements on the grounds of age, disability, religious grounds or certain other practical reasons. If HMRC grants exemption to a business, it can continue to keep paper records and submit paper returns.

Benefits of going digital

While the transition may feel daunting, MTD can bring long-term advantages for small business owners:

• Fewer errors and late filings.

• Better financial oversight throughout the year.

• Smoother year-end tax calculations.

• Time savings by automating admin tasks.

What’s changing in 2026?

The big shift in 2026 is the rollout of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA). From April 2026, self-employed individuals and landlords with gross income over £50,000 will need to keep digital records and file quarterly updates to HMRC. This threshold will drop to £30,000 in April 2027, and further reductions are expected in 2028.

Key changes to know:

• Quarterly reporting: Submit income and expenses updates every three months.

• Digital records: Spreadsheets alone won't cut it, records must be stored and submitted using MTD-compatible software.

• End-of-period statement (EOPS): At the end of the tax year, submit a final declaration and confirm your figures.

• Digital-only communication: HMRC will begin moving away from paper letters, make sure your online contact details are up to date.

  
  

These changes will affect sole traders, landlords, and many micro businesses, even those currently under the VAT threshold.

Timeline: When MTD applies to your business

Key dates and who this affects are:

April 2026

• Affects individuals with income over £50,000 from self‑employment or property.

April 2027

• Threshold lowers to £30,000, bringing more people into scope.

2028+ (expected)

• Further rollout to smaller businesses with income under £30,000.

Step-by-step: How to comply with MTD in 2026

1. Check if you’re affected

If your total self-employed or rental income is above £50,000 (dropping to £30,000 in 2027), you must comply.

2. Choose compatible software

Select an MTD-recognised platform that fits your business needs.

3. Keep digital records

Store receipts, invoices, and income details in your software.

4. Send quarterly updates

Submit summaries every three months through your software.

5. Submit an annual declaration

At year-end, confirm your figures and finalise your return.

6. Stay informed

Rules may evolve. Subscribe to updates or consult with a qualified accountant.

While these changes are upcoming, VAT-registered businesses must already be compliant. Here’s a refresher on what’s required under MTD for VAT.

What information must be kept digitally? 

MTD may affect your bookkeeping processes and the way your business stores information. You must keep electronic records and digital copies of transactions. You can find further guidance on what records you must keep digitally on HMRC’s website.

I already keep digital records. What’s different about Making Tax Digital for VAT? 

All VAT-registered businesses must maintain records and accounts, and most are already keeping these digitally. With MTD, the more significant change was the need to use Making Tax Digital software to submit your VAT return to HMRC.

Are my VAT returns MTD compliant?  

Here is what you need to do to comply with the MTD legislation so you're not caught out by fines.

If you have an accountant who looks after your bookkeeping, speak to them to check whether you are already compliant, or understand what needs to change to make you so. For example, you may need to set up a process for sharing digital records and information with the accountant in order for them to submit your VAT returns via their own MTD compatible software. 

If you do your own accounts using spreadsheets, manual records, or paper-based bookkeeping - or if you’re already keeping your accounts digitally - you must use MTD compatible software to submit your information to HMRC via the MTD portal.

Here are the four simple steps that you need to take to comply with MTD VAT return requirements in just 10 minutes.

1. Register for Making Tax Digital

Any VAT registered businesses should have been enrolled for MTD.

HMRC will sign up all new VAT registered businesses to Making Tax Digital for VAT automatically unless they are already exempt or have applied for exemption.

All other VAT registered businesses should already be using MTD compatible software to submit their VAT returns (unless granted MTD exemption) as the old VAT return portal was switched off in 2022.

2. Sign up for an MTD compatible app

The FSB Making Tax Digital app will ask you to select if you wish to use the easy-to-use bridging feature to load your existing VAT spreadsheet. Alternatively, you can use our record-keeping features to create invoices and track your expenses. This is a one-off process and takes approximately 3 minutes to complete.

3. Connect the app to your MTD account

The FSB Making Tax Digital App will prompt you to enter your VAT details and it will guide you through the process of connecting the app to your HMRC MTD account. This is a one-off process and takes approximately 2 minutes to complete. This step can only be completed after you have registered for Making Tax Digital and HMRC has copied your VAT account across to the new MTD system.

4. Submit your MTD VAT return

The FSB Making Tax Digital App will download and display your latest VAT information including your quarterly submissions. You can make a submission by loading your VAT spreadsheet to populate the 9-box VAT form. Alternatively, the app will populate the 9-box VAT form if you have entered invoices and expenses into our app. This takes approximately 2 minutes to complete.

What is compatible software? 

You’ll need to keep your digital records using compatible VAT record-keeping software that connects to HMRC systems and allows you to store and update records like receipts and VAT invoices digitally.  

It must be able to: 

• keep and maintain digital records specified in the regulations 

• prepare VAT returns using these records 

• communicate with HMRC through a digital link  

Some MTD solutions contain a bridging feature that lets you digitally link data in a spreadsheet to HMRC’s system.

Can I still use spreadsheets?

Yes. If you currently use spreadsheets to calculate your VAT submission, you can use the simple bridging feature that lets you upload and submit your VAT spreadsheet to complete your MTD VAT submission. This is the simplest and most cost-effective way to tick the MTD VAT compliance box.

Alternatively, you can use the record-keeping features to create invoices and track your expenses. This will require a little more effort to set up but is very easy to use thereafter.

Many business owners can start with the bridging feature and adopt the record-keeping features within the FSB Making Tax Digital app at a later date when they have more time. The FSB Making Tax Digital app provides both features in one app. You can enable any of the features at any time at no additional cost. Customers on the Standard and Professional Licence Editions can book a free one-to-one online training session with a product expert.

Penalties and legal responsibilities

MTD compliance is a legal requirement, and HMRC has introduced new penalties for:

• Late submissions of quarterly reports or annual statements.

• Late payments of tax owed under MTD.

It’s more important than ever to maintain accurate records and meet deadlines, especially as HMRC transitions to a points-based penalty system from 2026.

Selecting MTD compatible software 

You need to get compatible software in place before you register for the MTD service. It won’t be provided by HMRC, so you’ll need to upgrade existing software or source new software.  

The FSB Making Tax Digital app is recognised by HMRC and it's a cost-effective solution for small businesses. Users can submit their business accounts directly from the app to the online MTD portal. It allows you to: 

• Upload your VAT spreadsheet using the simple bridging feature.

• Or you can use the record-keeping features to create customer invoices and track your expenses.

  
  

What if you’re digitally excluded?

Some businesses may be exempt from MTD if they:

• Cannot access reliable internet.

• Have a disability that makes digital filing impractical.

• Have religious objections.

You must apply for an exemption in advance via HMRC, it's not granted automatically.

Is Making Tax Digital only for VAT?

No. From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. 

Taking the next step with Making Tax Digital

Whether you’re a sole trader, landlord, or part of a growing team, Making Tax Digital (MTD) marks a major shift in how the UK tax system works. With new income tax rules on the horizon and MTD for Income Tax Self Assessment coming into force in 2026, now’s the time to review your approach to digital records, compatible software, and quarterly submissions.

If you're already one of the many VAT-registered businesses using MTD-compatible software to submit your VAT returns, you’ve taken an important first step. For those preparing for MTD for Income Tax, the earlier you adopt a digital approach, the smoother the transition will be. Keeping clear, accurate digital tax records can also bring benefits beyond compliance – from improving cash flow to gaining better oversight of your business income and expenses throughout the tax year.

From understanding if your gross income meets the new qualifying income thresholds to selecting the right tax digital software, FSB is here to help your small business adapt to change with confidence.

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