MTD for real: reflections on taking part in HMRC’s Making Tax Digital for Income Tax trial
Introduction
Making Tax Digital for Income Tax (MTD) has been on the cards for a while. In 2015, when HM Revenue & Customs (HMRC) first proposed it, it was due to be introduced in April 2018. Successive delays, not helped by Covid and Brexit, pushed the implementation date back to April 2026.
Making Tax Digital is a new way for sole traders and landlords to report their income and expenses to HMRC. Anyone who had business turnover and/or rental income of £50,000 or more in the 2024-25 tax year, before allowing for any expenses, will need to use MTD from 6th April 2026.
Use HMRC’s online tool to find out when you need to start using Making Tax Digital for Income Tax.
How different is Making Tax Digital from Self Assessment?
Self Assessment:
- Report details of your income and expenses to HMRC once a year on Form SA100 tax return.
- Business records can be kept in any format you like – written out by hand, typed up in a Word document, recorded on a spreadsheet, or kept in bookkeeping or accounting software.
- A tax return for the year from 6th April 2024 to 5th April 2025 needs to be received by HMRC on or before 31st January 2026 – giving you not quite 10 months from the end of the tax year to complete your tax return.
Making Tax Digital:
- Report details of your income and expenses to HMRC every quarter using software that works with MTD for Income Tax.
- Handwritten records and Word documents won’t be allowed. You’ll still be able to use spreadsheets; but will need additional “bridging” software to link the spreadsheet to HMRC’s MTD system. Bookkeeping or accounting software will need to be MTD-compatible.
- Figures for the quarter from 6th April 2026 to 5th July 2026 need to be received by HMRC on or before 7th August 2026 – giving you less than 5 weeks to get the figures together. If you want to use calendar quarters rather than tax quarters, you will need to set this up in your software before make your first quarterly submission, as it can’t be changed afterwards.
- A final tax return for the year, including any other sources of income, still needs to be submitted and received by HMRC on or before 31st January.
HMRC have put together some guidance on the new MTD tax system and how it works.
Signing up for Making Tax Digital
Even though MTD will be gradually become compulsory for more and more people, there is still a sign-up process.
You can also choose to sign up voluntarily now, to help test the service and get used to the new system before it goes live. There are no penalties for missing a quarterly submission whilst taking part in the trial, but there will be from April 2026.
If you don’t use a bookkeeper or accountant, you can sign yourself up. If you use an agent, they can sign you up instead. You will need to get MTD-compatible software, or bridging software to link your spreadsheet to HMRC, to take part in the trial.
My experience
Preparing to submit my first Making Tax Digital quarterly update
For me, the hardest part was signing up. HMRC’s sign up guidance lists all the people who cannot sign up voluntarily. Even if you meet all the eligibility criteria, there are other reasons why the system may prevent you from signing up. It took a brief call to HMRC’s dedicated MTD support line to resolve the technical hitch.
Once I was signed up, the MTD-compatible tax software package I was using displayed details of the self-employments and sources of rental income HMRC were aware of for me to check. Everything was fine so, on the click of a button, all my business details were imported into the software.
The software then asked me whether I wanted to submit quarterly reports for tax or calendar quarters. My accounting year end is 5th April, so it made sense for me to stick with tax quarters. If my accounting year end had been 31st March, I would have chosen calendar quarters.
What is Making Tax Digital like in practice?
There was no real change to my bookkeeping processes, because I keep my records up to date as I go. If you do your bookkeeping less frequently, you will need to allow time to update your records at least once a quarter. To reduce any time pressure at the end of the quarter, you might prefer to update your records on a monthly or weekly basis.
Whether you prepare your accounts on a cash basis (money in, money out) or a traditional (accruals) basis, you can send your Making Tax Digital quarterly update to HMRC as soon as you’ve completed your bookkeeping for the quarter.
HMRC don’t expect the quarterly submissions to be perfect. The figures submitted must come directly from your bookkeeping records and be factually correct – so you can’t submit nil returns or estimates – but, if there are any errors, they can either be corrected in the following quarter’s submission or when you complete your end of year tax return.
What this means is, even though I prepare accruals accounts, I don’t have to work out my accruals and prepayments quarterly. I can leave any accounting and tax adjustments until I finalise my income tax position and submit my tax return at the end of the year.
HMRC’s digital records requirement
As the bookkeeping software I use isn’t quite ready for Making Tax Digital yet, it can’t connect directly to HMRC. So, the other tricky bit for me was transferring the figures from my bookkeeping records into the tax software whilst still meeting HMRC’s digital links rules. This is a similar process to what anyone who wants to keep using spreadsheets will have to do.
A key component of Making Tax Digital is that any transfer or exchange of data between different software programs must be done electronically, without manual intervention. Data can’t be transferred using “cut and paste”, “copy and paste” or by manually copy-typing figures from one system into another.
As there was no automated data transfer facility between the bookkeeping and tax software packages I used, I had to export a summary of my bookkeeping records into a spreadsheet and then import the spreadsheet summary into the tax software.
It was a bit of fiddle to set up, because the first time you import the bookkeeping spreadsheet you’ve got to tell the tax software which boxes on the spreadsheet relate to which boxes on the Tax Return. The second quarter was much quicker.
How to prepare for Making Tax Digital for Income Tax
Does Making Tax Digital change how you need to keep your bookkeeping records?
If Making Tax Digital is likely to apply to you, now is the time to review how you keep your bookkeeping records, to make sure they’ll be compliant when the new rules come in.
You won’t be able to keep handwritten bookkeeping records anymore; nor type your income and expenditure up in a Word document.
If you’re using spreadsheets, check that you have access to “bridging software” (either by direct subscription or via your accountant). If not, then you might want to consider moving to an MTD-compatible software package instead.
If you’re already using bookkeeping or accounting software, make sure that the software is going to be MTD-compatible for Income Tax by April 2026; or that it can export your data in an MTD-compatible format (xml, csv or xlsx) ready for import into another software package or to pass to your accountant.
HMRC has issued guidance on finding software that’s compatible with MTD. The list only includes providers that have already been recognised and approved by HMRC.
HMRC has also released a list of software in development, but the list is not complete. If in doubt, contact your software provider directly. Making Tax Digital for VAT has been in place since 2019, so if a software provider tells you that that their package is MTD-compatible, check that they mean MTD for Income Tax not just MTD for VAT.
What are your bookkeeping options?
There are several ways you can keep your records and still be MTD-compliant.
- Comprehensive all-in-one software packages
All-in-one software solutions can handle both the quarterly updates and the end of year tax return. They can be without agent access, so you do it all yourself; or with agent access, so you or your bookkeeper can do the four quarterly updates, and your accountant does the end of year.
- MTD-compatible bookkeeping software
This software can handle the quarterly updates, but you or your accountant may need to digitally transfer or export the data into a different package to do the end of year.
- Other bookkeeping software
Bookkeeping software that can’t connect directly to HMRC can still be used if it enables you to export your data in an MTD-compatible format (xml, csv or xlsx) for import into an MTD-compatible package.
- Spreadsheets
Spreadsheets can still be used, provided that you use formulae to calculate the totals; if you use multiple spreadsheets, any cells that bring in figures from another sheet have to be linked so the amounts update automatically; and you’ll need “bridging software” to link your spreadsheet to HMRC.
- Let your accountant do it
Please bear in mind, though, that your accountant won’t be able to handle multiple MTD submissions on your behalf for the same price as they did your annual Self Assessment tax return.
Final words
Here are my top tips on preparing for MTD for Income Tax:
- Update your bookkeeping regularly
Set aside a regular time slot to update your bookkeeping records, ideally weekly or monthly.
- Do your software research
There are a range of free and low-cost software packages out there. Don’t assume that you’ll have to sign up for an expensive, all-singing all-dancing software package, unless that’s what your business needs.
- Allow yourself enough time
Don’t leave it until the last minute to decide what software you’re going to use. There will be a learning curve in getting used to a new accounting system, and you may not want the stress of a new software system and a new system for reporting your income and expenditure to HMRC at the same time.
- Remember digital links
If you use other software in your business, such as stand-alone invoicing software or a CRM/point-of-sale system, make sure it’s compatible with your existing or proposed new accounting system, so that financial data can be digitally transferred between the two.
- Decide who’s going to do what
Are you going to do it all yourself, let your accountant handle it, or agree a hybrid arrangement? HMRC has plenty of online guidance to help people transition to the new system – or you might prefer the reassurance of working alongside an accountant who can either do it all for you or guide you along the way.
About Springreach Training and Coaching
I’m Jill. I created Springreach Training & Coaching to provide practical, down-to-earth training and resources to empower people like you to take control of your bookkeeping and business finances. It’s a vision that has been inspired by all the clients I’ve worked with who are keen to do as much as possible themselves and just needed someone to show them how.
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