Making Tax Digital Software: A Guide
Tax digital software is required for all VAT-registered businesses. Learn more about its uses, benefits, compatibility, and what businesses employ it here.
Introduction
Since 1 November 2022, all VAT-registered businesses have been required to use Making Tax Digital (MTD) software, or software that’s compatible with the format. For businesses working or doing business with firms in the UK, their MTD software is also required to be recognised by His Majesty’s Revenues and Customs (HMRC) department.
As part of the HMRC’s overall plan to digitise the VAT system for VAT, corporation taxes, and Income Tax Self Assessment (ITSA) for businesses and individuals alike, MTD was implemented to make the tax return process simpler for all involved.
Which businesses are eligible to use Making Tax Digital software?
Since its implementation, most businesses are eligible for MTD software if doing global trade. However, there are some exemptions for companies to make note of. These include when it’s not feasible to employ MTD software due to a user’s age, if they have a disability, or if their current location precludes the use of MTD. Additionally, if a business owner’s religious beliefs aren’t in line with electronic communications or maintaining electronic records, they can also apply for an exemption. Lastly, if a business is going through insolvency they are also exempt.
What is MTD for ITSA
ITSA, or Income Tax Self Assessment, is the next iteration of the Making Tax Digital rollout. As of April 2026, individuals, unincorporated businesses and landlords will also need to make digital tax submissions using MTD-compatible software quarterly. The threshold for compliance will be £50,000 in 2026.
Selecting the right MTD software
What are the key requirements?
When it comes to selecting the right MTD software there are some essentials and key requirements that need to be considered. Firstly, one of the most important features of MTD software is that it regularly updates and stores all your records digitally, a feature included in even the most basic MTD software. Also, it needs to be compatible with all HMRC systems so you can file a VAT return and ensure your submission filing is received properly.
What to consider when choosing software providers
Some of the most highly sought additional features to streamline processes for businesses, self-employed individuals, and individual tax returns include functionality that enables users to bridge the gap between MTD and non-HMRC-compatible software like spreadsheets, digital bookkeeping systems, and other accounting systems using bridging software. For those using ERP software or their own specialised accounting software, it’s imperative to select an MTD software that is easily integrated with all these things to ensure efficiency and avoid errors by following Making Tax Digital rules.
Using Making Tax Digital for VAT returns and other tax obligations
How to set up an MTD-compatible accounting software system
The first step in setting up an MTD-compatible accounting software system is to ensure you’re already registered for VAT. If so, you should automatically be registered for Making Tax Digital for VAT. Most often, if you do need to sign up for MTD you do so via a software provider that offers such services.
File VAT returns electronically with MTD-compatible accounting software
To file MTD-for-VAT returns it’s recommended using an HMRC-approved MTD software - all of which will contain this feature- which you use to submit your return. As mentioned above, since every business is different, those employing spreadsheets or other accounting tools will need MTD bridging software. This is because digital linking is required when using MTD for VAT.
Record and store digital records as required by Making Tax Digital regulations
The requirements for MTD to VAT usage are monitored by the HMRC and there is currently a points-based system in place to monitor those that fail to meet regulations. This is to prevent businesses and people from repeatedly making mistakes or failing to meet the proper deadlines. Those that make an occasional error aren’t normally penalised. The points system is based on how frequently you submit.
Additional benefits of using Making Tax Digital software
In addition to helping companies and self-employed business owners remain in compliance with HMRC regulations there are additional benefits of MTD software. Some of the foremost include making it easier for businesses and individuals to keep a digital record of all their transactions and helping them get their taxes right. For businesses, it opens the door for more productivity gains via digitalisation. In business-to-business sectors, customers can integrate tax management solutions with a wide variety of business processes.
MTD software also minimises errors that could have been avoided, which often result in lower returns. Most software is equipped with strong support and features that make the MTD for VAT easier for users and offer digital records with improved accuracy. Lastly, everything is sent directly to the HMRC, resulting in faster return processing.
Making Tax Digital Takeaways
Not only is Making Tax Digital for VAT a global standard for those doing business with the UK, but it also offers many businesses and users a chance to streamline and improve their tax processes, reducing their tax submission effort in the long run. Since MTD-compatible software helps prevent errors and digitises all your tax-related assets, it also provides a clearer record and detailed historical data for long-term financial and cost planning.
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