Making Tax Digital: what it is, how it works, and the pros and cons 

MTD requires businesses to use a digital system to submit tax data and payments to HMRC, as well as to maintain accurate tax records.  

The government expects around 780,000 people to join the scheme for income tax self-assessment from April 2026, with an extra 970,000 forecast to join from April 2027. 

We explore what you need to know. 

What is Making Tax Digital? 

Making Tax Digital (MTD) will make it compulsory for businesses to file specific taxes digitally, encompassing the submission of tax data, records, and payments to HMRC. The scheme hopes to simplify record keeping and tax payments with HMRC and reduce costly errors.  

The initiative was originally announced during the 2015 Budget, with the first phase implemented in April 2019 for VAT-registered businesses. Before MTD, businesses were only required to submit tax updates once a year; however, this requirement has now been changed to quarterly. 

While the scheme currently only applies to those submitting VAT returns, it will be expanded over time to include other taxes, such as income tax and corporation tax. 

General partnerships will need to use the MTD scheme for income tax, and limited companies will need to use it for corporation tax; however, the implementation dates have yet to be confirmed. 

VAT-registered businesses, including limited companies and sole traders, with a taxable income of over £90,000 in a year, must use MTD. If a company has a taxable income of under £90,000 a year, it can choose to register for MTD and file its tax returns digitally. 

Businesses must use software compatible with and authorised by HMRC to manage their VAT records and send tax returns. You can continue to use accounting software if it’s compatible. 

If you’re looking for HMRC-approved software that’ll allow you to submit VAT returns to the taxman directly, GOV.UK has compiled a handy list. 

How do I apply for the Making Tax Digital scheme? 

If your company is VAT-registered, you will be automatically enrolled in the scheme. 

Once you’re confident your software is compatible, you need to register for VAT through the GOV.UK site for your VAT registration number. 

It’s a good idea to ensure you have all the necessary details before registering, including your Government Gateway login details, your company’s VAT number, and your email address. 

You may also need your national insurance number, unique taxpayer reference, and company registration number, but it’s worth checking first.  

What happens if I don’t pay on time?  

There will be late payment penalties for those who fail to pay VAT and self-assessment income tax on time. 

To encourage more taxpayers to pay on time, the government plans to increase late payment penalties for those joining the scheme. This will come into force from April 2025.  

How is the Making Tax Digital scheme being implemented? 

The MTD scheme for income tax self-assessment will apply to self-employed sole traders and landlords from: 

• April 2026 for those with a qualifying income of over £50,000 

• April 2027 for those with a qualifying income of over £30,000 

• April 2028 for those with a qualifying income of over £20,000 

The above includes business and property income and applies to gross income, so it is the amount you have before subtracting any costs. 

Are there any exemptions to the Making Tax Digital scheme? 

There are a few exemptions to the MTD scheme for VAT, including: 

• If you or your business are subject to insolvency procedures 

• If you’ve cancelled your VAT registration but need to send a final tax return 

You can apply for an exemption to the MTD scheme if it’s not reasonable or practical for you to use computers, software, or the internet. This could be due to your age, health, disability, where you live, or if you don’t have access to the internet or object to using computers on religious grounds. 

To apply, you must call or write to HMRC with your: 

• VAT registration number 

• Business name and address 

• Specific reason why you think you’re exempt from the scheme 

• Details of how you send your tax return 

If you’re applying on behalf of someone else, you’ll need authorisation from the business. You should continue your tax returns as before until you hear from HMRC. 

How much will Making Tax Digital cost businesses? 

HMRC estimates some of the costs for businesses, including: 

• An average ‘transitional’ cost of £350 and an extra annual cost of £110 for those in the £30,000 to £50,000 threshold. 

• An average ‘transitional’ cost of £285 and an extra annual cost of £115 for those above the £50,000 threshold. 

Of course, the annual costs can vary depending on the accounting software used. 

Does Making Tax Digital impact the information and records you need? 

It’s worth stressing that you need to keep the same information on hand as before the MTD scheme, as it only changes how you submit tax information to HMRC. 

So, you’ll still need a lot of information, such as: 

• The name, address, and contact details of your company 

• Any tax registration numbers and details of accounting schemes used 

• The amount and rate charged on goods you’ve made and received (if filing a VAT return)

• The date each transaction took place 

• Any adjustments to previous tax return errors 

• Data on exports and imports, debit and credit notes, and VAT-exempt items bought and sold 

If there are any expenses exempt from VAT, you should also note these. 

What are the pros and cons of Making Tax Digital? 

There are many advantages and disadvantages of the Making Tax Digital scheme.  

The pros of Making Tax Digital 

• It can make it simpler to submit taxes: By pushing more businesses to submit tax data and payments to HMRC and maintain tax records via digital accounting software, it makes it easier for companies to manage their taxes in one place. 

• You may have a better overview of company finances: Making Tax Digital can help you understand your company’s finances better, including tax and cash flow. 

• Less chance of errors: Submitting taxes can be complex, and it can be easier than you think to make costly errors, which digital software can help avoid.  

• Better data security: You can safely store your tax records in one digital place instead of relying on storing physical documents that could get lost or damaged. You can also benefit from real-time access to your tax information. 

The cons of Making Tax Digital 

• You’ll incur additional costs: While there is some free digital accounting software available, these may be limited in terms of features, so you’ll likely need to pay for a package. It’s worth researching the right accounting software to meet your needs. 

• New processes take time to adopt: Many businesses may be skilled at using digital systems, but some may not. Therefore, you may need to learn how to use accounting software and share it with staff. While MTD should save time in the long term, it can be time-consuming to set everything up under the scheme.  

Get expert financial advice 

Navigating your taxes, whether you own a business or are self-employed, can be tricky, but you don’t have to do it alone.  

Unbiased can quickly match you with a qualified accountant who can help you manage your taxes.