Understanding Making Tax Digital Requirements Post-Setup

You’ve signed up for Making Tax Digital (MTD) – but what happens next? Many UK business owners are surprised by the ongoing demands, software choices, and pitfalls involved in day-to-day MTD compliance. This article walks you through exactly what you need to do post-setup, including real-world deadlines, digital record-keeping rules, and tips to avoid HMRC penalties. Whether you’re VAT registered or anticipating MTD for Income Tax, you’ll find practical, honest advice for making MTD work in your business.

When you first register for Making Tax Digital (MTD), it can feel like you’ve ticked a box and moved on. But MTD isn’t a one-off event – it’s an ongoing way of working that fundamentally changes how you keep records and interact with HMRC. After setup, your business must maintain digital records, submit returns through compatible software, and follow strict timelines. These obligations apply whether you’re a sole trader, partnership, or limited company, and the requirements differ depending on whether you’re registered for VAT, subject to MTD for Income Tax Self Assessment (ITSA), or Corporation Tax (in pilot phase as of 2026).

The core principle behind MTD is that all transactional data – sales, purchases, expenses – must be kept digitally. This means no more handwritten ledgers, and crucially, no re-keying data from paper into spreadsheets unless using approved digital links or software. HMRC’s aim is to reduce errors, improve transparency, and eventually phase out the old way of filing tax returns. The law now requires certain businesses to use software not just for submissions, but for the day-to-day running of their accounts.

Post-registration, HMRC expects you to use MTD-compatible software for all relevant submissions, keep your digital records up to date, and ensure that any spreadsheets, bridging software, or integrations use proper digital links. Failing to do so can result in penalties, lost VAT reclaim, or even compliance investigations.

HMRC is absolutely clear: you must keep your business records in a digital format. This doesn’t just mean scanning receipts – it means entering and storing all key transactional data in MTD-compliant software. For VAT, that means every sale, purchase, and adjustment must be logged with details like invoice date, value, and VAT rate. For MTD for Income Tax, you’ll need digital records of all business income and expenses, including categorisation.

The legal requirement is to maintain these records for at least six years, and they must be complete, accurate, and accessible. The point isn’t just to satisfy HMRC – digital records can help you spot errors, reclaim VAT promptly, and prepare for quarterly updates or returns with less stress. If you’re inspected and can’t produce compliant records, you risk fines and lost tax relief.

Many businesses still make the mistake of using spreadsheets without proper digital links, or keeping partial paper records. HMRC’s guidance is strict: if you use spreadsheets, you must use bridging software that connects directly to HMRC, and all data transfers between systems must be digital – manual copy-pasting or retyping is not allowed. The rules are designed to prevent errors and fraud, but they can catch out honest mistakes too.

• Keep all sales invoices, purchase receipts, and VAT calculations in your digital system
• Record transactions as close to real-time as possible – don’t batch once a quarter
• Use categories that match HMRC’s guidance (especially for MTD for ITSA)
• Secure your digital records – cloud backups are essential

The days of submitting VAT returns via the old HMRC portal are over. Post-setup, you must use MTD-compatible software that connects directly to HMRC’s systems. This software acts as your digital link for submissions, and is expected to be the primary repository for your business records. Options range from full accounting packages (like Xero, QuickBooks, Sage), to bridging tools that sit on top of spreadsheets, to sector-specific apps. Your choice can have a big impact on your workload and compliance risk.

HMRC maintains a list of recognised MTD-compatible products on GOV.UK. However, not all software is created equal – some are designed for accountants, some for DIY business owners, and some only support VAT or ITSA. Important features to look for include automatic digital links, error checking, and support for the specific MTD regime you’re subject to.

Don’t assume that using a spreadsheet with bridging software is a shortcut – it often adds complexity and increases the risk of non-compliance, especially as HMRC’s rules around digital links tighten. For most small businesses, a cloud-based accounting package is the safest and most straightforward route. These systems update regularly to reflect HMRC changes and provide built-in support for digital record-keeping.

• Look for bank feed integration to automate imported transactions
• Check if your software supports both VAT and Income Tax MTD (if needed)
• Consider the learning curve – intuitive interfaces save time
• Ensure your accountant can access your software, if you use one
• Beware of free tools that may lack proper digital links

Once registered for MTD for VAT, you must submit your VAT returns using your chosen software every quarter (or monthly, if you’ve agreed this with HMRC). The submission process is now fully digital: your software will prepare the nine-box VAT return based on your digital records, and send this directly to HMRC’s MTD system. You can no longer type figures into the HMRC portal manually.

It’s crucial that your VAT return figures are generated automatically by the software, using the transactional data you’ve entered. HMRC expects an unbroken digital link from your source records through to the final figures. If you use spreadsheets, the bridging software must pull the data without manual intervention. Failing to meet these requirements can lead to rejected returns or penalties.

Deadlines remain the same: returns and payments are due one calendar month and seven days after the end of your VAT period. However, HMRC can now more easily detect late filings, errors, or missing returns, and will issue points-based penalties from January 2023 onwards. Always check your software has submitted the return and received confirmation from HMRC.

• Set calendar reminders for VAT period end and payment deadlines
• Reconcile your digital records before filing – errors can be costly
• Keep evidence of submission receipts from your software
• If you make corrections, use your software’s adjustment feature – don’t manually override figures

If you’re a sole trader or landlord with turnover above £50,000 (dropping to £30,000 from April 2027), you’ll be required to join Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) from April 2026. Post-setup, the process is very different from the old annual tax return: you must submit quarterly updates for each business or property income stream, plus an annual End of Period Statement (EOPS) and a final declaration.

Each quarterly update is a summary of your digital records for that period – income, expenses, and adjustments – filed through MTD-compatible software. The deadlines for these are one month after the end of the quarter (e.g., 5 August for the quarter ended 5 July). The EOPS is submitted after the tax year ends and confirms your final figures, including any accounting adjustments or claims for reliefs.

This regime is designed to give HMRC and business owners a more up-to-date view of tax liabilities. But it also means more frequent deadlines, more chances for errors, and a real need for disciplined, ongoing record-keeping. Many businesses underestimate the time required to prepare and submit four updates plus two year-end statements per year.

If you have multiple businesses or separate property income streams, you must submit separate updates for each. Your software should allow you to manage these, but the onus is on you to keep records accurate and timely. Missed deadlines will attract points under HMRC’s new penalty system, leading to fines after repeated failures.

A major source of confusion is what HMRC means by a ‘digital link’. In MTD, a digital link is an electronic transfer of data between software programs or spreadsheets, without manual copying, retyping, or cut-and-paste. Examples include formula-driven cell references in spreadsheets, direct API connections, or file imports. The aim is to eliminate human error and ensure that the numbers you submit are traceable to your source records.

If you use more than one system – for example, a sales platform and a separate accounting package – you must ensure that any transfer of VAT-relevant or tax-relevant data is via digital link. Typing figures from one system into another, or manually consolidating figures before submission, is not permitted. HMRC expects you to be able to demonstrate your digital links if asked during a compliance check.

Bridging software is allowed as a workaround, especially for businesses reliant on spreadsheets. However, it must be MTD-compatible (on the GOV.UK list) and must pull data directly from your spreadsheet into HMRC’s system, with no manual intervention. Increasingly, HMRC is encouraging businesses to move to fully integrated cloud systems, and may tighten the rules on bridging tools in future.

• Set up automated imports or direct integrations between your systems
• If using spreadsheets, maintain formula-driven links (not manual entry)
• Regularly test your digital links to ensure data flows correctly
• Document your processes – HMRC may ask for evidence during a check

HMRC’s approach to MTD compliance is increasingly robust. From January 2023, a points-based penalty system applies to late VAT return submissions: each missed deadline earns a point, and after four points you’ll receive a £200 fine, with more for each subsequent failure. Similar rules will apply for MTD for ITSA updates from 2026. In addition, inaccurate returns or failure to keep digital records can result in separate penalties and, in severe cases, disallowance of VAT reclaim or tax relief.

Compliance checks are now more likely to focus on your digital record-keeping processes. HMRC can request evidence of your software, digital links, and backup procedures. If you’re using spreadsheets or bridging software, you must be able to demonstrate that all data transfers are electronic and that your records are complete. Failing to do so can trigger investigations into your past returns.

Common mistakes include misunderstanding what counts as a digital link, failing to keep up with quarterly updates, or thinking that using accounting software alone is enough. Another frequent error is only updating records at quarter-end, leading to forgotten transactions and rushed submissions. Staying compliant means building good habits and regularly reviewing your systems.

Mastering MTD is about developing good habits, not just ticking boxes. The businesses that thrive under MTD are those that treat digital record-keeping as part of their daily routine – not a quarterly scramble. This means reconciling transactions weekly, uploading receipts as you go, and reviewing your figures ahead of each deadline. Cloud software can make this easier, but only if you use it proactively.

Work closely with your accountant or bookkeeper if you have one. Many accountants now require clients to use specific MTD-compatible packages, and may offer training or support. If you’re DIY, invest time in learning your software’s features – automation, reporting, and reconciliation tools can save hours and prevent errors.

Don’t ignore HMRC updates – the rules around digital links and software compliance change frequently. Subscribe to HMRC’s business email alerts, or regularly check GOV.UK for new guidance. Treat MTD as an ongoing project, not a set-and-forget task.

• Schedule time each week for bookkeeping and reconciliation
• Use your phone to snap and upload receipts immediately
• Set up multi-factor authentication on your accounting software
• Train staff on MTD basics if others help with your records
• Keep a log of software updates and any changes to your process

MTD is not standing still. The next major change is MTD for ITSA, which will bring millions of sole traders and landlords into the regime from April 2026. Corporation Tax is set to follow, with pilot schemes already running. Even if you’re not currently affected, it pays to get your systems and habits in order now – digital record-keeping will soon be the default for all businesses.

If your turnover is below the current VAT threshold (£85,000), you still need to follow MTD for VAT if you’re registered voluntarily. For MTD for ITSA, the threshold is £50,000 from April 2026 and £30,000 from April 2027. HMRC may lower these further in future. Being prepared means reviewing your software, record-keeping, and update routines well in advance.

Keep an eye on developments via GOV.UK, your accountant, or trade bodies like the Federation of Small Businesses (FSB). Early adopters of MTD for ITSA are already reporting that quarterly updates require more discipline – but also offer better financial visibility. The direction of travel is clear: digital is here to stay.