Everything You Need to Know About Making Tax Digital Software

Each year, HMRC estimates that the UK tax gap is about £39.8 billion. Much of this is due to avoidable mistakes, late submissions, and old-fashioned record-keeping.

Making Tax Digital software aims to solve these problems. If you run a business, are a landlord, or work as a sole trader in the UK, it’s important to know about this now.

This guide explains what MTD is, how it works, which software you need, and how to prepare without stress.

What Is Making Tax Digital (MTD)

Making Tax Digital (MTD) is a UK government program from HMRC designed to modernize the tax system.

The idea is simple. Rather than filing one large annual tax return using memory and paper receipts, businesses keep digital records all year and send updates regularly.

MTD for VAT has been mandatory since April 2019 for businesses above the VAT threshold.

MTD for Income Tax will start in April 2026, beginning with sole traders and landlords who earn more than £50,000 a year.

By April 2028, everyone with a qualifying income over £20,000 will need to follow these rules.

→ Read Also: Accounting Software Capabilities to Simplify Sales Tax and VAT Management

What Is The Scope of Making Tax Digital?

MTD applies to more than just large companies. It affects many types of taxpayers:

• VAT-registered businesses (already mandatory since 2022 for all, regardless of turnover)
• Sole traders and landlords with a qualifying income above £50,000 from April 2026
• Those with income above £30,000 from April 2027
• Those with income above £20,000 from April 2028

Qualifying income is the total of your gross self-employment income and UK property income added together.

Remember, expenses are not taken off this amount. For example, if you make £35,000 from freelancing and £18,000 from renting property, you are above the 2027 threshold.

HMRC, which stands for His Majesty's Revenue and Customs, gives exemptions in certain cases, such as for people who cannot use digital tools or those with a power of attorney.

→ Read also: What is a Fiscal Year?

How Making Tax Digital Empowers Your Business

MTD is a compliance requirement, but it also changes how businesses manage their finances in a positive way.

With quarterly reporting, you always have a current view of your income and expenses. This helps not only with taxes, but also with cash flow planning, loan applications, and noticing trends early.

HMRC data shows that keeping digital records greatly reduces errors. With 97.3% of Self Assessment returns already filed online, the system is well established.

For accountants, MTD means less year-end stress and more time for advisory work. Rather than chasing receipts and fixing mistakes, you can help clients make better choices.

What Does MTD Software Include

MTD-compatible software should handle a few key tasks well. To get ready, look for these features:

• Digital record keeping: every transaction logged individually, not as summaries
• Quarterly updates: automated submissions to HMRC at the end of each quarter
• Final Declaration: a year-end digital tax return replacing the old Self Assessment form
• Audit trail: a clear, searchable log of all entries and changes
• API integration: direct connection to HMRC's systems so submissions go through without manual steps

Bridging software is also an option if you already use spreadsheets. It acts as a connector between your existing records and HMRC's API.

However, full MTD-compatible software is usually more reliable and easier to use in the long run.

What Are The Benefits of Using MTD Software

MTD software is not just for compliance. It also makes managing your finances easier. Here are the real benefits:

• Fewer mistakes, less stress: Manual data entry often leads to mistakes. MTD software automates calculations and keeps digital records, which greatly reduces errors and helps you file with confidence.
• Less admin, more time back: Instead of spending hours on reports and returns, the software does it for you. Tax calculations and direct submissions are streamlined, so you can focus on your business.
• Real-time visibility: You no longer have to rely on old numbers. MTD tools show your finances in real time, helping you track cash flow, catch problems early, and make quick decisions.
• Built-in compliance: Tax rules change often, and tracking them by hand is risky. MTD software stays up to date with the latest rules, lowering your risk of penalties and helping you stay compliant with HMRC.
• Smoother audits: When your records are digital and organized in one place, audits are much easier. You can quickly find the data you need without searching through spreadsheets or paperwork.
• Lower long-term costs: There is an upfront cost, but you save money over time. Fewer mistakes mean fewer fines, and automation cuts down the time and cost of manual accounting.
• Better collaboration: Most MTD tools are cloud-based, so your team, accountant, and advisors can access the same data at any time. This speeds up communication and makes decisions easier.
• Ready for growth: As your business grows, your financial data becomes more complex. Good MTD software grows with you, handling more transactions and complexity without making you change systems later.

How To Choose The Right MTD Software

There are many options available, and most claim to be “fully compliant.” The best choice depends on your business size, how complex your operations are, and how you manage your accounts now. Rather than comparing every feature, focus on what matters for your daily work and compliance:

Make sure the software is officially approved by HMRC

This is essential. The software must be on HMRC’s official list of compatible products, or your submissions will not be accepted. Also, check that it supports all needed MTD features (like VAT or ITSA) and updates automatically with new rules.

Choose a tool that is easy to use from day one

MTD means you will use this software often, not just once a quarter. Getting started should be quick, with a simple interface that does not need much training. If your team or clients find it hard to use, mistakes and delays can happen.

Check if it integrates with your existing systems

Your MTD software should work well with your other tools. It should connect easily to your bank feeds, accounting systems, payroll software, and invoicing platforms. Good integrations cut down on manual data entry, reduce mistakes, and keep your records consistent.

Ensure you have access to reliable and fast support

If something goes wrong, especially near a submission deadline, you need quick and reliable support. Choose providers with responsive customer service, clear guides, and real human help, not just automated support centers.

Pick a solution that can scale with your business growth

Software that works for a small business now might not keep up as you grow. Pick software that can handle more transactions, entities, or clients without making you switch systems later. Changing tools during growth is expensive and disruptive.

For accounting firms managing multiple clients, pricing structure becomes critical. Per-seat models are often more predictable and cost-effective, while per-user or per-entity pricing can escalate quickly as your client base grows.

Eleven is built specifically for accounting and CPA firms, with multi-entity management and scalability at its core. See a live demo to understand how it fits into your workflow.

MTD for Value Added Tax (VAT) Implementation

If you are not yet following MTD for VAT, here is the process explained simply:

Step 1: Review your current systems and processes: Begin by looking at how you manage VAT records and submissions now. Find any gaps in compliance and check if your current tools meet MTD rules, especially for digital record keeping and system connections.

Step 2 - Choose MTD-compatible software: If your current setup does not meet the rules, you will need new software or to change your processes. The best solution should support digital record keeping, VAT report creation, and direct submission to HMRC, while also being easy to use and working well with your other tools.

Step 3 - Set up and configure your system: After you choose your software, set it up correctly. This means adding tax codes, entering opening balances, and making sure all connections, like bank feeds or payroll systems, are set up to support accurate VAT reporting.

Step 4 - Transfer and validate your data: Move your existing records into the new system, whether they are in spreadsheets or on paper. It is important to keep your data accurate and complete to avoid problems later.

Step 5 - Establish reliable digital record keeping: From now on, all VAT records must be kept digitally. Make sure your records are complete, accurate, and organized so you have a clear audit trail.

Step 6 - Configure VAT reporting properly: Set up your system to create VAT returns in a format that HMRC accepts. Make sure all transactions are included correctly and that you can review and check reports before sending them.

Step 7 - Submit VAT returns through MTD software: After testing everything, start sending VAT returns directly through your MTD software. Keep track of deadlines and make sure HMRC receives your submissions.

Step 8 - Monitor compliance on an ongoing basis: Staying compliant with MTD is ongoing. Check your records and submissions often to make sure they are correct, fix any mistakes quickly, and keep up with any changes to MTD rules.

The current VAT registration threshold is £90,000 (from April 2024). If you exceed this, MTD for VAT is not optional.

Get MTD-Ready With Eleven

MTD is not just a future concern. If you are a sole trader or landlord earning over £50,000, April 2026 is coming soon. If you run an accounting firm, your clients will need help with this change.

The good news is that the right software makes compliance simple. With the right tools, you get digital records, automated submissions, and real-time visibility as standard features.

Eleven is designed for accounting firms and CPA practices that want to manage MTD compliance efficiently for all their clients. There are no per-entity fees, no need to use multiple systems, and no last-minute rush at quarter-end.

Want to see how it works? Book a free demo with Eleven today and get your firm ready for MTD.