Making tax digital

MANAGE YOUR BUSINESS FINANCES

Jump to Chapter

Introduction 1. About Making Tax Digital 2. The VAT scheme 3. The Income Tax scheme 4. Common questions 5. Further support

Introduction to 'Making tax digital'

The Government set up 'Making Tax Digital' (MTD), to make it easier for individuals and organisations to get their tax right and manage it more easily. It can help make your tax returns more effective, efficient and easier for you, so you can save valuable time for your organisation.

This lesson will give you an overview of the Making Tax Digital scheme. It describes how the scheme works and how to use it. We’ll take you step by step through the process for VAT (Value Added Tax), which is active now. We’ll also cover the Income Tax option. This part of the scheme will become mandatory in 2026, but you can sign up to test it out now. 

What you'll learn

  • What Making Tax Digital is, and how it works.
  • If and when you need to use it.
  • Where to find more support.

How long it takes

9 minutes

Chapter 1 - About Making Tax Digital

About Making Tax Digital

Chapter 1

How long it takes

1 minute

What are the benefits?

'Making Tax Digital' aims to help you to manage your tax returns. It can help you save costs, time and space by getting rid of many existing paper-based processes. Plus, it can help simplify your financial planning, so you have more time to focus on other aspects of your organisation.

Who needs to follow the Making Tax Digital rules?

All VAT-registered organisations need to follow the Making Tax Digital rules, by keeping digital records and using software to send their VAT returns. You’ll need to register for VAT if your VAT taxable turnover is more than £90,000.

 

What’s VAT?

If you sell goods or services, you’re likely to need to add VAT to the price you charge. There are different rates of VAT, and this page shows the current rates and where they each apply. It also shows how to work out prices with and without VAT.

 

If you're not VAT registered

If you’re a sole trader or landlord, you may want to sign up for the voluntary scheme for Income Tax. This part of Making Tax Digital becomes mandatory in 2026 if your income is over £50,000. We’ll look at this later in the lesson.

Introduction - Making tax digital
Chapter 2 - The VAT scheme

The VAT scheme

Chapter 2

How long it takes

2 minutes

What steps do you need to take?

This next section will help you to work through the steps you need to take to set up for Making Tax Digital for VAT. They are:

Step 1

Register for VAT.

Step 2

Pick your software.

Step 3

Store or transfer your details.

Let’s look at each step in more detail.

 

Step 1 - Register for VAT

When you register for VAT, HMRC will automatically sign you up for Making Tax Digital. Wait for HMRC to confirm your registration before moving to Step 2.

 

Step 2 - Pick your software

Before you start to use Making Tax Digital for VAT, you need to store your accounts online using Cloud software. This software lets you store, transfer and access files over the internet instead of keeping them stored in files on your computer. This can make transferring files safer and easier.

So the next step is to select and choose a software system that works for your business. This software can be either compatible VAT record-keeping software, or ‘bridging’ software that can link non-compatible software (such as spreadsheets) to the HMRC systems. The government has a tool to help you find this software. Their list includes free options like QuickFile, MTDsorted and MyTaxDigital. 

 

Step 3 - Store or transfer your details

 

You’ll need to store the following information digitally:

  • Any VAT accounting schemes you use. 
  • The VAT on goods and services you supply or receive. 
  • The 'time of supply' and 'value of supply' (value excluding VAT) for everything you buy and sell. 
  • Any adjustments you make to a return. 
  • Reverse charge transactions. 
  • Your total daily gross takings (if you use a retail scheme). 
  • Items you can reclaim VAT on (if you use the Flat Rate Scheme). 
  • Your total sales, and the VAT on those sales (if you trade in gold and use the Gold Accounting Scheme).

 

You'll also need digital copies of documents covering multiple transactions made on behalf of your organisation by:

  • Volunteers for charity fundraising.
  • Third-party organisations.
  • Employees’ expenses in petty cash.

Test your knowledge

Try again - that's not quite right!

Hint: Doing this will free up space on your own computer.

Try again

That's right!

Storing your accounts online makes transfer to HMRC safer and easier and it frees up space on your own computer.

Chapter 1 - About Making Tax Digital
Chapter 3 - The Income Tax scheme

The Income Tax scheme

Chapter 3

How long it takes

3 minutes

What steps do you need to take?

The Income Tax scheme is voluntary until April 2026. You may want to sign up and help HMRC test out this part of the service.

 

Here are the steps to take: 

Step 1

Work out your qualifying income.

Step 2

Find out if and when you need to use MTD.

Step 3

Pick your software.

Step 4

Sign up to MTD for Income Tax.

Step 1 – Work out your qualifying income

Your qualifying income can be from self-employment, rental or both. HMRC looks at your gross income (or ‘turnover’) from the year before. So, if you submitted a tax return for tax year 2024 to 2025, they’ll use this to work out your qualifying income for tax year 2026 to 2027.  

If you part-own a property that you rent out, HMRC will work out your share. 

 

What else counts towards your qualifying income?

 

What doesn’t count towards it?

  • Qualifying care relief receipts if you’re a carer. 
  • Income from a partnership (unless you receive disguised investment management fees or income based carried interest). 

Be aware

Do you live outside the UK? Check the residence and domicile rules to check what counts towards qualifying income.

Step 3 – Pick your software 

Just like the VAT scheme, you’ll need to pick software that works with Making Tax Digital. This HMRC page has a list of free and paid software that is available now or soon. The list is likely to grow during the voluntary period.  

 

Step 4 – Sign up to MTD for Income Tax 

Before April 2026, signing up is voluntary.

 

You can sign up to the service if:

  • Your HMRC personal details are up-to-date. 
  • You’re a UK resident. 
  • You have a National Insurance (NI) number. 
  • You’ve submitted at least one Self Assessment tax return. 
  • Your tax records are up-to-date (for example, you don’t have any outstanding tax liabilities). 
  • Your accounting period runs from 6 April to 5 April (or 1 April to 31 March if the software you pick supports this).

 

There are some exceptions to who can sign up at this stage.  

 

You won’t be able to sign up voluntarily if: 

  • You have a payment plan with HMRC. 
  • You’re a partner in a partnership. 
  • You claim Married Couple’s Allowance or Blind Person’s Allowance. 
  • You’re (or about to be) bankrupt or insolvent. 
  • You’re an MP, minister of religion or Lloyds underwriter. 
  • You have income from being a foster carer or in a shared lives scheme. 
  • You have income from a trust or a furnished holiday let. 
  • You’re subject to a compliance enquiry.
  • You use ‘averaging’ or other arrangements because your profits vary from year to year (for example if you’re a farmer, writer or artist). 
  • You’re signing up on behalf of someone else (unless you’re an agent). 

Be aware

At busy times, MTD for Income Tax may be slow. There will also be times when system updates mean you won’t be able to use it. This page shows service availability and issues.

Chapter 2 - The VAT scheme
Chapter 4 - Common questions

Common questions

Chapter 4

How long it takes

2 minutes

Answering common questions

  • The Government says that if you already pay by Direct Debit, you shouldn't sign up too close to your Tax return due date. Aim to sign up at least 7 days before or 5 days after. If you don't pay by Direct Debit, then they recommend you sign up at least 3 days before.

  • Once you've signed up, you'll get a confirmation email from noreply@tax.service.gov.uk no later than 3 days later (check your spam folder if you haven't). Don't submit your VAT return before you receive this. If you haven't received it after 3 days, you can contact HMRC.

    The deadlines for your VAT returns won't change after you sign up to Making Tax Digital. You can check when your next return is due on your VAT online account.

  • Some people and businesses will be exempt from one or more parts of Making Tax Digital.  

     

    You may be exempt for MTD for VAT if: 

    • you or your business are subject to an insolvency procedure. 
    • you’ve cancelled your VAT registration but still need to send your final return. 

     

    You may be exempt for MTD for Income Tax if:

    • You’re a trustee. 
    • You don’t have a National Insurance (NI) number on 31 January before the start of that tax year. 
    • You’re a personal representative of someone who’s died. 
    • You’re a Lloyds underwriter. 
    • You have a non-resident company. 

     

    You may also be able to apply for exemption from both parts, if it’s not reasonable or practical for you to use computers, software or the internet.  

     

    This may be due to:

    Your age, health condition, disability or where you live.

    Your religious objections to using computers.

    You don't have access to the internet.

    HMRC has pages to help you find out if you’re exempt and guidance on how to apply for exemption from the VAT and Income Tax parts of MTD.

  • Corporation Tax is the newest part of the Making Tax Digital service. The government ran a consultation about this, which ended in 2021. HMRC doesn’t have a mandated date for the Corporation Tax scheme at the moment. For updates on this, see the HMRC Corporation Tax page.

Chapter 3 - The Income Tax scheme
Chapter 5 - Further support

Further support

Chapter 5

How long it takes

1 minute

Is it normal to need support?

Of course, everyone wants to get their tax right first time. This is why Making Tax Digital is trying to help support businesses by making the process simpler from record keeping to data transfer.

HMRC asked business owners who use MTD for VAT about their experience so far.

 

Their research (PDF, 2.2Mb) found that:

More than half

Feel more confident about getting their tax right.

61%

Feel MTD reduced the potential for making mistakes when submitting their tax return. 

Twice as many

Spend less time on record keeping and tax returns since using MTD, compared to those who spend more time. 

Where to go for support

If you need further help with the Making Tax Digital service, then the Government gives some helpful guidance on their website. You can also contact HMRC for specific guidance.

Related learning links

Receiving online payments

View lesson

Taking control of your revenue and cash flow

View lesson
Chapter 4 - Common questions

Want to learn more?

There are many more lessons to help you manage your business' finances.

Go to this topic Manage your business finances

 

Lloyds Bank Academy is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Lloyds Bank does not endorse the services they provide. The information in this module was last updated on 13th March 2023.

Back to top Click to jump to top of page