What is Making Tax Digital? A Complete Guide for UK Sole Traders

Why HMRC Introduced Making Tax Digital

HMRC estimates that "avoidable" tax errors cost the UK billions each year, largely due to mistakes on paper tax returns, lost receipts, and miscalculated figures. Making Tax Digital was designed to reduce this tax gap by moving record keeping and filing into approved digital software.

The shift to digital also means HMRC receives more up-to-date information about your income. Rather than waiting until January each year to find out what you earned in April, HMRC will receive quarterly summaries throughout the year. The goal is fewer surprises and fewer errors on both sides.

What MTD Means in Practice

Under MTD, you can no longer keep records in a paper ledger or a basic spreadsheet and type figures into HMRC's website at the end of the year. You must use HMRC-recognised software that stores records digitally and submits data directly to HMRC via their API.

For most sole traders this means: recording every sale and expense in approved software throughout the year, submitting a quarterly summary of income and expenses to HMRC (four times per year instead of once), and making a final End of Period Statement and crystallisation declaration at the end of the tax year.

The practical impact is smaller than it sounds. If you already use accounting software or a modern banking app, you may already be capturing much of this data. The main change is the quarterly submission requirement.

MTD for VAT: Already Mandatory

MTD for VAT became mandatory for all VAT-registered businesses in April 2022. If you are VAT registered, regardless of your turnover, you are already required to keep digital VAT records and submit returns through compatible software. There is no opt-out.

If you are VAT registered and not yet using MTD-compatible software, you are already non-compliant and may receive a penalty notice from HMRC.

MTD for Income Tax: Mandatory from April 2026

MTD for Income Tax Self Assessment (ITSA) becomes mandatory in two stages. From 6 April 2026, sole traders and landlords with gross income over £50,000 per year must comply. From April 2027, the threshold drops to £30,000.

If your combined income from self-employment and property is above the threshold, you must be using MTD-compatible software from the start of the 2026–27 tax year. Signing up before the deadline is recommended. HMRC requires advance registration.

Penalties for non-compliance with MTD are points-based. Late or missed quarterly submissions earn penalty points, and once you accumulate enough points, a financial penalty is applied.

Who is Exempt from MTD?

HMRC has confirmed exemptions for taxpayers who cannot use digital tools for religious reasons, or where it is genuinely not practicable due to disability, age, remoteness of location, or other reasons. Exemptions must be applied for. They are not automatic.

Partnerships, trusts, and companies are not in scope for MTD ITSA, though they will be addressed in future phases.

How to Get Ready

The most important action is to choose MTD-compatible software and start using it before your mandatory start date. Using software for a full tax year before you are mandated will make the transition much smoother.

You should also register for MTD with HMRC before your start date. You cannot submit MTD updates without first enrolling. Your software provider should guide you through this.

FileThat supports full MTD for VAT and MTD for Income Tax. It handles quarterly submissions, digital record keeping, and the End of Period Statement, all in one place, at a flat fee per filing rather than a monthly subscription.