Making Tax Digital Compliance Explained: Rules & Requirements

Making Tax Digital (MTD) compliance requires taxpayers to keep digital records, use HMRC-compatible software, and submit tax information electronically.

For some people, that means changing how they keep records and report taxes. For others, it means preparing for new rules that may apply soon, as MTD continues rolling out.

Understanding what is required early on can help you make the transition much smoother.

In this article, we’ll break down what Making Tax Digital actually is, who it applies to, and what you need to do to stay compliant.

Key points

• Compliance is built around three core rules 3️⃣
  To be MTD-compliant, you must keep digital records, use approved software, and submit information to HMRC digitally. These rules apply differently depending on whether you’re VAT-registered, self employed, or a landlord, but the structure stays the same across all groups.
• Digital records and software are the foundation 💻
  MTD isn’t just about filing differently. Records must be kept digitally using compatible software, which helps reduce errors, accurately capture transactions, and keep you ready for reporting deadlines.
• Income Tax reporting is moving to quarterly updates 📅
  Under MTD for ITSA, self employed individuals and landlords will move away from a single yearly return and instead submit updates throughout the year. This is being rolled out gradually from 2026 based on income thresholds.
• Automation tools can significantly reduce compliance stress 🚀
  Because MTD increases ongoing admin, many people use automation tools like ANNA to simplify compliance. ANNA handles digital bookkeeping, real-time tax estimates, expense tracking, invoicing, and deadline reminders in one system.

What is Making Tax Digital?

Making Tax Digital is a UK government initiative led by HMRC to modernise the tax system.

According to HMRC, mistakes in record-keeping and tax reporting account for a significant share of the tax gap – the difference between tax owed and tax collected.

Digital processes improve accuracy, reduce manual mistakes, simplify filing, boost visibility into liabilities, and streamline compliance, shifting tax admin from reactive to proactive.

Instead of relying on manual spreadsheets, paper records, or one annual tax return to report everything at the end of the year, MTD requires taxpayers to:

• Keep digital records
• Use compatible software
• Send tax information to HMRC digitally
• Follow new reporting schedules, depending on the tax involved

The long-term goal is a more efficient system where tax is managed in real time, with fewer surprises, missed deadlines, and costly mistakes.

What does MTD compliance mean?

MTD compliance means following HMRC’s digital rules for record-keeping, software use, and submissions, tailored to your tax type (VAT or Income Tax). Obligations vary depending on whether you’re VAT-registered, self employed, or a landlord.

In practice, MTD compliance usually rests on three core requirements:

1. Keeping digital records

Under MTD, businesses and individuals need to keep certain records in digital form. This involves keeping records electronically as part of your day-to-day bookkeeping process.

Depending on your circumstances, digital records may include:

• Income received
• Sales transactions
• Business expenses
• VAT records
• Property income
• Allowable deductions
• Purchase information
• Tax adjustments, where relevant

In practice, this means information should be captured and stored using software, apps, digital bookkeeping systems, or other compliant methods.

Keeping digital records can help you:

• Improve accuracy
• Reduce missed transactions
• Stay ready for filing deadlines
• Track tax liabilities throughout the year
• Support compliant submissions to HMRC

That matters because many tax problems begin long before a return is submitted. They start with incomplete records, forgotten expenses, missing invoices, or figures entered months after transactions happened.

In many ways, this is less about extra admin and more about replacing reactive admin with organised systems.

2. Using MTD-compatible software

The second major requirement is using MTD-compatible software.

Broadly, this means software capable of:

• Storing digital records
• Maintaining required tax data
• Connecting with HMRC systems
• Submitting information digitally
• Supporting digital links where needed

There are many different software types, such as:

• Accounting software: Broader tools that manage bookkeeping, invoicing, expenses, and tax reporting in one place
• Bookkeeping tools: Software focused mainly on recording income, expenses, and keeping financial records organised
• Bridging software: Tools that connect existing spreadsheets or records to HMRC so you can submit data digitally
• Integrated tax platforms: Software designed to handle compliance and tax submissions, often alongside automated calculations and filing features

Whichever software you choose, the important point is that it satisfies HMRC requirements.

Compatible software can also help with:

• Automating calculations
• Capturing transactions in real time
• Tracking VAT obligations
• Managing quarterly reporting where relevant
• Reducing manual errors
• Supporting deadline management

For many people, this is where MTD shifts from being a compliance burden to something that can actually simplify tax admin.

3. Submitting information digitally to HMRC

The third core requirement is digital submission.

Certain returns or updates must be submitted via compatible software rather than older manual methods.

What exactly must be submitted depends on the part of MTD that applies to you.

This may involve:

• VAT returns under MTD for VAT
• Periodic updates under MTD for Income Tax
• End-of-year declarations

MTD compliance timeline: When you need to comply

When you need to start MTD depends on the type of tax that applies to you. There are two possibilities:

1. Making Tax Digital for VAT

MTD for VAT is already part of the compliance landscape.

If you are VAT registered, you need to keep digital VAT records and maintain digital links where required. You must also use compatible software to submit VAT returns through MTD processes.

For many VAT-registered businesses, this is already routine.

Businesses often need to maintain digital records, including:

• Time of supply
• Value of supply
• VAT charged
• VAT reclaim information
• Adjustments where relevant

Exactly what records you need depends on circumstances, but the principle is clear – the underlying records supporting your VAT return must meet digital requirements.

2. Making Tax Digital for Income Tax

In April 2026, MTD was also expanded into Income Tax.

Making Tax Digital for Income Tax Self Assessment, or MTD for ITSA, affects sole traders, self employed individuals, and landlords.

MTD for ITSA is coming out in phases:

If you fall within the relevant thresholds when the rules apply, you’ll need to comply with the new MTD for ITSA rules.

Because thresholds and timelines can change, it is important to check the current HMRC guidance.

How to prepare for MTD for ITSA

Even if you’re not affected by MTD for ITSA this tax year, you still need to prepare for the future rollouts.

Here are the main steps to take:

1. Check if MTD for ITSA applies to you

Start by confirming whether you’ll need to comply and when the rules affect you. This depends on your qualifying income from self employment and property.

Knowing your timeline gives you time to prepare gradually, rather than rushing when the rules take effect.

2. Move your records into a digital system

If you currently use spreadsheets, paper receipts, or manual records, now is a good time to switch to digital bookkeeping. Under MTD, keeping digital records is a core requirement, so getting comfortable with this early can make the transition much smoother.

3. Choose MTD-compatible software

You’ll need software that can maintain digital records and submit information to HMRC in line with MTD requirements. Choosing software before you’re required to use it gives you time to get set up and build good habits.

4. Get used to more regular reporting

One of the biggest changes under MTD for ITSA is moving away from relying on a single annual Self Assessment return.

You’ll need to get used to:

• Sending quarterly updates
• Reviewing income and expenses more regularly
• Completing the year-end finalisation process
• Keeping records accurate throughout the year

Building a routine now can make quarterly reporting feel manageable instead of disruptive.

5. Review your bookkeeping processes

MTD is a good motivator to tidy up your overall financial management.

Ask yourself:

• Are my expenses being recorded consistently?
• Are invoices tracked properly?
• Are receipts stored digitally?
• Are my tax estimates clear throughout the year?
• Are deadlines easy to keep on top of?

Improving these processes now can reduce errors, missed deductions, and last-minute stress later.

6. Consider using software that automates compliance

For many sole traders and landlords, preparation is less about learning complicated tax rules and more about reducing admin.

As reporting becomes more frequent, manual admin can quickly add up, from keeping digital records up to date to ensuring submissions stay compliant. That’s why many people preparing for MTD look for software that can automate as much of this work as possible.

ANNA – the smarter, free MTD compliance solution

MTD compliance is easier when the admin takes care of itself.

Rather than relying on spreadsheets, manual record-keeping, separate filing tools, and deadline reminders scattered across different systems, ANNA helps bring everything together in one place and automates much of the work in the background.

If you’re new to MTD, ANNA offers free Self Assessment filing for the 2025/26 tax year. If you’ve already registered with someone else, don’t worry – ANNA will also refund the filing fee when you switch.

With ANNA, you also get:

• MTD for ITSA compliance support built in: Rather than adapting your processes around new reporting rules, ANNA is designed to support digital record-keeping and MTD compliance as part of your day-to-day admin.
• Real-time tax estimates: You can see what you owe as you go, based on your actual income and expenses, so there are fewer surprises.
• Automatic bookkeeping and expense tracking: Income and expenses are categorised automatically, reducing manual admin and helping keep your records accurate and up to date.
• Built-in UK business account and invoicing: Cash management, bookkeeping, and invoicing all sit in one place, so there’s less switching between separate tools and systems.
• Smart Tax Pots: Set money aside for tax automatically as you earn, helping you stay prepared for future bills.
• Deadline reminders and 24/7 support: Stay on top of what’s due and get support whenever you need it.

If you want to achieve MTD compliance with less admin, sign up with ANNA today.