Making Tax Digital
Making Tax Digital (MTD) is the digital transformation of the United Kingdom’s tax system by HM Revenue & Customs (HMRC).
What is Making Tax Digital?
Making Tax Digital (MTD) is a UK government initiative led by HMRC, launched in 2019, with the goal of simplifying and modernising the way businesses and individuals manage their tax. MTD requires businesses to keep digital records and submit tax returns using compatible software, reducing the reliance on manual processes and minimising errors.
This initiative is a part on an ongoing effort by global tax authorities to modernise and digitalise their tax processes (examples include myDATA in Greece and SII in Spain).
As of 2025, MTD for VAT is fully in effect for most UK VAT-registered businesses, with plans underway to extend it to Income Tax Self Assessment (ITSA) and Corporation Tax in future phases.
Timeline of Making Tax Digital
April 2019: The UK government launched Phase I of Making Tax Digital. This signalled the beginning of a soft landing period requiring VAT-registered businesses with taxable turnover above the VAT threshold to keep digital records and file VAT returns through HMRC’s API-portal.
30 April 2019: The first monthly VAT return was submitted through MTD.
30 June 2019: The first quarterly MTD VAT return was filed.
April 2021: The soft-landing period ended. Businesses were required to have digital links in place throughout their VAT accounting process.
April 2022:MTD for VAT was extended to all VAT-registered businesses, including those below the VAT threshold.
2024 – 2025: HMRC continued pilot testing for MTD for Income Tax Self Assessment (ITSA). The official rollout for ITSA was delayed to April 2026 to allow more time for testing and support for taxpayers.
Who does MTD affect?
The implementation affected all VAT registered businesses with a taxable turnover above the UK VAT threshold of £85,000. This was then deferred to October 2019 for certain types of businesses e.g. trusts, non-profits and public sector bodies.
Adaption to this new system was not entirely straightforward. Many businesses struggled to implementing digital programs and compatible software solutions. Similarly, the HMRC encountered problems on their side.
To ease the transition, the HMRC introduced a one-year soft-landing period. During this time, businesses were allowed to implement permanent links whilst using bridging software to transmit their VAT returns digitally. During this grace period the HMRC did not issue penalties for not keeping incomplete digital records.
As of 2025, MTD for VAT, is mandatory for all VAT-registered businesses, regardless of turnover. Future MTD phases will impact those under Income Tax Self Assessment (ITSA) and, eventually, Corporation Tax.
Digital links for MTD
Digital links are an integral part of Making Tax Digital, yet many businesses remain unclear about what does, and does not qualify as a digital link. To remain compliant within the MTD system, businesses need to maintain a connection via ‘functional compatible software’ with the HMRC.
In other words, businesses need to show that digital links are implemented throughout the end-to-end process for their VAT returns. There needs to be an electronic data trail between the company’s invoices and the HMRC portal.
However, the case may be that a business uses one software for submissions and another for record keeping. The solution is using a digital link.
What qualifies as a digital link?
There are strict rules about what qualifies as a digital link and it took a long time for the HMRC to give exact details on what qualified. However, the definition isn’t as narrow as was first assumed.
According to the HMRC, digital links have two qualifications.
- Data should be able to be transferred electronically between software programs, products, or applications.
- Transfers should be automated. No manual intervention should be required.
Examples of accepted digital links:
- Linked cells in an excel spreadsheet
- Emailed records (e.g. Excel spreadsheet)
- Records stored on a portable device (memory stick etc)
- Imported or exported XML and/or CSV
- API transfer
- Downloaded files
What does not qualify as a digital link?
- Manual data that has been ‘cut and pasted’.
- Manual adjustments or consolidations of group returns via spreadsheets.
Comply – Our Unique Solution to Making Tax Digital
Recognised by HMRC, Comply can assist businesses in adhering to Making Tax Digital obligations. Any adjustments to submitted data are fully tracked by Comply to ensure it is compliant with MTD requirements during preparation and adjustments can only be amended before the submission. Comply provides a full audit trail for the HMRC.
Making Tax Digital – Phase II
Phase 2 of MTD was originally scheduled for April 1st 2020 but was postponed by 12 months due to COVID-19 lockdowns. The revised start date was April 2021.
This phase marked a significant tightening of MTD compliance requirements. From this point on, all VAT-registered businesses above the threshold were required to:
- Maintain fully digital VAT records
- Implement digital links throughout their VAT return process
- Use functional compatible software to submit returns via HMRC’s API
Manual processes, including copying and pasting figures between spreadsheets or systems, were no longer permitted. Failure to meet these requirements could result in penalties, with HMRC beginning to enforce MTD rules more actively following the end of the soft-landing period.
As of 2025, these obligations also apply to VAT-registered businesses below the threshold, which came into scope in April 2022
Digital Reporting
What records does a business need to keep?
There is a variety of VAT data that needs to be stored digitally according to the MTD rules. As of Phase 2 and the expanded MTD rollout, business are required to keep the following digital records:
- Basic business information, including:
- Business name and address
- VAT registration number
- Details of any VAT accounting schemes used
- Sales and output VAT data, including:
- Time of supply (tax point)
- Value of supply (net value excluding VAT)
- Rate of VAT charged
- Reverse charge transaction (if applicable)
- Daily gross takings (for businesses using retail schemes)
- Total sales including VAT (for those under the Gold Accounting Scheme)
- Purchases and input VAT data, including:
- Goods and services received
- Time and value of supply
- Amount of input VAT to recalim
- Items reclaimable through the Flat Rate Scheme
- Adjustments and corrections, such as:
- Error corrections
- Partial exemption adjustments
- Capital goods scheme adjustments
- Bad dept relief
Since the beginning of phase 2, digital links need to be in place to track the digital journey of all the data. Failure to properly follow MTD requirements will result in penalties. Non-compliance risks penalties under HMRC’s MTD penalty regime, which as of January 2023, uses a new points-based system for late submissions and payments.
Making Tax Digital Penalties
Between April 2019 to April 2021,HMRC operated a ‘soft landing’ period for Making Tax Digital (MTD). During this time, businesses were expected to make a genuine effort to comply, but penalties were not enforced for non-compliance with digital link requirements or software usage.
However, since the launch of Phase II in April 2021, and particularly following the introduction of a new penalty regime in January 2023, the rules have become significantly stricter.
HMRC now applies penalties in three key areas:
- Failure to maintain digital records
- Late submission of VAT returns
- Late VAT payments
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