Making Tax Digital — HMRC's project to digitise tax compliance — has been mandatory for all VAT-registered businesses since April 2022, regardless of size. If you're VAT-registered and still emailing your accountant a spreadsheet for the quarter, you're technically non-compliant and accumulating penalty points. This guide covers what MTD actually requires, the software options, and the related Income Tax MTD rollout starting in April 2026.
What MTD for VAT actually requires
MTD for VAT has three operational requirements:
- Digital record-keeping. Your VAT records must be kept in digital form using "functional compatible software" — not on paper, not in a spreadsheet that's manually summarised. Specifically, every line of your sales and purchases must exist in software that can be linked digitally to your VAT return.
- Digital links between systems. If you use multiple bits of software (e.g. a billing app + a separate accounting package), the data must move between them via a "digital link" — an API, a CSV export-import, an Excel formula linking cells. Manually retyping numbers between systems breaks the rules. The "soft-landing" period that allowed copy-paste ended in April 2021.
- Submission via MTD-compatible software. The return itself must be filed through software with an API connection to HMRC — not by retyping figures into the old gov.uk VAT portal (which has been switched off for MTD-mandated businesses since November 2022).
Who has to comply
VAT: Every VAT-registered business since April 2022, regardless of turnover. There used to be an exemption for businesses below the registration threshold; that's gone. If you're VAT-registered, you're in.
Exemptions exist but are narrow: businesses run by religious societies whose beliefs are incompatible with computer use; businesses whose owners are demonstrably unable to use digital tools because of age, disability or geographical remoteness; insolvency cases. HMRC must approve the exemption in advance — you can't self-exempt.
The MTD for Income Tax timeline
MTD for Income Tax Self Assessment (MTD ITSA) is the next phase. The timeline has slipped twice, but the current plan is:
- April 2026 — mandatory for sole traders and landlords with gross income from self-employment + property over £50,000.
- April 2027 — extended to those with gross income over £30,000.
- April 2028 — proposed extension to those with gross income over £20,000.
Under MTD ITSA, the annual Self Assessment return is replaced by quarterly summary updates plus an end-of-year statement and final declaration. Total: five submissions per tax year instead of one. The income threshold is based on gross self-employment + property income (not profit, and not including employment or investment income), so freelancers with side-employment can still be caught.
If you're affected, the practical move is to migrate to MTD-compatible bookkeeping software this year rather than waiting — the quarterly updates require records that are already in software-friendly format.
MTD-compatible software
HMRC publishes the full list of compatible software, but for UK freelancers the relevant options are:
- FreeAgent — UK-built, included free if you bank with NatWest, RBS, Mettle or Ulster. Best fit for most sole traders and small Ltds. Full review in our accounting software comparison.
- Xero — polished international option, strong with accountants. Better fit for limited companies working with an accountant.
- QuickBooks Self-Employed — stripped-back option for sole traders, but limited on the company side.
- Sage Accounting — older incumbent; pricing tends to drift up.
- Bridging software (e.g. VitalTax, 123 Sheets, BTC Software) — small utilities that submit a spreadsheet's totals to HMRC. Useful if you already have a spreadsheet-based bookkeeping system and don't want a full accounting subscription. But the digital-link rules mean the spreadsheet itself still has to comply.
The points-based penalty regime
From January 2023, late VAT submissions and late VAT payments use a points-based system that's more lenient on one-off slips and harsher on repeat offenders.
Late submission
Each late submission earns one penalty point. When you hit the threshold for your filing frequency, you get a £200 fine and a further £200 fine for each subsequent late submission:
- Quarterly filers (most VAT-registered businesses): threshold is 4 points.
- Monthly filers: threshold is 5 points.
- Annual filers (Annual Accounting Scheme): threshold is 2 points.
Points expire after 24 months if you stay clean. Once you've reached the threshold, you have to submit on time for a "period of compliance" (12 months for quarterly filers) before the slate is wiped.
Late payment
- Days 1–15 overdue: no penalty, but interest accrues.
- Days 16–30: 2% of the unpaid VAT.
- Day 31+: additional 2% (i.e. 4% total) plus a 4% annualised second penalty until paid.
Interest on unpaid VAT runs from the day after the due date at Bank of England base rate plus 2.5%.
Common mistakes
- Keeping a "shadow" spreadsheet alongside accounting software and manually reconciling. Even if your software is MTD-compliant, if your actual day-to-day records live in a non-linked spreadsheet and you re-enter the totals each quarter, you're breaking the digital-link rules.
- Filing through the old gov.uk portal. The portal still exists for non-mandated businesses, but if you're VAT-registered, submitting there isn't valid. HMRC will treat it as a non-submission.
- Missing a quarter while migrating software. If you switch accounting packages mid-year, you need the new software registered and linked to your HMRC MTD account before the next return is due.
- Forgetting the reverse-charge. Foreign software bills (Google, Meta, AWS) require reverse-charge entries that show up in both Box 1 and Box 4. See our reverse-charge guide.
No — if your current setup is MTD-compatible for VAT, you're fine for VAT going forward. The same software will likely handle MTD for Income Tax when your income threshold is breached, but check that your provider has confirmed ITSA support (most have).
Yes, but only as one component of a compliant system. The spreadsheet must have a digital link to MTD-compatible bridging software (which submits to HMRC's API). Manual retyping of totals from spreadsheet to portal is not compliant.
The legal responsibility for the accuracy of the return is yours, not the software's. Cross-check the figures before submitting. If a software fault caused a material error, HMRC's "reasonable excuse" provisions sometimes apply, but it's rarely a get-out-of-jail-free card.
No — most VAT-registered businesses file quarterly. Monthly filing is optional and usually only chosen by businesses in a repayment position (where HMRC owes you regularly). Annual filing is available via the Annual Accounting Scheme. Whichever frequency, MTD rules apply.
For late submission, the points system is automatic — you get a point as soon as you're late. The £200 fine only triggers once you cross the threshold for your filing frequency. For late payment, interest accrues from day 1 and the percentage penalties trigger at day 16 and day 31 — both automatic.
You must apply to HMRC in advance and provide evidence. Common grounds: severe disability, no internet access in your area, religious objection. Once granted, you can continue filing via the old portal. The exemption is narrow — most businesses don't qualify.
Not yet for corporation tax — MTD for Corporation Tax has been mooted but not confirmed. MTD for VAT applies to limited companies just like to sole traders. MTD for Income Tax Self Assessment applies to individuals (sole traders, landlords) — limited company directors aren't included in that programme (they file annual CT600 returns separately).
General guidance on MTD compliance for UK freelancers. Not personal tax advice. For exemption applications, complex multi-entity setups, or migration projects, consult a qualified accountant or MTD specialist.