How HMRC Making Tax Digital Is Transforming UK Tax Compliance

The UK tax landscape is undergoing one of its biggest digital transformations in decades. HMRC’s Making Tax Digital (MTD) programme is reshaping how businesses and individuals maintain records, submit returns, and manage compliance. Designed to reduce errors, improve accuracy, and streamline tax administration, MTD is pushing the UK towards a fully digital tax ecosystem. As new phases roll out, understanding how MTD is transforming tax compliance is essential for businesses that want to stay ahead of the curve.

What is Making Tax Digital UK?

Launched in 2019 by the UK government’s His Majesty’s Revenue and Customs (HMRC), Making Tax Digital or MTD is an initiative to push businesses and individuals into keeping digital records and submitting tax returns using compatible software. As of 2025, only MTD for VAT is mandatory for most VAT-registered businesses in the UK. In the planned phase-wise roll-out of MTD, Income Tax Self Assessment (ITSA) and, eventually, Corporation Tax will come under MTD. The roll-out of MTD for ITSA is expected to start in April 2026 in phases. For most sole traders and landlords, MTD will be mandatorily applicable from April 2026.

Making Tax Digital Deadlines for Income Tax

• Sole traders and/or landlords with an income of over £50,000 will need to use Making Tax Digital for Income Tax from April 2026.

• Sole traders and/or landlords with an income of over £30,000 will need to use Making Tax Digital for Income Tax from April 2027.

• In the future, the income from the above sources exceeding £20,000 will have to use MTD for Income Tax. However, the dates for this change have not been announced by the HMRC.

• To calculate if you are above or below the threshold, you should combine all self-employment and landlord incomes.

Making Tax Digital for Individuals and Self-Assessment

The next phase of MTD brings self-employed people and landlords into the digital system. HMRC will gradually move these groups into the Making Tax Digital for individuals framework, which means their income and expenses will be recorded digitally throughout the year. As part of this, quarterly updates will replace the old once-a-year routine of making tax digital for self-assessment, giving people a clearer sense of their tax position and fewer surprises at year-end.

The idea isn’t to make life harder. It’s to stop the usual rush in January and give people a clearer view of what they owe throughout the year. If someone already keeps decent digital records, the shift won’t feel dramatic. But if everything sits in notebooks or loose bills, now’s the time to start organising things properly.

How MTD Is Transforming UK Tax Compliance

The MTD initiative is meant to transform the UK tax system and make way for a more efficient and error-free system. Some of the benefits of the HMRC Making Tax Digital are discussed in this section.

Greater Accuracy and Fewer Errors

• Digital record-keeping reduces transposition errors (as opposed to the manual data entry system).

• Automated calculations avoid human errors.

Real-Time, Insightful Data

• Businesses get a clearer financial picture throughout the year.

• Accountants can provide proactive advice (cash flow planning, tax forecasting).

Streamlined Processes for Small Businesses

• Less paperwork, better integration with accounting software (Xero, QuickBooks, Sage).

• Avoids repetitive data entry, enabling a seamless workflow.

Faster Filing and Reduced Admin

• Submissions directly from software save time.

• HMRC receives cleaner data, leading to fewer queries later.

Better Compliance and Lower Audit Risk

• Digital audit trails.

• Fewer late filings or missing data.

Making Tax Digital Software Options

The software side can confuse people, especially those switching from spreadsheets. Tools like Xero and QuickBooks work well, but a lot of smaller businesses still prefer Sage, which is now built to support making tax digital requirements.

All of these platforms follow the rules set under Making Tax Digital (MTD), meaning they can store digital records, send updates directly to HMRC, and reduce the back-and-forth that usually happens during filing. The main benefit is that you don’t have to enter the same numbers in three different places anymore.

Making Tax Digital Challenges for Businesses

Despite the several advantages of HMRC’s Making Tax Digital initiative, many businesses still face challenges and difficulties in adopting it, such as:

• Software learning curve for traditional businesses

• Initial setup costs, especially for micro-businesses and sole traders

• Need for consistent digital record-keeping

• Internet and tech readiness in rural areas

• Compliance deadlines and adapting to ongoing tweaks to HMRC’s roadmap

Many small businesses find it difficult and costly to adapt to the MTD system, and are reluctant to move to an electronic tax lodgement process. Even in the initial roll-out period, a lot of businesses struggled to implement digital programs and compatible software solutions. However, even micro-businesses, by April 2027, would have to opt for MTD as the HMRC would no longer accept manual lodgement. This is where an agent or an outsourced partner can come in handy. 

Making Tax Digital Corporation Tax: What Businesses Should Know

While corporation tax isn’t part of MTD yet, HMRC has already started testing the system. At some point, companies will fall under digital corporation tax, but HMRC hasn’t confirmed the exact date.

For most companies, the best approach right now is to shift away from manual books and move towards digital workflows that can eventually plug into HMRC’s system. When the rules go live, businesses that already use proper software won’t have much to change.

Making Tax Digital Accountants: Preparing for MTD Compliance

Accountants have been adjusting behind the scenes for years. Most firms now offer dedicated MTD support because clients ask for it more than anything else.

Many have upgraded to cloud tools, added digital record-keeping checks, and built processes that match HMRC’s rules. When people talk about making tax digital accountants, they’re usually referring to firms that help clients move away from old systems and keep their books updated throughout the year. The role is less “fix it at year-end” and more ongoing guidance.

Making Tax Digital: The Role of Accountants and Outsourcing Partners

Sole traders and small businesses can benefit from outsourced accounting partners who specialise in  tax solutions for UK businesses. With specialised knowledge and experience in Making Tax Digital rules and regulations, outsourced partners make the process of adopting MTD a hassle-free and easy process. Outsourcing partners help businesses move to compliant systems, migrate data, and maintain accurate digital books. This leaves business owners free to focus on their revenue-generating activities instead of administrative and regulatory tasks. This also helps businesses avoid costly Making Tax Digital penalties.

How Businesses Can Prepare for Future MTD Phases

As HMRC continues to move towards a universal application of MTD across VAT, Income Tax, and eventually Corporation Tax, sole traders, small and large businesses, and self-employed individuals have to make changes to the way they do business for a fully digital compliance environment. The best way to do this is by partnering with specialist outsourced tax support services that offer MTD-compliant solutions. 

Outsourced partners such as befree help you to:

• Adopt MTD-compatible software early

• Digitise receipts, invoices, and processes

• Automate reconciliations

• Train teams on digital bookkeeping

These partners bring the right mix of technology, software expertise, and compliant workflows to help businesses transition smoothly. Outsourced teams ensure every element of the MTD framework is met without adding extra burden on internal staff. 

Conclusion – The Digital Future of UK Tax

UK businesses have to be early adopters of digital technology to remain competitive and compliant in the face of the upcoming end-to-end digital tax ecosystem. Making Tax Digital is an opportunity to transform your processes, automate systems, and ensure higher accuracy and enhanced efficiency. By partnering with befree for MTD compliance, you stand to gain efficiency, accuracy, and better financial control. Contact us to learn how we can assist you in adopting Making Tax Digital early on.