Making Tax Digital: What UK Businesses Need to Know

What Is Making Tax Digital?

Making Tax Digital (MTD) is HMRC’s programme to move the UK tax system online. It requires businesses to keep digital records and submit tax returns using HMRC-recognised software. If you use Xero, you already have everything you need to comply.

MTD started with VAT in April 2019 and is now expanding to income tax. Here’s what UK businesses need to know in 2026, and how Xero handles it.

MTD for VAT: What You Need to Know

Since April 2022, all VAT-registered businesses must use Making Tax Digital compatible software to keep digital records and submit VAT returns. This applies regardless of turnover – if you’re VAT-registered, you’re in scope.

In practice, this means:

You must keep your VAT records digitally (not on paper or in spreadsheets without a digital link)
You must submit your VAT return through HMRC-recognised software, not through the HMRC online portal
There must be digital links between your records and the submission – no manual retyping of figures

Xero has been HMRC-recognised for MTD for VAT since the programme launched. You can file your VAT return directly from Xero in a few clicks.

MTD for Income Tax: The 2026 Deadline

From 6 April 2026, MTD extends to income tax self assessment (MTD for ITSA). This affects sole traders and landlords with qualifying income above £50,000. The rollout is phased:

April 2026: Sole traders and landlords with income over £50,000
April 2027: Income threshold drops to £30,000
April 2028 onwards: HMRC plans to extend further, potentially to all self-employed individuals

Under MTD for ITSA, you’ll need to submit quarterly updates to HMRC (not just an annual tax return) and file a final declaration at the end of the tax year. Xero supports both quarterly submissions and the final declaration process.

How Xero Handles Making Tax Digital

MTD for VAT in Xero

If you’re already using Xero for your bookkeeping, MTD for VAT compliance is built in. Xero connects directly to HMRC’s MTD gateway, so you can:

Record your transactions in Xero as normal
Go to Accounting > Reports > VAT Return
Review the figures Xero has calculated from your records
Click Submit to HMRC to file your return

That’s it. No separate software, no bridging tools, no manual data entry. Your bank feeds, invoices, bills, and expense records all feed directly into the VAT return calculation. The digital links requirement is satisfied automatically because everything lives in one connected system.

MTD for Income Tax in Xero

Xero has been part of HMRC’s MTD for ITSA pilot programme and is ready for the April 2026 launch. If you’re a sole trader or landlord using Xero, the software handles:

Quarterly updates – submit your income and expense summaries every quarter directly from Xero
Digital record keeping – your Xero records satisfy HMRC’s digital record requirements
Final declaration – at the end of the tax year, submit your final figures through Xero (replacing the old self assessment tax return)
Multiple income sources – if you have both self-employment and property income, Xero handles separate submissions for each

Connecting Xero to HMRC for MTD

To use Xero for MTD submissions, you need to connect your Xero account to HMRC. This is a one-time setup:

In Xero, go to Accounting > Reports > VAT Return (for VAT) or the MTD for Income Tax section
Click Connect to HMRC
You’ll be redirected to the HMRC Government Gateway login page
Enter your Government Gateway credentials and grant Xero permission to submit on your behalf
You’ll be redirected back to Xero, and the connection is live

The authorisation lasts 18 months before you need to reconnect. Xero prompts you when it’s due for renewal.

What About Spreadsheets? MTD Bridging Software

If you currently keep your records in Excel or Google Sheets and don’t want to switch to full accounting software, you have two options:

Option 1: Use bridging software – tools like VitalTax and 123 Sheets connect your spreadsheet to HMRC’s MTD gateway. You keep your records in the spreadsheet and the bridging tool submits the summary figures. This is the cheapest route to MTD compliance (from around £30/year).

Option 2: Move to Xero – this gives you MTD compliance plus proper cloud accounting: bank feeds, invoicing, expense tracking, and real-time financial reporting. If you’re going to invest time in MTD compliance anyway, moving to Xero gives you far more value than a bridging tool alone.

We’ve written a detailed comparison of free and low-cost MTD software options on our sister site if you want to compare costs.

MTD Penalties: What Happens If You Don’t Comply?

HMRC introduced a new penalty points system for MTD in January 2023. Here’s how it works:

You receive one penalty point for each late submission
Once you reach the threshold (4 points for quarterly submissions), you get a £200 penalty
Every subsequent late submission also triggers a £200 penalty
Points expire after 24 months of compliance (for quarterly filers)

There’s also a separate regime for late payment of tax owed. Interest accrues from the due date, and penalties kick in after 15 days (2% of tax owed), 30 days (another 2%), and ongoing (4% per annum).

The first MTD for ITSA quarterly update is due by 7 August 2026 for anyone starting in April 2026. Miss it and you start accumulating penalty points.

Exemptions from Making Tax Digital

Not everyone needs to use Making Tax Digital. HMRC grants exemptions for people who are digitally excluded, have religious objections to using computers, or live in areas with no internet access. If you qualify for an exemption, you can continue using the existing Self Assessment process.

How JacRox Helps with Making Tax Digital

As Xero Gold Partners, we help UK businesses with every aspect of MTD compliance:

Setup – we connect your Xero account to HMRC, configure your VAT scheme, and make sure your digital records meet HMRC requirements
Quarterly submissions – we can prepare and submit your quarterly updates on your behalf, so you don’t have to think about deadlines
Migration from spreadsheets – if you’re still using Excel, we handle the move from spreadsheets to Xero so you’re MTD-ready
Ongoing support – MTD rules change regularly. We keep you informed and make sure your software stays compliant

Not sure if MTD applies to you? Get in touch and we’ll check your situation. There’s no charge for an initial conversation.

Looking for help? Our MTD-ready Xero accountants work with businesses like yours every day.

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