Last updated Apr 03, 2024 and written by Lauren Felstead

Your Making Tax Digital Questions Answered

You may have heard a lot about digital tax recently, as the government’s ‘Making Tax Digital’ (MTD) initiative ramped up at the start of the new financial year. Eventually, business owners across the UK will be affected by MTD but many are still unsure about what digital tax really means and how it will affect them.


To get you up to speed with the latest developments and get a clearer understanding of what you need to do, here’s a quick guide that answers the most common MTD questions small businesses have been asking.

What is Making Tax Digital?

Making Tax Digital is the government’s plan to introduce a digital tax system to every taxpayer in the UK in order to make it easier for individuals and businesses to get tax right and keep on top of their affairs. A fully digital tax system will make tax administration more effective, more efficient and easier for taxpayers to understand their tax position at any time.

MTD will eventually apply to all taxpayers, including businesses, self-employed people, landlords and individuals.

What’s Going to Change?

You may have noticed that you already have access to a digital tax account – this account is integral to HMRC’s digital tax plans. This is where you’ll be able to see your tax liability, file your returns and pay your tax bills.

The biggest change is that you’ll need to use accounting software that can connect with HMRC’s systems in order to store digital financial records and comply with the new regulations. The onus is on you to find MTD-compatible software that can meet the demands of the new tax system.

When is MTD Happening?

Right now! Making Tax Digital for VAT, the first stage in the initiative, was rolled out to all VAT registered businesses with VATable sales above the VAT threshold (£85,000) on the 1st April 2019. All affected businesses should already be using MTD-compatible accounting software to record their VAT figures as the next VAT return will need to be done through HMRC’s new systems.

Even if you’re already using digital accounting software, make sure you’ve signed up to MTD to allow you to file your return through the new system.

HMRC hasn’t yet committed to a date for MTD for Income Tax or Corporation Tax, but they’re certainly in the pipeline and could come around as soon as April next year.

What Sort of Accounting Software Will I Need to Use?

There are a few different types of MTD software available, but many of these might not be suitable for your business.

If you’re still using spreadsheets to manage your business finances, it’s a good idea to start looking for a solution that will work in the MTD era. On their own, spreadsheets are not compliant with the new tax rules for MTD for VAT.

You may have heard that “bridging software” enables you to continue to use spreadsheets to submit MTD VAT returns. While this is true, bridging software does not enable you to comply with other parts of the legislation, such as storing digital records and maintaining a digital link with HMRC.

Tried and tested accounting software, like FreeAgent, is the best MTD software solution that will ensure you meet every part of the new MTD for VAT legislation.

More About Making Tax Digital

To stay up-to-date with the new initiative, take a look at FreeAgent’s Making Tax Digital resources for small businesses and accountants, including an in-depth guide outlining everything you need to know about MTD.

More information about the Making Tax Digital initiative, along with a detailed breakdown of timescales and milestones, is also available from