From Paper to Digital- Preparing for HMRC’s 2026 Making Tax Digital (MTD) Mandate

From April 2026, a significant change will come into effect regarding how businesses report tax to HMRC.

Under the Making Tax Digital (MTD) initiative, businesses with annual income over £50,000 will be legally required to use compatible digital software to keep tax records, submit tax data, and make payments. This change marks the beginning of a phased and mandatory shift away from traditional paper-based and spreadsheet accounting. Rather than manually entering figures on the HMRC website, all submissions must be made through approved digital systems that connect directly to HMRC.

The rollout of MTD will continue in stages, with businesses earning over £30,000 required to comply from April 2027, and the threshold further lowering to £20,000 from April 2028. Ultimately, the goal is for all businesses to adopt MTD, although HMRC may grant exemptions in specific cases. Exemptions could apply if age or disability prevents use of electronic devices to manage digital tax records, if the business is undergoing insolvency procedures, or if religious beliefs prohibit the use of electronic records or devices.

While compliance with MTD is mandatory, the transition offers clear opportunities to improve financial efficiency and gain better visibility of tax positions. Digital record-keeping and quarterly submissions streamline compliance, reducing administrative burdens and simplifying the tax process. Automation of data entry improves accuracy by minimising human error, which in turn lowers the risk of penalties. The ability to update tax information regularly provides real-time financial insight, enabling better planning and cash flow management. Replacing the traditional year-end rush with smaller, more manageable updates throughout the year saves valuable time and reduces stress. Additionally, having access to up-to-date, centralised records enhances financial management by supporting more informed decision-making and a clearer understanding of business health.

To comply with Making Tax Digital, businesses must use accounting software that is compatible with HMRC’s digital system. This software must connect securely to HMRC, facilitate digital submission of tax data and payments, and be authorised and recognised by HMRC.

As a Sage Accountant, Sawford-Bullard highly recommends this software. Such offers robust features for VAT, income tax, and self-assessment and is well suited for growing businesses. Other popular HMRC-approved options include QuickBooks, known for its user-friendly interface and strong invoicing and tax forecasting capabilities; and Xero, a cloud-based platform offering extensive bank feeds and app integrations for seamless tax management.

With these important changes approaching, it is essential for businesses to begin preparing for the transition to Making Tax Digital. Selecting the right software and adapting accounting processes early will help ensure smooth compliance and allow businesses to fully benefit from the efficiencies of digital tax management.