Making Tax Digital (MTD) Guide for Small Businesses: What You Need to Know in 2026

Making Tax Digital is HMRC's plan to bring UK tax into the digital age. If you're VAT registered or self-employed, here's what you need to know.

What is Making Tax Digital?

MTD requires businesses to:

1. Keep digital records of income and expenses
2. Submit tax information using compatible software
3. Maintain digital links between systems

It's not about filing online (we've done that for years). It's about how your records connect to your submission.

The goal? Reduce errors and make tax management easier. Whether it achieves that is... debatable.

MTD for VAT (Now Mandatory)

All VAT-registered businesses must use MTD, regardless of turnover.

What You Must Do

• ✓ Keep VAT records digitally
• ✓ Use MTD-compatible software
• ✓ Submit VAT returns through the software
• ✓ Maintain "digital links" between records

What's a Digital Link?

A digital link is an automatic transfer of data between systems.

Acceptable:

• Importing from CSV
• API connections
• Linked spreadsheet cells

Not acceptable:

• Copy and paste
• Typing figures manually from one system to another

MTD for Income Tax (Coming Soon)

Self-employed individuals and landlords will need to submit quarterly updates to HMRC.

If this applies to you, start getting your digital records in order now.

Choosing MTD Software

Not all software is created equal. Here's what to look for:

Essential Features

• ✓ HMRC-recognised for MTD
• ✓ Direct VAT submission
• ✓ Digital record keeping
• ✓ Automatic VAT calculations

Nice to Have

• Bank feeds and reconciliation
• Invoicing built in
• Expense tracking with receipt capture
• Multiple VAT schemes support
• UK-based support

VAT Schemes Under MTD

Your software should support whichever scheme you use:

Standard VAT — VAT on sales minus VAT on purchases

Flat Rate Scheme — Simplified rates based on your industry

Cash Accounting — VAT based on when payments are received/made

Annual Accounting — One annual return with advance payments

Penalties for Non-Compliance

HMRC can penalise you for:

• Not keeping digital records
• Not using compatible software
• Late submissions
• Late payments

The penalty system uses points. Once you hit the threshold, financial penalties kick in.

Getting Started with MTD

Step 1: Check if your current software is MTD-compatible

Step 2: If not, switch to compliant software

Step 3: Connect your Government Gateway account

Step 4: Set up digital records

Step 5: Submit your next VAT return through the software

Stay Compliant with dynamik.app

dynamik.app is fully MTD-compatible and HMRC-recognised.

You can:

• Submit VAT returns directly to HMRC
• Track VAT obligations and deadlines
• Maintain fully compliant digital records
• Support all VAT schemes

Start your free trial →