Making Tax Digital: The Complete Guide for UK Business Owners in 2025

What Making Tax Digital Actually Is

Making Tax Digital (MTD) is HMRC's programme to move the UK tax system to fully digital record-keeping and submission. The logic is straightforward: digital records are more accurate, harder to manipulate, and enable HMRC to pre-populate tax returns with information it already has — reducing errors and the tax gap.

For business owners, MTD means two practical things: you must keep records in a digital format (not paper), and you must submit tax information to HMRC using HMRC-approved software (not paper returns or manual web form entry).

MTD for VAT: Already Mandatory

MTD for VAT has been mandatory for all VAT-registered businesses since April 2022. If you are VAT-registered and not yet using MTD-compatible software, you are already non-compliant. HMRC has been issuing penalties for MTD VAT non-compliance since January 2023 under the new points-based penalty system.

What MTD for VAT requires:

• Digital records of all VAT transactions (sales, purchases, adjustments)
• A "digital journey" from records to submission — no manual re-keying of totals into the HMRC portal
• Submission via MTD-compatible accounting software or bridging software

Compatible software includes Xero, QuickBooks, Sage, FreeAgent, and many others. Your POS data must feed into one of these systems — either directly via integration or by export and import — to maintain the required digital journey.

MTD for Income Tax: Coming April 2026

MTD for Income Tax Self Assessment (ITSA) begins in April 2026 for sole traders and landlords with income above £50,000. From April 2027, the threshold drops to £30,000. Eventually, it will extend to all self-employed individuals.

Under MTD ITSA, affected businesses must:

• Keep digital records of income and expenses throughout the year
• Submit quarterly updates to HMRC (summaries of income and expenses for each quarter)
• Submit an end-of-period statement after the tax year
• File a final declaration (replacing the current Self Assessment return)

This is a fundamental change for sole traders. Instead of one annual return, there will be four quarterly updates plus a final declaration — five HMRC touchpoints per year instead of one. The quarterly updates are not full tax returns; they are income and expense summaries. But they require digital records to be maintained continuously throughout the year, not assembled retrospectively in January.

What You Need to Do Now

If you are already MTD for VAT compliant: you have the infrastructure — digital records and compatible software. Ensure your records are accurate and the digital journey is unbroken. Prepare for MTD ITSA by reviewing whether your income threshold puts you in the April 2026 cohort.

If you are not yet MTD compliant: act now. HMRC's penalty points system accumulates: 1 point per missed submission, penalty charges after reaching the threshold for your filing frequency. Points expire after 24 months of compliance, but accumulation is real and ongoing.

How Your POS Fits In

Your POS is the primary source of your sales data. For MTD compliance, that sales data must flow digitally into your VAT and income tax records without manual re-entry. OneScale exports sales summaries in formats compatible with leading UK accounting packages — ensuring the digital journey from POS transaction to HMRC submission is complete and unbroken.

Conclusion

MTD is not going away. HMRC's digital transformation programme is multi-year and accelerating. The businesses that adopt compliant digital systems now avoid the penalty exposure of late compliance and gain the side benefit of better, more timely financial information for their own management use.