Making Tax Digital

Making Tax Digital (MTD) is HMRC’s shift from paper and manual online filings to a system where records are kept digitally and tax submissions flow directly from software. MTD for VAT became mandatory for all VAT-registered businesses from April 2022. MTD for Income Tax Self Assessment (MTD for ITSA) will require sole traders and landlords with qualifying income above £50,000 to submit quarterly updates from April 2026, dropping to £30,000 from April 2027.

What it means in practice

For a VAT-registered business using Xero, MTD compliance means the VAT return is prepared and submitted inside Xero rather than keyed into the HMRC portal by hand. Xero is on HMRC’s list of compatible software and submits via the MTD API. The key requirement is an unbroken digital link — you cannot manually retype figures into a separate spreadsheet and submit from there without a compliant bridging connection.

Reconciliation sits upstream of MTD compliance. A VAT return can only be submitted with confidence once the bank is reconciled for the period, because unmatched lines may represent taxable income or reclaimable input VAT. A business with £240,000 annual revenue carrying a backlog of unreconciled lines risks submitting a VAT figure HMRC can later challenge. Keeping the bank reconciled monthly removes that exposure and makes the MTD submission itself routine.