Making Tax Digital is no longer something you can park for “later”. If you’re VAT registered, you already need digital records and MTD-compatible submissions (HMRC, 2024). If you’re self-employed or a landlord, MTD for Income Tax is starting in phases from 6 April 2026, based on your qualifying income (HMRC, 2025). That means MTD software is becoming a day-to-day business tool, not just a compliance add-on.
The shift matters because HMRC is bringing large numbers of people into quarterly reporting. Based on 2023/24 data, 864,000 individuals have qualifying income over £50,000 and are expected to be in the first mandatory cohort from April 2026. At the same time, the UK still has a huge base of VAT and PAYE-registered businesses, 2.73 million as of March 2025 (ONS, 2025). Against that backdrop, choosing and implementing MTD software well can reduce admin, improve visibility, and help you stay on the right side of deadlines.
Below, we set out the practical benefits and drawbacks of Making Tax Digital software, plus a clear way to decide what’s right for your business.
What MTD software is and who needs it
At its simplest, MTD software is any accounting or tax solution that can keep the digital records HMRC requires and send the right submissions through HMRC’s systems.
Who needs MTD software now or soon:
- VAT-registered businesses: You must keep VAT records digitally and submit VAT Returns via compatible software.
- Sole traders and landlords (Income Tax): MTD for Income Tax becomes mandatory in stages:
- Over £50,000 qualifying income, based on 2024/25, starts from 6 April 2026
- Over £30,000 qualifying income, based on 2025/26, starts from 6 April 2027
- A planned further extension to £20,000 is set out by government, with legislation expected.
It’s worth separating two common approaches:
- Full accounting software: Handles bookkeeping, invoicing, bank feeds, VAT, and reporting in one place.
- Bridging software: Connects spreadsheets to HMRC, so you can submit VAT (and in some cases other returns) while keeping your existing spreadsheet process. It can work, but it needs careful handling to avoid gaps in the audit trail.
If you’re unsure what qualifies, HMRC publishes lists of compatible products for VAT and Income Tax (HMRC, 2025; HMRC, 2025).
Pros of Making Tax Digital software for SMEs
Used properly, MTD software can improve compliance and make the finance side of the business easier to run.
- Improved accuracy: Digital records reduce manual re-keying, which cuts the risk of basic errors and mismatches between invoices, bank activity, and VAT figures.
- More reliable visibility: Up-to-date reports give you a clearer view of cashflow, upcoming tax liabilities, and trading performance, without waiting for year-end.
- Smoother VAT compliance: For VAT, compatible software is designed to support digital record-keeping and MTD submissions, which reduces last-minute scrambles.
- Less admin over time: Once set up, recurring items like bank rules, standard expense categories, and automated VAT coding can save hours each quarter.
- Better collaboration: Sharing records with us becomes simpler, which can speed up query resolution and help us give advice earlier. If you want hands-on support, our outsourced accounting service can take the day-to-day load off your team.
- Stronger record discipline: Quarterly routines push many businesses into a healthier monthly close process, which usually improves decision-making.
- Future readiness: If you’re likely to fall into MTD for Income Tax soon, choosing MTD software early gives you time to embed good habits before quarterly submissions become mandatory.
A quick example: a growing consultancy registered for VAT often starts with spreadsheets and manual VAT workings. Moving to MTD software with bank feeds and automated VAT treatment can reduce quarter-end pressure and highlight cash collection issues earlier, which is often where profits leak in real life.
Where MTD software can cause friction
The drawbacks are real, especially during set-up and the first few reporting cycles. Most issues are manageable, but it helps to go in with your eyes open.
- Initial set-up time: You may need to migrate data, map your chart of accounts, and set up VAT codes, bank feeds, and user access.
- Learning curve: If you’ve relied on spreadsheets for years, the change in process can feel disruptive at first.
- Ongoing subscription costs: Most MTD software is paid for monthly. For micro-businesses, it can feel like a new fixed cost.
- Not always proportionate: Some businesses with very simple transactions may feel they’re doing “more than needed” just to stay compliant.
- Reliance on technology: Internet issues, software outages, or broken bank feeds can slow you down. The practical answer is to build a simple monthly routine and not leave everything to the deadline week.
- Data security concerns: Reputable providers take security seriously, but you still need strong passwords, multi-factor authentication, and sensible user permissions.
- Penalty risk if routines slip: Late VAT Returns can trigger penalty points under HMRC’s system (HMRC, 2023). With MTD for Income Tax, a points-based model also applies, so consistency matters (HMRC, 2023).
In practice, the friction usually comes from one of two places: poor set-up (wrong VAT mapping, messy opening balances), or unclear responsibilities (who raises invoices, who reconciles, who reviews). We can help you design the workflow so the MTD software supports the business, rather than becoming another job on the list.
How to choose the right Making Tax Digital software for your business
There is no “best” MTD software for every SME. The right choice depends on what you sell, how you invoice, how many transactions you run each month, and how you want to work with your accountant.
Here’s the decision framework we use with clients.
Start with your compliance footprint:
- VAT registered: Ensure the product is on HMRC’s compatible list and can handle your VAT scheme (standard, cash accounting, flat rate, partial exemption if relevant).
- Self-employed or landlord approaching MTD for Income Tax: Check income tax compatibility and whether it supports quarterly updates and end-of-period submissions.
Then match features to your day-to-day reality:
- Do you need invoicing and payment links, or do you invoice elsewhere?
- Do you need multi-currency, project tracking, stock, or time recording?
- Do you run payroll in-house, or do you want it integrated?
- Do you need approval workflows for staff expenses?
Decide how you want to keep records:
- If you want to stay on spreadsheets, bridging software can be a stepping stone, but it’s only effective if the spreadsheet is well controlled and consistently updated.
- If you want visibility and less admin, full MTD software is usually the better fit.
Finally, check the support model:
- Some businesses want us to do most of the processing and keep internal admin light. Others prefer to do bookkeeping in-house and use us for review and planning. Your choice of MTD software should reflect that. If you want support that goes beyond filing, our taxation team can advise on structure, VAT treatment, and how decisions flow through to your wider tax position.
Implementation tips that reduce disruption
The fastest route to value is a short, structured implementation, rather than trying to “learn it all” at once.
- Set a clear start date: Pick a clean point, often the start of a VAT quarter or month.
- Get the opening balances right: Most early problems come from incorrect debtors, creditors, VAT control, or bank positions.
- Agree a monthly rhythm: Reconcile banks, upload receipts, and review VAT coding monthly. This makes quarter-end far easier.
- Keep it simple at first: Automations help, but start with a basic process and add refinements once the numbers are stable.
- Build a review step: Even if you do the bookkeeping, a quarterly review before submission can catch coding issues and missed income.
- Protect access and data: Use role-based permissions and multi-factor authentication, and keep logins limited to those who need them.
A practical example: a VAT-registered trades business with regular subcontractor costs can save time by setting up bank rules and supplier defaults early. That reduces manual coding and helps you spot gross margin movement sooner, which supports pricing decisions and cashflow planning.
Next steps if you’re considering MTD software
If you’re VAT registered, MTD software is already part of your compliance process, and the question becomes whether your current set-up is doing a proper job for the business. If you’re a sole trader or landlord, the phased rollout from 6 April 2026 means it is worth acting now, particularly if your qualifying income is likely to exceed £50,000 or £30,000 in the relevant tax years.
The benefits of Making Tax Digital software usually land when three things are true: the set-up is clean, the workflow is clear, and someone owns the monthly routine. The risks also become easier to control, because you’re far less likely to miss deadlines or file figures you have not properly reviewed. It also helps to remember the scale of the UK VAT population. HMRC reports 2.33 million businesses in the VAT population in 2024/25 (HMRC, 2025). That’s a lot of businesses dealing with the same change, so planning beats reacting.
If you want help choosing and setting up MTD software, we’ll recommend options that suit how you run your business and we’ll put a simple process around it. Speak to us and tell us what you currently use, your VAT status, and whether you’re self-employed or have property income. We’ll take it from there.
