Making Tax Digital Rules for Micro Entities | What You Need to Know

Making Tax Digital (MTD) is HMRC's programme to move tax record-keeping and submissions online using compatible software. For micro entities — very small limited companies with a turnover of no more than £1M — the MTD rules that are most immediately relevant are those for VAT, which already apply if you are VAT-registered, and the upcoming MTD for Income Tax Self Assessment (MTD for ITSA), which will affect sole traders and landlords from April 2026. MTD for Corporation Tax, which would directly affect micro entity limited companies, has not yet been given a mandatory start date. This guide explains where each strand of Making Tax Digital currently stands, what it means in practice for your micro entity, and what you need to do to prepare.

What is Making Tax Digital and Why is HMRC Introducing It?

Making Tax Digital is a long-running HMRC initiative aimed at replacing paper-based and manual tax filing with a fully digital system. The idea is that businesses keep their financial records in compatible software, which then submits information directly to HMRC either quarterly or annually, depending on the tax in question. HMRC's stated reasons for the programme are to reduce errors caused by manual data entry, make it easier for businesses to see their tax position in real time, and improve the overall accuracy of tax collection. The knock-on effect for businesses is that the old approach of gathering paper records once a year and giving them to an accountant before a deadline is gradually being replaced by a more continuous process. The programme is being rolled out in stages across different taxes. MTD for VAT was the first to become mandatory, and it has been in place since 2019 for most businesses. MTD for Income Tax is next, with a phased start from April 2026. MTD for Corporation Tax is still in a consultation and design phase, with no confirmed mandatory start date as of early 2025.

Does Making Tax Digital Apply Differently Depending on Your Business Structure?

Yes — and this is an important point for micro entity directors to understand. The Making Tax Digital rules apply to different taxes, and which taxes affect you depends on how your business is structured. If you operate as a sole trader or a landlord, MTD for Income Tax Self Assessment is the most pressing upcoming change — it will affect you from April 2026 if your qualifying income exceeds £50,000, and from April 2027 if it exceeds £30,000. If your business is a micro entity limited company, MTD for VAT already applies if you are VAT-registered, and MTD for Corporation Tax will apply at some future date — but no mandatory date has yet been announced. In the meantime, your Corporation Tax obligations remain as they currently are.

What are the MTD for VAT Rules and Do They Apply to Your Micro Entity?

MTD for VAT has been mandatory since April 2019 for businesses with taxable turnover above the VAT registration threshold (currently £90,000). Since April 2022, it has applied to all VAT-registered businesses regardless of turnover — including those that voluntarily registered below the threshold. If your micro entity is VAT-registered, you are already required to comply with MTD for VAT. If you are not VAT-registered, MTD for VAT does not apply to you at present.

What Does MTD for VAT Actually Require You to Do?

MTD for VAT has two core requirements:

• You must keep your VAT records digitally — meaning in software that is compatible with HMRC's MTD system, rather than in a paper ledger or non-compatible spreadsheet
• You must submit your VAT returns to HMRC using MTD-compatible software — you can no longer log into your HMRC online account and manually type in your VAT figures

The software does the submission for you once you have entered or imported your figures. Most bookkeeping platforms — Xero, QuickBooks, FreeAgent, Sage — are MTD-compatible and handle this automatically as part of their standard VAT return process. There is also a requirement known as digital links — the figures that flow from your bookkeeping records into your VAT return must travel digitally, without being manually retyped at any stage. Copying and pasting figures from a spreadsheet into a separate filing tool without a direct digital connection is not compliant.

What Happens if You Are Not Complying With MTD for VAT?

If your micro entity is VAT-registered but you have not yet signed up for MTD for VAT, you are in breach of HMRC's requirements. HMRC has the power to issue penalties for non-compliance, though in practice it has taken a relatively soft approach to enforcement during the transition period. That said, the expectation is that all VAT-registered businesses are now operating within the MTD framework, and penalties for continued non-compliance are becoming more likely. If you are unsure whether your current process is compliant, the simplest check is to ask your accountant or software provider. If you are submitting your VAT returns through compatible software, you are almost certainly already compliant.

What is MTD for Income Tax, and Who Does It Affect?

MTD for Income Tax Self Assessment — often shortened to MTD for ITSA — is the next major phase of the Making Tax Digital programme. It will require self-employed individuals and landlords to keep digital records and submit quarterly updates to HMRC, in addition to an annual end-of-period statement and a final declaration. This is a significant change from the current system, where sole traders and landlords submit a single annual Self Assessment tax return by 31 January following the end of the tax year.

When Does MTD for Income Tax Start and Who Is Affected First?

HMRC has confirmed the following rollout dates as of early 2025:

Mandatory Start Date	Who It Applies To	Qualifying Income Threshold
April 2026	Self-employed individuals and landlords	Over £50,000 per year
April 2027	Self-employed individuals and landlords	Over £30,000 per year
April 2028	Self-employed individuals and landlords	Over £20,000 per year
Not yet confirmed	Partnerships	Threshold TBC
Not yet confirmed	Limited companies (Corporation Tax)	Threshold TBC

Qualifying income for the purposes of these thresholds means your total gross income from self-employment and property, before any expenses are deducted. If your income comes from a combination of employment and self-employment, only the self-employment and property income count towards the threshold.

What will MTD for Income Tax Require You to Do Differently?

Under MTD for ITSA, sole traders and landlords will need to:

• Keep their business income and expense records in MTD-compatible software throughout the tax year
• Submit quarterly updates to HMRC — four times a year, summarising income and expenses for each three-month period
• Submit an end-of-period statement — an annual review of the figures for that business or property
• Submit a final declaration — which replaces the current Self Assessment tax return and confirms the overall tax position for the year, including any other income

The quarterly updates are not tax returns in the traditional sense — they do not trigger a tax payment. Their purpose is to give HMRC an ongoing picture of your income and allow them to provide a running estimate of your tax liability. The actual tax calculation and payment process remains broadly similar to the current system, with payments due in January and July.

Does MTD for Income Tax Apply to Micro Entity Directors?

MTD for ITSA applies to sole traders and landlords — not to limited companies directly. However, if you are the director of a micro entity limited company and you also have income from self-employment or property in your own name, that income may bring you within the scope of MTD for ITSA. For example, if you run a micro entity limited company and you also do some freelance work in your personal name, the freelance income is self-employment income for MTD for ITSA purposes. If it exceeds the relevant threshold, you will need to comply with MTD for ITSA for that income stream, even though your limited company work is separate. Directors who pay themselves a salary from their company and nothing else — with no separate self-employment or property income — are unlikely to be caught by MTD for ITSA, as employment income alone does not count towards the qualifying income threshold.

When will Making Tax Digital Apply to Corporation Tax for Micro Entities?

MTD for Corporation Tax is the strand of the programme that will eventually apply directly to micro entity limited companies. However, as of early 2025, HMRC has not set a mandatory start date for MTD for Corporation Tax, and the detailed rules have not yet been finalised. HMRC has been consulting with businesses and accountants about how the Corporation Tax version of MTD should work, and a voluntary pilot was being planned before any mandatory rollout. The earliest realistic mandatory start date, based on HMRC's published timelines, is April 2026 for the most straightforward cases — but this has not been confirmed, and it is possible the timeline will be pushed back further, as has happened with other phases of the programme.

What Might MTD for Corporation Tax Look Like When It Arrives?

Based on HMRC's consultation documents, MTD for Corporation Tax is likely to follow a similar structure to MTD for Income Tax:

• Companies would be required to keep their accounting records in MTD-compatible software
• Quarterly updates of income and expenses would be submitted to HMRC during the accounting period
• An annual Corporation Tax return would still be filed at the end of the period, finalising the tax position

For micro entities, the practical impact would be similar to the impact of MTD for VAT — a requirement to use compatible software and submit figures digitally rather than manually. Most micro entities that already use cloud-based bookkeeping software would find the transition relatively straightforward. The key question — which HMRC has not yet answered definitively — is whether micro entities will face the same quarterly reporting requirements as larger companies, or whether there will be a simplified or delayed route for very small businesses. Previous phases of Making Tax Digital have made some accommodations for smaller businesses, and it is reasonable to expect similar considerations for Corporation Tax.

What Should a Micro Entity Do Right Now to Prepare for Making Tax Digital?

Even where MTD rules do not yet apply to your micro entity's Corporation Tax, there are practical steps worth taking now that will make compliance straightforward when the rules do arrive — and that benefit your business in the meantime.

Step 1: Make Sure Your VAT Compliance is Already in Order

If your micro entity is VAT-registered, check that you are submitting VAT returns through MTD-compatible software and that your records are being kept digitally with proper digital links. If you are not sure, ask your accountant. This should already be the case if you registered for VAT after April 2022, but some businesses that have been registered for longer may still be operating on legacy processes that are no longer compliant.

Step 2: Move to Cloud-Based Bookkeeping Software if You Have Not Already

MTD for VAT, MTD for Income Tax, and the upcoming MTD for Corporation Tax all have one thing in common: they require digital record-keeping in compatible software. If your micro entity is still using spreadsheets or paper records as its primary bookkeeping method, moving to a cloud-based platform now means you will not face a last-minute scramble when a new MTD requirement becomes mandatory. The main options used by UK micro entities are Xero, QuickBooks, FreeAgent, and Sage. All of these are MTD-compatible for VAT, and all are expected to support MTD for Corporation Tax when it becomes available. Your accountant may have a preference for one platform over another based on what they use for filing.

Step 3: Understand Whether MTD for Income Tax Will Affect You Personally

If you have any income in your personal name from self-employment or property — in addition to your director's salary and dividends from your micro entity — check whether that income is likely to exceed the MTD for ITSA threshold by April 2026. If it is above £50,000, you need to be compliant by then. If it is between £30,000 and £50,000, you have until April 2027. The preparation needed is not extensive, but it does require a change in habit — moving from an annual record-keeping process to a quarterly one. Starting to keep your records on a compatible platform before the deadline means the transition is gradual rather than sudden.

Step 4: Talk to Your Accountant About Your Specific Position

The interaction between MTD for VAT, MTD for ITSA, and the future MTD for Corporation Tax can be confusing — particularly for micro entity directors who have both a limited company and some personal income streams. An accountant who is familiar with both the current rules and the upcoming changes can map out exactly what applies to you and when, and make sure your software setup is correct for each requirement.

FAQs About Making Tax Digital for Micro Entities

Is Making Tax Digital Compulsory for All Micro Entities?

Not for all taxes yet. MTD for VAT is compulsory for all VAT-registered micro entities, regardless of turnover. MTD for Income Tax is compulsory for sole traders and landlords with qualifying income above the relevant threshold, starting from April 2026. MTD for Corporation Tax — which would directly affect micro entity limited companies — has no confirmed mandatory start date as of early 2025. The rules are being introduced in phases, and compliance requirements depend on your business structure and income level.

Can You Still Use a Spreadsheet Under Making Tax Digital?

You can use a spreadsheet as part of your bookkeeping process, but only if it is connected to HMRC's systems via bridging software that provides a compliant digital link. Simply entering figures in a spreadsheet and then manually copying them into HMRC's portal is not compliant with MTD for VAT. The same principle will apply to MTD for Income Tax and MTD for Corporation Tax. Using dedicated bookkeeping software that submits directly to HMRC is simpler and less error-prone than relying on bridging software with a spreadsheet.

What Is the Penalty for Not Complying With Making Tax Digital?

HMRC uses a points-based penalty system for MTD late filing. Each missed submission earns a penalty point. Once you reach a threshold of points — which varies by how frequently you are required to submit — a fixed financial penalty of £200 applies. Additional points and penalties accumulate for continued non-compliance. For MTD for VAT, penalties for non-compliance with the digital record-keeping and filing requirements can also be charged separately. HMRC has given businesses time to adapt, but the enforcement position is tightening.

What Is Bridging Software and Do You Need It?

Bridging software is a tool that sits between your existing records (typically a spreadsheet) and HMRC's MTD submission system, creating the required digital link. It allows businesses that cannot move away from spreadsheets immediately to comply with the digital submission requirement without switching to full bookkeeping software. For most micro entities, however, moving to a cloud-based bookkeeping tool is a more complete and sustainable solution than using bridging software as a workaround.

Will Making Tax Digital Change How Much Tax You Pay?

No. Making Tax Digital changes how you keep records and how you submit information to HMRC — it does not change the tax rates, allowances, or the method by which your tax liability is calculated. The same reliefs, deductions, and thresholds that apply under the current system will continue to apply under MTD. The tax you owe is determined by your income and your allowable deductions, not by the format in which you report them.

Making Tax Digital Compliance Checklist for Micro Entity Directors

Work through this checklist to make sure your micro entity is prepared:

1. If VAT-registered, confirm you are submitting VAT returns through MTD-compatible software
2. Confirm your bookkeeping records are kept digitally, with proper digital links between each stage
3. Check whether you have any personal self-employment or property income that may bring you within MTD for ITSA from April 2026
4. If your personal qualifying income exceeds £50,000, plan to be MTD for ITSA compliant before April 2026
5. If your personal qualifying income is between £30,000 and £50,000, plan for April 2027
6. Move to cloud-based bookkeeping software if you are still using spreadsheets or paper records
7. Confirm with your software provider that the platform is MTD-compatible for VAT and will support future MTD requirements
8. Speak to your accountant about your specific income streams and which MTD rules apply to each one
9. Set a reminder to check HMRC's MTD for Corporation Tax updates at least twice a year until a mandatory date is confirmed
10. Make sure your quarterly record-keeping habits are in place before any new MTD obligation starts — do not wait until the deadline

The Bottom Line

Making Tax Digital is not a single change that happens on a single date — it is an ongoing shift in how businesses and HMRC communicate, and it is being introduced gradually across different taxes. For micro entities, the most immediate obligations are around VAT if you are registered, and Income Tax if you have personal self-employment or property income above the threshold. The Corporation Tax phase that will directly affect your limited company is still to come, but the groundwork — digital records, compatible software, quarterly habits — is worth putting in place now. The businesses that will find Making Tax Digital most disruptive are those that leave preparation until the last moment. The ones that find it straightforward are those that have already moved to digital bookkeeping and work with an accountant who keeps their compliance up to date throughout the year. At Micro Entity Accounts, we help small limited company directors stay on top of their filing obligations — including Making Tax Digital compliance for VAT, and MTD for ITSA where it applies to directors with personal income. If you are not sure which Making Tax Digital rules currently apply to you, or you want to make sure your current setup is compliant, we are happy to review your position and tell you exactly where you stand. Disclaimer: The information provided on MicroEntityAccounts.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.