Enterprise Business Guide to MTD Software

What to know about MTD software, from how it supports the UK's MTD policy, its benefits, and its challenges.

Vertex Inc. helps businesses achieve true tax compliance and efficiency through best-in-class tax automationsolutions.

What is MTD?

Making Tax Digital (MTD) is a tax compliance policy that aims to ensure accurate tax filing while emphasising compliance and efficiency. MTD requires the use of digital tools and software to keep records compatible with its requirements. Businesses must set up a new digital tax account, submit updates every quarter, and follow a new authentication process. This brings the tax system closer to real-time reporting. Read our guide below to learn more.

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Why does MTD matter?

There are a number of key reasons why the UK government has implemented MTD as part of its tax administration strategy. These include:

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Streamlined Maintenance of Rules & Rates

How has MTD evolved?

Making Tax Digital (MTD) has experienced some setbacks, largely due to COVID-19 disrupting the projected timeline. With the new Labour government, the MTD initiative may (or may not) change. We suggest keeping up-to-date to ensure your business remains compliant.

What is MTD software?

MTD software is a selection of digital financial tools compatible with the Making Tax Digital (MTD) initiative. Its primary function is to send a business’s digital financial records directly to HMRC via HMRC’s API.

One of the MTD requirements is 'digital links'—the electronic exchange of data between software programs, products, or applications without manual intervention. Digital records can be submitted in a range of formats, including XML, CSV, and Excel, provided they are API-enabled.

These stored financial records must include designatory data and summary VAT data for the period. The format of these VAT returns is a 9-box summary filed via the HMRC’s JSON API platform, which must be digitally linked between the customer’s source data and the submitted digital return.

MTD software is integral to Making Tax Digital (MTD) because the initiative can’t be rolled out successfully without it. No MTD software means no digital, real-time data for HMRC!

Who is subject to MTD? Who needs MTD software?

Here are the thresholds and requirements for MTD:

If you are self-employed or a landlord, you must follow the requirements for Making Tax Digital for Income Tax
If, by 6 April 2026, you have an annual business or property income of more than £50,000
If, by April 2027, you have an annual business or property income of more than £30,000

What penalties exist for MTD non-compliance?

As you’d imagine, there are penalties for not complying with MTD and integrating MTD compliant software into your financial systems. These are:

A default surcharge of up to 15% may be imposed for any late payments of VAT
Up to 100% of any VAT may be recouped if it is found to be understated or over-claimed due to a careless or deliberate inaccuracy in a VAT return
Up to 30% of an understated assessment of VAT is due if HMRC is not informed within 30 days that it is incorrect
A £400 penalty applies for submitting a paper VAT return without an exemption

Read our guide on preparing for MTD to ensure that you don’t get caught out by non-compliance.

What are the benefits of MTD software?

The MTD initiative and implementation of MTD software provides many benefits to businesses - it’s not just HMRC that sees advantages! These include:

Reducing businesses' costs, uncertainty, and worry when HMRC is forced to intervene to make things right.
AI algorithms improve accuracy, reducing the chance of human error. This may signal the end of the tax return!
Real-time access to sales information at the point of sale can make the internal accounting process much easier. Spotting issues and getting accurate data for other accounting activities can be easier. This is great for internal tax audits, reporting needs, and detailed analytics.

What are the challenges of MTD software?

As you’d imagine, Making Tax Digital (MTD) does present some challenges to businesses. These include:

MTD software adoption requires training, upfront costs and investment, and potentially higher reliance on accountants at the beginning.
There may be additional expenses for small businesses and sole traders with limited resources mean increased overheads.
The reliance on automated software may be concerning for some, especially those who are used to having more manual control over their financial systems.
There are data security and privacy concerns with third-party software tools and submitting information regularly to HMRC. Implementing a cybersecurity process in lieu of this may be yet another cost.

How does tax automation support continuous VAT compliance as part of MTD?

Compliant electronic formats of VAT data for all sales are automated. This means it is no longer a manual task, and businesses can scale their VAT compliance through a more streamlined, effective process.

If further data is required, automated tax software can be updated to gather it instead of manually. Again, this is far easier on finance teams, lifting up some of the burden.

Our article discussing the practical implications of MTD goes into this in more detail.

What are the MTD benefits of compliant software integration into an ERP?

When you begin using MTD-compliant software, you can achieve MTD compliance from the start. The process is much smoother and more straightforward and can be integrated into an existing ERP system. Some customisation or process updates may be necessary, but there's no need to completely replace a legacy system and start from scratch. This can make it easier to adopt and train for. For businesses seeking an integrated solution, Vertex VAT software can streamline your VAT processes to improve accuracy and adherence to new tax regulations.

The implementation of MTD compliant software is one part of the overall MTD transformation that UK businesses need to undertake in the next few years.

Like any overhaul project, Making Tax Digital (MTD) presents both benefits and challenges that each company will need to navigate individually, and this extends to the integration of new financial processes that MTD software will inevitably bring. However, the advantages of MTD software do look promising. The best thing for UK businesses to do right now is get prepared, stay up-to-date with the latest news on MTD, and research software solutions that are suitable for their particular needs and requirements.

Stay up-to-date with MTD