MTD for VAT vs MTD for Income Tax: What's the Difference and Why It Matters
- 2 days ago
- 5 min read
By Sam
The world of UK tax is shifting gears. If you’re a small business owner, a sole trader, or a landlord, you’ve likely heard the phrase "Making Tax Digital" (MTD) more times than you’d care to count. But while MTD for VAT has been the standard for some time, the upcoming MTD for Income Tax (often called MTD for ITSA) is bringing a whole new set of rules to the table.
Understanding the difference between these two regimes is no longer just "good to know": it’s essential for staying compliant and avoiding hefty penalties. In this guide, we’ll break down the key differences between MTD for VAT and MTD for Income Tax, explain who needs to do what, and show you how to manage both without losing your mind.
What is Making Tax Digital?
At its heart, Making Tax Digital is HMRC’s plan to move the UK tax system into the digital age. The goal is to make it easier for individuals and businesses to get their tax right and stay on top of their affairs. This means moving away from paper records and manual spreadsheets and toward MTD-compatible software that links directly to HMRC.
While the "Digital" part is the same for both VAT and Income Tax, the "Making Tax" part differs significantly depending on whether you're reporting what you've sold (VAT) or what you've earned (Income Tax).
MTD for VAT: The Groundwork
If you are already VAT-registered, you are likely already part of the MTD for VAT system. As of April 2022, all VAT-registered businesses: regardless of their turnover: must follow MTD rules.
Who it affects
Every business that is registered for VAT. This includes those who have voluntarily registered even if they are below the current £90,000 threshold.
The Requirements
Digital Record Keeping: You must keep your VAT records digitally in compatible software.
Digital Submissions: You must submit your VAT returns through your software rather than the old HMRC portal. If you're still relying on spreadsheets, it's worth understanding what happens if you don't have bridging software by the deadline.
Frequency: Usually, these are submitted quarterly, though some businesses choose monthly or annual cycles.
MTD for Income Tax (ITSA): The New Frontier
MTD for Income Tax Self Assessment (ITSA) is the next big phase of the rollout. It changes how self-employed individuals and landlords report their business income to HMRC. Unlike the single annual Self Assessment return we use today, MTD for ITSA requires more frequent updates.
The Rolling Deadlines
From 6 April 2026: Mandatory for self-employed individuals and landlords with a qualifying income over £50,000.
From 6 April 2027: Mandatory for those with a qualifying income over £30,000.
Future Plans: The government intends to bring in those earning over £20,000 from April 2028.
The Requirements
Instead of one big tax return at the end of the year, you will be required to provide:
Quarterly Updates: Digital summaries of your income and expenses every three months.
End of Period Statement (EOPS): A final statement for each source of business or property income.
Final Declaration: A summary of all other income (like savings interest or dividends) to calculate your total tax bill.
If you're preparing for this change, our guide on transitioning to MTD step by step as a sole trader explains what to expect and how to get set up.
Key Differences: Side-by-Side
It can be confusing when you have to deal with both. Here is a simple comparison to help you distinguish between the two.
Feature | MTD for VAT | MTD for Income Tax (ITSA) |
Who is in scope? | All VAT-registered businesses | Self-employed & Landlords over £30k-£50k |
Current Status | Active and mandatory now | Mandatory from April 2026/2027 |
Threshold | Any VAT-registered business | £50k (2026) / £30k (2027) |
Submission Type | Quarterly VAT Return | Quarterly Updates + Final Declaration |
Reporting Nature | Non-cumulative (isolated periods) | Cumulative (builds throughout the year) |
Records Needed | Sales and purchase invoices | Business/Property income & expenses |
Managing Both: When Worlds Collide
For many SME owners, the real challenge begins when they fall into both categories. For example, if you are a sole trader with a turnover of £95,000, you are likely already doing MTD for VAT. From April 2026, you will also have to do MTD for Income Tax.
Here is how you manage the overlap:
1. Unified Software
The easiest way to handle both is to use accounting software that supports both MTD for VAT and MTD for Income Tax. This ensures that when you log a sale, it populates both your VAT return and your Income Tax quarterly update.
2. Understand the Timelines
VAT deadlines are based on your specific VAT periods (e.g., Jan-March). Income Tax updates are based on the tax year (6 April to 5 April). This means you might be filing a VAT return in one month and an Income Tax update the next. Keeping a clear tax preparation calendar is vital.
3. Digital Links
HMRC requires "digital links" between your data. You can't just copy and paste numbers from a spreadsheet into your software. The data must flow digitally from the point of entry to the point of submission. If you're still using manual bookkeeping methods, now is the time to switch.
Why This Matters for Your Business
Staying on top of MTD isn't just about avoiding fines; it's about better financial health.
Real-Time View: Because you’re updating your records quarterly, you always know exactly how much tax you owe. No more "January surprises."
Efficiency: Digital records reduce the risk of human error.
Growth Ready: Having clean, digital books makes it much easier to apply for business loans or attract investors if you are a limited company.
How Accountant Search Can Help
Navigating two different MTD systems can feel like a full-time job. That’s where we come in. At Accountant Search, we specialise in matching SMEs with expert accountants who are fully versed in the latest HMRC regulations.
Whether you need help choosing the right software or you want a dedicated professional to handle your Self Assessment, we can connect you with the right local expertise.
From accountants in London to specialized firms in Romford or Bexley, we ensure you get the support you need to stay compliant and focus on growing your business.
Conclusion
The transition to a fully digital tax system is inevitable. While MTD for VAT is already the norm, the countdown to MTD for Income Tax has officially begun. By understanding the differences today, you can prepare your business for the changes in 2026 and 2027.
Don't wait until the deadline is looming to digitise your accounts. Start looking at your income thresholds now and ensure your bookkeeping is MTD-ready. If you're feeling overwhelmed, our complete guide to finding the right accountant for your business is a helpful next step, or let us help you find the perfect accountant to take the weight off your shoulders.
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