What is Making Tax Digital and does it apply to sole traders?

Understanding Making Tax Digital (MTD) in Plain English

Making Tax Digital (often shortened to “MTD”) is a UK government programme designed to change the way taxpayers keep records and submit tax information to HM Revenue & Customs (HMRC). Instead of relying on paper records, spreadsheets that are never quite up to date, or a once-a-year scramble to put everything together, MTD aims to make tax administration more accurate, more consistent, and more “real time” by using digital record-keeping and structured submissions.

In practice, MTD is less about making people pay more tax and more about changing the process of reporting tax. The goal is that, over time, fewer errors are made, taxpayers have a clearer picture of their position during the year, and HMRC receives information in a format that reduces the chance of mistakes. For businesses and individuals, the key question is not whether MTD exists, but which taxes it covers, who it applies to, when it starts for different groups, and what you need to do to comply.

This article explains what MTD is, how it works, and—most importantly—whether it applies to sole traders. It also covers what a sole trader should do to get ready, what “digital records” really means, what software might be needed, and how the changes could affect your everyday admin.

What HMRC Means by “Making Tax Digital”

When people first hear the phrase “Making Tax Digital,” it can sound like a single switch being flipped. In reality, MTD is a set of rules and systems that apply to specific taxes. Each part of MTD has its own start date, scope, and requirements. As a result, two businesses can both be “in MTD” but for different taxes and with different obligations.

At its core, MTD introduces three connected expectations:

First, you keep certain business records digitally. This means maintaining your key accounting information in a digital format rather than purely on paper.

Second, you use compatible software to send required updates or returns to HMRC. Instead of typing figures into an online form, the information is transmitted through software that connects to HMRC’s systems.

Third, you maintain “digital links” between different parts of your record-keeping and reporting process. This is designed to reduce the need for copying and pasting numbers from one place to another—a common source of errors.

MTD is therefore not simply “use software” in a vague sense. It is a compliance framework that affects how records are kept and how submissions are made.

Why MTD Exists: The Practical Reasons Behind the Change

Tax systems are complex, and errors are common. Many mistakes are not deliberate; they come from poor records, lost invoices, incorrect calculations, or last-minute rushes at year end. From HMRC’s perspective, reducing avoidable error improves the overall effectiveness of the tax system and makes it easier to ensure the right tax is being paid.

From a taxpayer’s perspective, better record-keeping can mean fewer unpleasant surprises. If you keep track throughout the year, you have a better sense of whether you need to set aside more for tax, whether your business is growing, and where your costs are going. In theory, MTD pushes people toward that healthier habit.

Some people worry that “more frequent reporting” will mean paying tax more often. That is a common misconception. MTD changes reporting processes, but it does not automatically mean that tax is collected more frequently. The main shift is in record-keeping and submissions, not the tax payment schedule itself.

Which Taxes Does MTD Cover?

MTD is rolled out tax-by-tax. The two areas most relevant to small businesses are:

MTD for VAT: This is already in place for many VAT-registered businesses. It requires keeping VAT records digitally and submitting VAT returns using compatible software.

MTD for Income Tax (often referred to as MTD for Income Tax Self Assessment or MTD for ITSA): This is the part that is most relevant to sole traders who are not limited companies. It introduces digital record-keeping and more frequent updates for income tax for those within scope.

There are also wider ambitions for digitising other areas over time, but for most sole traders, VAT and income tax are the key focus.

Does Making Tax Digital Apply to Sole Traders?

The short answer is: it can, and for many sole traders it will, depending on your circumstances and which taxes you deal with.

Sole traders can be affected in two main ways:

If you are VAT-registered, you may already be required to follow MTD for VAT rules. This applies regardless of whether you are a sole trader, a partnership, or a limited company. If you are VAT-registered and within scope, you generally need to keep digital VAT records and submit your VAT returns through compatible software.

If you are not VAT-registered, you may still be affected by MTD for Income Tax when it applies to you. This is the part that changes how you keep records for income and expenses and how you provide information to HMRC during the year.

So, whether MTD applies to you depends on questions like: Are you VAT-registered? What is your level of business income? Are you operating purely as a sole trader, or do you also have property income? And are there exemptions that might apply to you?

Understanding “Sole Trader” in This Context

A sole trader is an individual who runs a business and is self-employed. You report business income and expenses through Self Assessment and pay income tax and National Insurance contributions (as applicable) on the profits. This differs from a limited company, where the business is a separate legal entity and profits are taxed through corporation tax, with directors and shareholders taxed separately on salary and dividends.

MTD for income tax is aimed squarely at those who currently use Self Assessment for business and/or property income. That includes many sole traders and many landlords. If you are a sole trader and complete a Self Assessment return because you have self-employment income, MTD for Income Tax is the part you will want to understand.

What Changes Under MTD for Income Tax for Sole Traders?

Traditionally, a sole trader keeps records (in whatever way they choose), then submits one Self Assessment tax return after the end of the tax year. Under MTD for Income Tax, the direction of travel is different. You still end up finalising your tax position, but you will also need to keep digital records and submit periodic updates using compatible software.

In broad terms, the process becomes more structured:

Digital records throughout the year: You keep your income and expense records digitally. This does not necessarily mean you must abandon spreadsheets forever, but it does mean the information needs to be kept in a compliant digital format and connected through digital links if you use more than one tool.

Quarterly updates: Instead of only sending information once a year, you submit updates across the year. The idea is to provide HMRC with a view of your business activity in stages, rather than in one annual snapshot.

End of period statement (EOPS): After the tax year ends, you finalise your business information for the year.

Final declaration: You confirm your total income for the year and make a final declaration, similar in concept to the current annual submission.

The exact terminology can feel daunting, but the practical effect is: keep records digitally, submit more often, and then do an annual finalisation.

What Counts as “Digital Records” for a Sole Trader?

“Digital records” is a phrase that can sound more technical than it needs to be. The principle is simple: the key data about your business transactions must be captured and stored in a digital form. That typically includes:

Your business income (sales, fees, takings, other receipts).

Your business expenses (costs you pay that are allowable for tax).

The date of each transaction.

The amount of each transaction.

The category of the transaction (for example, travel, office costs, materials, professional fees).

The point is not that every single receipt needs to be photographed (although many people do this because it is convenient). The point is that the underlying information that feeds your updates must be kept digitally and be reliable.

For some sole traders, this will be a relatively small adjustment, especially if you already use accounting software. For others who have relied on paper and a yearly spreadsheet, it can be a bigger shift. The good news is that once your system is set up, it can reduce time spent chasing information later.

Do You Need Special Software?

Under MTD rules, submissions to HMRC are made through compatible software. This is usually accounting software or bridging software that connects your records to HMRC’s systems. The phrase “compatible software” matters because it must be able to communicate with HMRC in the required way.

If you already use bookkeeping software to track invoices and expenses, you may simply need to ensure your current provider supports the relevant MTD service. If you use spreadsheets, you might use bridging software, which can take your spreadsheet data and submit it to HMRC without you typing the same figures into an online form.

For a sole trader, the best approach often depends on the complexity of the business. A small service business with a limited number of transactions might prefer a simple tool that tracks income and expenses and produces reports. A retail business with many transactions, inventory, and multiple payment methods may prefer fuller accounting software that integrates with bank feeds and point-of-sale systems.

What Are “Digital Links” and Why Do They Matter?

A “digital link” is essentially an electronic connection between different pieces of your record-keeping and reporting process. The goal is to avoid manual transfer of data that can introduce errors, such as copying and pasting totals from one spreadsheet to another or typing numbers into a submission screen.

For a sole trader, digital links might come into play if you:

Use a spreadsheet to track transactions but then rely on a separate tool to submit information.

Have multiple spreadsheets for different parts of the business (for example, one for sales and one for expenses) and then consolidate them.

Work with a bookkeeper or accountant who imports your data into their own software.

In many cases, modern software makes this easier than it sounds. Bank feed integrations, exports, and imports can all be part of a digital link if handled properly. The key is to understand that the compliance aim is to reduce “re-keying” of numbers.

Is MTD Only About Compliance, or Can It Help a Sole Trader?

For many sole traders, admin time is a real cost. Every hour spent on receipts and spreadsheets is an hour not spent earning money or taking a break. While MTD introduces requirements, it can also encourage more efficient habits.

Some potential benefits include:

Better visibility of profits: If your income and expenses are updated regularly, you can see how the business is performing in near real time.

Improved cash flow planning: Knowing your approximate tax position earlier can help you set aside money gradually rather than facing a sudden bill.

Less year-end stress: When you capture information as you go, the end-of-year work is often smaller and simpler.

Fewer missed expenses: Regular record-keeping reduces the chance that you lose receipts or forget about allowable costs.

That said, the benefits depend on using the tools properly. If you treat MTD as a box-ticking exercise and keep poor records in a digital format, you may not gain much. The real value comes when your record-keeping becomes a normal rhythm of the business.

What If You’re a Sole Trader and Also VAT-Registered?

If you are VAT-registered, you may already be familiar with MTD for VAT. For sole traders, the VAT side can sometimes be the first step into MTD. You keep VAT records digitally and submit VAT returns through compatible software.

Where this can get interesting is when you are VAT-registered and later also fall within scope of MTD for Income Tax. In that case, you might end up using the same software for both VAT and income tax reporting, which can simplify things. Many platforms are designed to handle both, which can reduce duplication.

However, VAT rules and income tax rules are not identical, and the reporting cycles may differ. It can be helpful to think of VAT as its own system (often quarterly returns) and income tax as its own system (quarterly updates plus annual finalisation). The overlap is mainly in your underlying bookkeeping.

Common Misconceptions Sole Traders Have About MTD

“MTD means I’ll pay tax four times a year.” Not necessarily. MTD involves more frequent reporting, but it does not automatically mean your payment schedule changes. Reporting and paying are different processes.

“I can’t use spreadsheets anymore.” Many people can still use spreadsheets, but the way you use them may need to be compliant and connected via digital links. Some people move to accounting software because it is simpler; others prefer spreadsheets plus bridging software.

“MTD is only for big businesses.” MTD affects small businesses too, including sole traders, depending on thresholds and which taxes apply.

“It will be impossible without an accountant.” Many sole traders will be able to comply on their own, especially with simple businesses and user-friendly software. Others may prefer an accountant or bookkeeper for peace of mind, but it is not automatically required for everyone.

“Quarterly updates mean I have to finalise everything perfectly every three months.” The intention is that quarterly updates provide a picture of activity, with final adjustments and confirmations done after the year ends. In other words, the quarterly updates are part of the process, not necessarily the final word on your tax bill.

How MTD May Change Your Routine as a Sole Trader

One of the biggest impacts of MTD is behavioural. A sole trader who used to do bookkeeping once a year may need to develop a lighter but more frequent routine. This does not have to be burdensome. In fact, it can be easier if you break it into small steps.

A practical routine might look like this:

Weekly: photograph or file receipts, note cash expenses, and check that invoices have been recorded.

Monthly: reconcile bank transactions, categorise expenses, and ensure income is complete.

Quarterly: review your records, correct obvious issues, and submit the required update.

Year-end: finalise adjustments (such as capital allowances or private use), then complete the end-of-year finalisation and declaration.

Even if your business is simple, the rhythm of keeping up-to-date records can save time and reduce stress. The key is to choose tools that make the routine easier rather than harder.

What About Exemptions and Special Cases?

Some taxpayers may be exempt from MTD requirements in certain circumstances, for example if it is not reasonably practicable for them to use digital tools due to disability, age, remoteness of location, or other barriers. There can also be situations where a person’s affairs are managed by someone else, or where there are broader practical issues that make digital compliance unrealistic.

If you believe you might qualify for an exemption, it is important to treat that as a specific compliance matter rather than an assumption. An exemption is not simply “I don’t like computers.” The intent is to protect people for whom digital compliance is genuinely not feasible.

There are also special considerations for some business structures and for those with more complex tax affairs. A sole trader with multiple sources of income, international issues, or complicated expense claims might prefer professional advice—not because MTD requires it, but because complexity increases the risk of mistakes.

What Sole Traders Should Do Now to Prepare

Even if MTD for Income Tax is not yet active for you, preparation can be worthwhile. The earlier you get used to digital record-keeping, the less stressful any transition will be.

Here are practical steps a sole trader can take:

1) Review your current record-keeping: Are you using paper, a spreadsheet, or software? Do you know where invoices and receipts are stored? If your current system relies on memory and a shoebox, you will benefit from improving it regardless of MTD.

2) Separate business and personal finances: Having a dedicated business bank account can make bookkeeping easier. Even though sole traders are not legally separate entities like companies, separation in practice can reduce confusion.

3) Choose an approach: software or spreadsheets plus bridging: If you love spreadsheets and your business is simple, you may prefer to stay with them and connect via bridging software when needed. If you want automation, bank feeds, and easy categorisation, accounting software may be a better fit.

4) Develop a light routine: Decide when you will update records—weekly, fortnightly, or monthly. Consistency is more important than intensity.

5) Learn the basics of categories: Understanding how your expenses are categorised can make reporting easier and can help you spot spending patterns. It can also help you avoid claiming costs that are not allowable.

6) Keep evidence organised: Digital records are about data, but evidence still matters. Keeping receipts, invoices, and mileage logs in an organised digital folder can be very useful if you ever need to check or justify a figure.

Choosing Tools: What Matters Most for a Sole Trader

Sole traders often have one overriding goal: keep admin time low without losing accuracy. When choosing a toolset, focus on what you will actually use.

Look for features such as:

Simplicity: Can you record income and expenses quickly without navigating endless menus?

Bank feeds: Automatic importing of transactions can save time, but you still need to confirm categories.

Receipt capture: A mobile app that stores receipts alongside transactions can help keep evidence tidy.

Invoicing: If you invoice clients, built-in invoicing can keep your records consistent.

Reporting: Even a basic profit and loss summary can help you understand your business.

Compatibility: If you are VAT-registered or expect to fall into scope of MTD for Income Tax, check that the tool supports those submissions in the right way.

No single tool is perfect for everyone. Some sole traders prefer minimal apps that handle the basics. Others want fuller accounting packages. The right choice is the one that fits your working style and reduces the likelihood that you avoid bookkeeping until it becomes painful.

How MTD Interacts With Accountants and Bookkeepers

Many sole traders use an accountant for annual accounts and Self Assessment. Under MTD, an accountant can still play a valuable role, but the working relationship may evolve.

If you use software, your accountant might be able to access your records directly, review your quarterly updates, and help you correct issues early. This can reduce surprises at year end. Some sole traders may prefer to handle day-to-day bookkeeping themselves and then pay an accountant for a year-end review and finalisation.

If you prefer not to do bookkeeping at all, a bookkeeper can keep your records up to date and ensure quarterly updates are prepared and submitted correctly. This can be especially useful if you have a high volume of transactions or if you struggle to keep paperwork organised.

Ultimately, MTD does not remove the need for professional help where it makes sense. It simply changes the timing and format of the information being managed.

Potential Pitfalls for Sole Traders (and How to Avoid Them)

Falling behind: The biggest risk is letting records drift. A small backlog can quickly become a mountain. Setting a recurring weekly or monthly habit is often the best defence.

Mis-categorising expenses: Mis-categorisation can distort your understanding of profit and could affect what is claimed. If you are unsure about an expense, make a note and review it later or ask for advice.

Mixing personal and business transactions: This creates confusion and increases the time needed to reconcile accounts. Separate accounts and clear descriptions can help.

Overconfidence with automation: Bank feeds and automatic rules are useful, but they are not perfect. It is wise to review transactions periodically rather than assuming everything has been allocated correctly.

Ignoring the “evidence” side: Even with digital records, you should keep supporting documents. Good software can make this easier, but you still need a system.

So, Does Making Tax Digital Apply to You as a Sole Trader?

To bring it together: MTD is not a single rule that applies to every sole trader in exactly the same way. It applies through specific tax regimes.

If you are VAT-registered and within scope, MTD for VAT can apply to you now, requiring digital VAT records and software-based VAT return submissions.

If you complete Self Assessment for self-employment income, MTD for Income Tax is the part likely to be relevant as it is rolled out. When you are within scope, the expectations move toward digital record-keeping, quarterly updates, and a year-end finalisation process.

Even if you are not immediately affected, moving toward digital records can still be a smart business decision. It can improve visibility of your finances, reduce last-minute stress, and make tax compliance less of an annual ordeal.

Final Thoughts: Treat MTD as a System Upgrade, Not Just a Rule

It is natural for sole traders to view tax changes as yet another administrative burden. But there is also an opportunity to treat MTD as a prompt to build a better system—one that helps you run your business, not just report it.

The best approach is usually the simplest one that you will stick to. If you thrive on spreadsheets and have a tidy method, you may be able to continue with them in a compliant way. If you prefer automation and minimal effort, modern bookkeeping software can reduce manual work and keep everything in one place.

Either way, the central idea of Making Tax Digital is clear: keep accurate records in a digital format and use compatible software to submit required information. For sole traders, the question is not whether tax will remain part of life—it will—but whether your process for managing it can become more predictable, more organised, and less stressful.