Making Tax Digital is one of the biggest changes to UK tax administration in a generation. In Part 1 of this guide, we covered the basics: what MTD is, who it affects, and what the three main obligations are. If you have not read that yet, start there first. This article covers the questions that cause the most confusion in practice. Software requirements, digital links, the penalty points system, exemptions, and how agents work under MTD. These are areas where misunderstandings at the setup stage can lead to penalties or problems with HMRC. As an accountancy firm working with self-employed clients and landlords across the UK, we see these questions come up again and again. Below are 10 clear answers.
Contents
- Question 11 – Can I still use the HMRC online portal to submit my return?
- Question 12 – What software do I need to use for MTD?
- Question 13 – Can I still use spreadsheets such as Excel?
- Question 14 – What are digital links?
- Question 15 – How does the new penalty points system work?
- Question 16 – What penalties apply for failing to keep digital records?
- Question 17 – Who can apply for an exemption from MTD?
- Question 18 – What if I run more than one business?
- Question 19 – Can I have more than one accountant or agent?
- Question 20 – What are the main benefits of moving to MTD?
MTD – Software and Technology
Question 11 – Can I still use the HMRC online portal to submit my return?
No. This is one of the most significant changes that Making Tax Digital introduces.
At present, many people file their Self Assessment return directly through the HMRC website. That option will no longer be available for anyone who falls within MTD.
HMRC will not provide its own free tool or dedicated portal for MTD submissions. All record-keeping and quarterly updates must go through third-party software that HMRC has approved. The good news is that some approved options are completely free. These include QuickFile, TaxNav and MyTaxDigital. The right choice depends on the scale of your business and your individual needs.
Question 12 – What software do I need to use for MTD?
You must use software that HMRC classifies as functionally compatible. HMRC publishes and regularly updates a list of approved providers on its website.
To qualify, software must do three things. First, it must store digital records of income and expenses. Second, it must generate and submit quarterly updates directly to HMRC. Third, it must allow you to complete and submit your Final Declaration.
Popular options include QuickBooks, Xero, Free Agent and Sage. These differ in functionality and price. Your choice will depend on the size of your business, the number of transactions you process, and whether you need additional features such as invoicing or payroll.
If you are not sure which software suits your situation, it is worth speaking to a specialist before you commit. At Lidertax, we help clients choose the right tool for their business. Book a free consultation here – CLICK.
Question 13 – Can I still use spreadsheets such as Excel?
Yes, but only under specific conditions.
Excel and other spreadsheet tools are permitted under Making Tax Digital. However, they cannot work on their own. You must connect your spreadsheet to bridging software. This is a separate programme that reads your data and sends the required updates to HMRC.
In practice, you keep your records in Excel as normal. At the end of each quarter, the bridging software pulls the data from your spreadsheet and submits the update to HMRC. The entire flow of data must be digital throughout. You cannot retype or copy figures by hand at any stage.
This approach costs less than full accounting software. However, it requires careful setup and consistent record-keeping. We recommend discussing this option with a UK accountant before you go down this route.
Question 14 – What are digital links?
Digital links are one of the core technical requirements of MTD. They are also one of the most misunderstood.
A digital link means that data must transfer between programmes automatically, without any human involvement in the process. HMRC requires every step in the data flow between your records and your submission software to be fully digital.
What is permitted
- Exporting a file from Excel and importing it automatically into bridging software
- An API connection between two programmes
- Automatic data synchronisation through a system integration
What is not permitted
- Typing figures from one system into another by hand
- Copying and pasting data between spreadsheets or programmes
- Entering data from a printout into your submission software
If your current bookkeeping process involves any manual data entry between systems, you will need to change that before MTD applies to you. The sooner you make the change, the easier the transition will be.
MTD – Penalties, Exemptions and Agents
Question 15 – How does the new penalty points system work?
Making Tax Digital replaces the old automatic financial penalties for late filing with a points-based system. It is more predictable, but you do need to understand how it works.
The principle is straightforward. Every time you submit a document late, whether a quarterly update or a Final Declaration, you receive one penalty point. Points accumulate separately for Income Tax and VAT.
For quarterly reporting, the threshold is four points. Once you reach that threshold, HMRC charges a penalty of £200. Every further late submission above the threshold triggers another £200. There is no upper limit.
Important: the soft landing in 2026/27
HMRC has confirmed a significant concession for the first year of MTD. In the 2026/27 tax year, penalty points will not be charged for late quarterly updates. This is a deliberate decision to give taxpayers time to adapt.
However, this concession only covers quarterly updates in 2026/27. The Final Declaration and all payments remain subject to normal rules. Do not treat the soft landing as permission to be careless. Points will apply in full from 2027/28 onwards.
When do points expire?
Points do not automatically expire after two years if you are at or above the threshold. To reset your points to zero, you must meet two conditions at the same time. First, submit the next four quarterly updates on time. Second, have no outstanding submissions from the previous 24 months.
The most reliable strategy is simply to meet every deadline from the start. The soft landing is a safety buffer, not an invitation to delay.
Question 16 – What penalties apply for failing to keep digital records?
The points system applies to late submissions. Making Tax Digital also provides for separate penalties where a taxpayer fails to maintain adequate digital records. These are different types of breach, and the consequences differ accordingly.
Failure to keep digital records: up to £3,000
If HMRC finds that you are not keeping adequate digital records, a penalty does not follow automatically. On a first occurrence, HMRC will typically issue a written warning. However, where problems are repeated or persistent, HMRC can impose a penalty of up to £3,000 per tax year.
Even a warning is significant. It means HMRC is paying attention to your compliance. It is much better to get the records right from the start.
Breaking digital links: £5 to £15 per day
This is a separate category. If you manually retype or copy data between systems and thereby break the required digital links, you face a penalty of £5 to £15 for each day the breach continues. Even a minor breach lasting several months can add up to a meaningful sum.
The daily rates are £5 for a first breach, £10 for a second, and £15 for any further breaches. Penalties are capped at 100 days. They are not automatic and require a prior written warning from HMRC.
Incompatible software: up to £400 per return
If you submit a return using software that HMRC has not approved as MTD-compatible, the penalty is up to £400 per submission. This also applies to spreadsheets used without proper bridging software.
How to avoid all of these penalties
Three straightforward steps protect you against every category above. Use only HMRC-approved software. Do not retype or copy data between systems by hand. Keep your records current throughout the year rather than leaving everything until the end of the quarter.
At Lidertax, we help clients configure the entire process correctly from day one. Get in touch to book a free consultation.
Question 17 – Who can apply for an exemption from MTD?
MTD is not mandatory for everyone. HMRC provides two categories of exemption: automatic exemptions and exemptions that require an application.
Automatic exemptions
Certain individuals are automatically excluded from MTD and do not need to take any action. These include:
- Trustees managing charitable trusts and unregistered pension funds
- Individuals without a National Insurance number before the relevant start date
- Foster carers, in respect of their fostering income
- Non-resident entertainers and sportspeople with no other qualifying UK income
- Individuals reporting Lloyd’s income, and ministers of religion with specific income sources
Applied exemptions: digital exclusion
If you cannot use digital software for a genuine and unavoidable reason, you can apply for exemption on grounds of digital exclusion. HMRC accepts the following:
- Age or disability, whether physical or mental, that prevents computer use
- No internet access at your home or place of business
- Religious beliefs that are incompatible with the use of digital technology
HMRC will not grant an exemption simply because you prefer paper records or dislike computers. The barrier must be real and genuinely impossible to overcome.
Power of Attorney: permanent exemption
A permanent exemption applies to a taxpayer who is subject to a Power of Attorney, meaning someone whose affairs are managed by an appointed attorney. The exemption applies to the person being represented, not to the attorney acting on their behalf.
How to apply
You apply in writing or by telephone to HMRC, before the date on which MTD applies to you. You can apply yourself or through your accountant. HMRC typically responds within 28 days. If your application is refused, you have 30 days to appeal.
If you think you may qualify for an exemption, do not assume you do without checking first. Contact Lidertax and we will help you assess your position and submit an application with the right supporting evidence.
Question 18 – What if I run more than one business?
This question affects many of our clients, particularly those who combine self-employment with rental income.
Separate updates, but with a helpful rule
Under Making Tax Digital, each income source is treated separately. However, HMRC has introduced a practical rule that many people are not aware of.
If you run more than one trading business as a sole trader, you can submit a single combined quarterly update covering all of those businesses together. You do not need to file a separate report for each one.
Rental income is different. Property income requires its own quarterly update, separate from your trading income.
A practical example
Suppose you run a construction business and a consultancy as a sole trader, and you also rent out a property. Each quarter, you submit two updates: one combined update for both trading activities, and one separate update for the rental income. Not four separate reports, as you might expect.
The Final Declaration is always one
Regardless of how many income sources you have or how many quarterly updates you submit, the Final Declaration is always a single document. That is where you bring everything together, confirm your figures, and settle your tax for the year.
The more income sources you have, the more important it is to keep your records organised from the start. At Lidertax, we help clients set up their systems so that quarterly updates become a routine task rather than a source of stress.
Question 19 – Can I have more than one accountant or agent?
Yes. MTD introduces a flexible multi-agent structure. This is one of the more useful improvements HMRC put in place ahead of the 2026 launch.
Under this structure, you can appoint:
- One main agent, who has full access to your MTD account. They handle all tax matters including the Final Declaration, tax calculations, and all income sources.
- One or more supporting agents, who have limited access. They can submit quarterly updates and manage records for trading and rental income. They cannot view income outside of those activities, finalise the annual return, or access tax calculations.
How this works in practice
As an example, a bookkeeper might handle the day-to-day records and submit quarterly reports as a supporting agent. Your accountant acts as the main agent and handles annual tax planning and the Final Declaration. This split is now fully supported by HMRC.
A technical point to be aware of
Assigning agents requires care. If a supporting agent is accidentally added as a main agent, this automatically removes access from your existing main agent. HMRC sends no notification when this happens. Always discuss any changes to agent authorisation with your main accountant first.
At Lidertax, we act as both main agent and supporting agent depending on what each client needs. If you already have someone handling your day-to-day bookkeeping, we can take on the MTD work without disrupting that arrangement. Talk to us to work out the best structure for your situation.
Question 20 – What are the main benefits of Moving to MTD?
Making Tax Digital is often seen purely as a compliance burden. However, when it is set up properly, it brings real practical advantages for running your business day to day.
Fewer errors and fewer problems with HMRC
Manual data entry is one of the main causes of mistakes in tax returns. MTD removes this risk by requiring digital links between systems. Data flows automatically without human involvement in the transfer. As a result, errors decrease and the risk of an HMRC inquiry reduces.
A real-time view of your tax position
Annual Self Assessment gave you a single snapshot of your finances, once a year. MTD changes this completely. Your software estimates your tax liability after each quarterly update. You know throughout the year how much you owe HMRC. There are no unpleasant surprises in January.
Better cash flow planning
This follows directly from the previous point. If you know in advance what you are going to pay, you can manage your business finances more effectively. You set money aside as you go. You respond to changes in income during the year rather than after it ends.
MTD as a business tool, not just a requirement
With the right support, Making Tax Digital can become a tool that improves your financial position. It does not just satisfy HMRC. It helps you run your business with more clarity. As a further practical benefit, digital records make it easier to apply for a mortgage or leasing arrangement, as your income is documented clearly in a format lenders accept.
Summary: What to Take Away from Part 2
Software
The HMRC online portal is no longer available for those within MTD. You must use approved software. Free options exist, including QuickFile, TaxNav and MyTaxDigital. Excel is permitted, but only with bridging software and proper digital links throughout.
Digital links
Manual entry and copy-pasting between systems is not allowed. Breaking digital links attracts a daily penalty starting at £5, rising to £15 for repeated breaches, capped at 100 days. HMRC issues a written warning before imposing this penalty.
Penalties
The points system is more predictable than the old regime. Four late quarterly updates equals a £200 penalty. Failure to maintain digital records can result in a penalty of up to £3,000 per year, though HMRC issues a written warning first. The 2026/27 tax year is a soft landing period: penalty points will not accrue for late quarterly updates. Full enforcement begins from 2027/28.
Exemptions
Exemptions are available but narrowly defined. The barrier to digital filing must be real and impossible to overcome. Applications must be submitted before the date MTD applies to you, not after. Some exemptions are automatic and require no application.
Multiple agents
You can appoint one main agent and one or more supporting agents. A supporting agent cannot finalise the annual return or access income outside of trading and rental activities. Any change to agent authorisation requires care, as errors can remove access for your existing main agent without any notification from HMRC.
Three things to do now
- Check whether MTD applies to you and when. Compare your total gross income against the thresholds: £50,000 from April 2026, and £30,000 from April 2027.
- Review your current record-keeping. Is it digital? Does it meet the digital links requirement? If not, now is the time to change it, not in March 2026.
- Choose your software and start using it before the mandatory date. New habits take time. Your first quarterly submission should not also be your first time using the system.
Book a Free Consultation with Lidertax
At Lidertax, we help self-employed individuals and landlords navigate MTD without confusion. We work with clients across the UK in both English and Polish, covering everything from software selection and record setup to quarterly reporting and the Final Declaration.
If you have questions about Making Tax Digital, are not sure where to start, or want to check that your current setup is compliant, book a free consultation. We will look at your situation and tell you exactly what needs to happen next.
Book your free consultation at Lidertax
Part 3 of this guide will cover registering for MTD, preparing for your first quarterly report, and the most common mistakes people make during the transition.
