Making Tax Digital: What It Means for Contractor Bookkeeping

Making Tax Digital: what it means for contractor bookkeeping

Making Tax Digital (MTD) has been rolling out in stages since 2019, and for contractors trading through a limited company it is worth separating what already applies from what is still being phased in for other groups of taxpayers. This article explains the current position for VAT, what HMRC's Income Tax rollout covers, and what practical changes contractors may need to make to their bookkeeping.

This is general education on how MTD works, not advice on your own filing obligations. For anything specific to your company, a contractor accountant is best placed to confirm what applies to you.

MTD for VAT: already in force for limited companies

If your limited company is VAT-registered, MTD for VAT already applies to you. HMRC's VAT Notice 700/22 confirms that all VAT-registered businesses must:

• Keep VAT records digitally, rather than on paper or in a standalone spreadsheet that isn't linked to compatible software
• File VAT Returns using MTD-compatible software
• Maintain a digital link between the underlying records and the figures submitted to HMRC

This is the part of MTD that is most directly relevant to contractor limited companies today. Manual, paper-only bookkeeping is not sufficient where MTD for VAT applies, so if your company's bookkeeping still relies on spreadsheets that aren't digitally linked to filing software, it is worth checking this against the VAT notice above.

MTD for Income Tax: where the current guidance is aimed

HMRC has also been developing MTD for Income Tax, and this is where confusion often creeps in for contractors. The guidance on choosing the right software for MTD for Income Tax and on using MTD for Income Tax is framed around sole traders and landlords, explaining what to do once you've signed up and what happens in your first year.

Based on the HMRC sources available, there is no separate MTD regime described for companies filing Corporation Tax. In other words, a contractor operating through a limited company files Corporation Tax as they do now; the Income Tax rollout described in HMRC's guidance is not shown as extending to company filings.

Where this can still matter to contractors is if you have other sources of self-employed income or property income alongside your limited company, since it's that personal income that MTD for Income Tax is aimed at, not the company's Corporation Tax return.

The rollout dates and thresholds

HMRC's own public campaign material states that from 6 April 2027, sole traders and landlords with turnover above £30,000 will need to start using MTD-compatible software, per the HMRC MTD software guide.

Secondary contractor-focused sources, including ContractorUK's explainer, describe an earlier stage from April 2026, applying to self-employed individuals and landlords with total gross income above £50,000. Those in scope at that stage would need to submit quarterly updates through the tax year, followed by a final declaration, rather than filing a single annual Self Assessment return.

Given the thresholds and staged dates involved, and that different sources frame the rollout slightly differently, it's sensible to check the live HMRC guidance directly for the position that applies to your own circumstances, rather than relying on a summary.

What changes in practice for bookkeeping

For contractors who are affected, either through non-VAT registered self-employment income, property income, or because their limited company is VAT-registered, the practical bookkeeping changes are broadly the same:

• Digital record-keeping. Invoices, expenses, and other transactions need to be recorded digitally, not just kept as paper receipts or unlinked spreadsheets.
• MTD-compatible software. HMRC's software guidance sets out what functionality is required, including maintaining digital links between records and submissions.
• Periodic submissions. Where MTD for Income Tax applies, quarterly updates replace (or sit alongside) the old pattern of a single annual return, meaning bookkeeping needs to be kept current throughout the year rather than tackled once at year-end.

For a limited company contractor, this often means reviewing whether your existing accounting software (many contractor accountants provide MTD-compatible packages as standard) covers both the VAT obligations you already have and any personal Income Tax obligations that may apply from the relevant threshold date.

Getting your bookkeeping ready

If you're unsure whether MTD for Income Tax will apply to you, or want to confirm your VAT processes are properly digitally linked, the most reliable route is to check the live HMRC guidance linked above and speak to a contractor accountant who works with limited companies day to day. They can confirm what software and processes your specific situation requires.

While you're reviewing your company finances, it's also worth keeping an eye on the market for your next contract. You can browse outside-IR35 contracts or check current day-rate benchmarks to see how bookkeeping and administrative overheads compare across different engagement types.

This platform does not determine, verify, or warrant IR35 status; the SDS is the client's legal responsibility. Contractors should take their own advice and consider IR35 insurance.