Making Tax Digital is a UK government initiative requiring businesses to keep digital records and submit tax returns through HMRC-compatible software.
Making Tax Digital (MTD) is HMRC's programme to modernise the UK tax system. Since April 2022, all VAT-registered businesses (regardless of turnover) must keep digital records and submit VAT returns through MTD-compatible software. This means you cannot use spreadsheets alone or submit VAT returns manually through the HMRC website - you must use software that digitally links your records to the VAT return submission. Key MTD requirements include maintaining digital records of supplies made and received, the VAT rate applicable to each transaction, the time of supply and the value of supply. Digital links must connect all stages of the record-keeping and filing process - no manual re-keying of data is permitted. MTD for Income Tax Self Assessment is being phased in from April 2026 for self-employed individuals and landlords. Xero is fully MTD-compliant and handles VAT return submission to HMRC, and SortBooks helps by suggesting the right account and VAT code for miscoded transactions.
SortBooks helps with the bookkeeping behind mtd (making tax digital) by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing mtd (making tax digital) by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
VAT is a consumption tax charged on goods and services at each stage of production and distribution. Businesses collect VAT on sales and reclaim VAT on purchases, remitting the net amount.
HMRC is the UK's tax authority responsible for collecting taxes, administering benefits, enforcing customs regulations and overseeing Making Tax Digital.
In bookkeeping, compliance refers to meeting all legal and regulatory requirements for financial record keeping, tax reporting and lodgement obligations set by your tax authority.
A tax return is the formal document lodged with your tax authority reporting your income, deductions and tax payable for a specific period, usually annually.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.