Making Tax Digital jargon buster

Agent

An agent is an accountant or bookkeeper authorised to handle your tax affairs on your behalf. Agents can:

• prepare and submit your MTD VAT and Income Tax returns directly to His Majesty’'s Revenue and Customs (HMRC)
• use MTD-compatible software to manage your compliance
• represent you in dealings with HMRC

If you need an agent for MTD compliance, check out our advisor directory of MTD-ready accountants and bookkeepers.

Agent services account

An agent services account is the online portal that allows accountants and bookkeepers to access HMRC's digital services for their clients. This account enables agents to submit MTD VAT and Income Tax returns and manage multiple client accounts through a single login. Agents must register for an agent services account before they can handle MTD compliance for clients.

API-enabled spreadsheets

API-enabled spreadsheets are spreadsheet files that can connect directly to HMRC's systems through special programming interfaces.

Here's how they work for MTD:

• connect your existing spreadsheets to accounting software
• automatically transfer your tax data without manual copying
• enable digital submission of VAT and Income Tax returns to HMRC
• bridge the gap between spreadsheet users and MTD requirements

This technology lets you keep using familiar spreadsheets while meeting MTD's digital submission rules. MTD bridging software uses this API technology to connect your spreadsheets to HMRC.

Automated data transfer

Automated data transfer is a type of digital link that HMRC accepts. For instance, when your income and expense spreadsheet is directly linked to accounting software where it can access figures automatically, without you having to copy and paste them manually.

Basis period reform

Basis period reform changed how self-employed individuals and partnerships report their profits for tax purposes. From April 2024, you must report your profits based on the tax year (6 April to 5 April) rather than your accounting year end. This aligns with MTD for Income Tax requirements and means your tax reporting matches the actual tax year.

Cloud-based accounting software

Cloud-based accounting software is online software that stores your financial data securely on remote servers, accessible from any device with internet connection.

Key benefits for MTD compliance:

• : Automatically stores records in the required digital format
• Real-time access: View your finances from anywhere, anytime
• Direct submission: Submit VAT and Income Tax returns straight to HMRC without manual data entry
• Automatic updates: Always compliant with the latest MTD requirements

Xero's cloud accounting software handles MTD compliance automatically.

Designatory data

Designatory data is specific business information that you must keep in a digital record for MTD. It includes: your business name, the address of your main place of business, your VAT registration number (if applicable), any VAT accounting schemes you use, and your Unique Taxpayer Reference (UTR) for Income Tax.

Digital links

A digital link is a secure, automated connection that transfers data directly between software systems without manual intervention.

For MTD compliance, digital links must:

• Transfer data automatically: No copying and pasting between systems
• Maintain data integrity: Preserve original transaction details
• Create audit trails: Track every step of data movement
• Connect approved software: Link MTD-compatible systems to HMRC

Examples include connections between your accounting software and HMRC, or between your spreadsheet and accounting system.

Digital audit trail

A digital audit trail is a record of every step in a business transaction. This allows HMRC to clearly see the journey from transactional data recorded in your accounting system all the way through to the figures you've submitted on your VAT or Income Tax return. Examples of these steps could include invoices and receipts from customers or suppliers.

Digitalisation

Digitalisation refers to automating processes or business models through software and digital technology. In the context of Making Tax Digital, digitalisation refers to HMRC's goal to shift the UK's tax system online.

Digital records

Digital records are business information stored electronically that you can access on computers, tablets, or phones. MTD requires all qualifying businesses to maintain records digitally using HMRC-recognised software.

Required digital records include:

Business details:

• business name
• business address
• VAT registration number (if VAT-registered)
• Unique Taxpayer Reference (UTR)

Transaction data:

• sales invoices and receipts
• purchase invoices and receipts
• income and expenses
• VAT calculations and adjustments (if applicable)

Paper-only record keeping is no longer sufficient for MTD compliance. You must use approved digital software to store and manage these records.

Digital tax account (DTA)

A digital tax account (DTA) is your online HMRC account where you view and manage your taxes. This includes both Business Tax Accounts (for VAT and other business taxes) and Personal Tax Accounts (for Income Tax and Self Assessment).

Domestic reverse charge

VAT domestic reverse charge procedure is an anti-fraud measure designed to combat complex fraud in the UK VAT system, particularly in the construction industry.

End of period statement (EOPS)

An end of period statement (EOPS) was previously a declaration you had to submit at the end of each quarterly period under MTD for Income Tax. However, this is no longer a requirement. Much of the information that would have been included in your EOPS is now part of your final declaration instead, simplifying the reporting process and avoiding duplication of work.

Final declaration

A final declaration is your annual submission under MTD for Income Tax that finalises your tax position for the year. It's submitted after you've sent all your quarterly updates and includes any additional information needed to complete your Self Assessment, such as tax reliefs or other income sources.

Flat Rate VAT Scheme

Under the Flat Rate VAT scheme, businesses pay a percentage of their total turnover as VAT. The actual amount you pay depends on the type of business, as different industries have different flat VAT rates. This scheme is designed to help simplify the VAT return process for businesses.

Form 64-8

Form 64-8 is used to tell HMRC that you've given permission for an agent (like an accountant or bookkeeper) to act on your behalf. You can find more information on Form 64-8 from HMRC here.

Government Gateway account

A Government Gateway account is what you use to communicate with HMRC online. An account is created when you first sign up for a government online service, such as Self Assessment or VAT registration.

HMRC

His Majesty's Revenue and Customs (HMRC) is the UK government department responsible for collecting taxes. Making Tax Digital is managed by HMRC.

HMRC API

The HMRC API (Application Programming Interface) allows for the exchange of data between two software programmes. It's the technology that connects third-party accounting software such as Xero to HMRC systems, enabling you to submit your tax returns digitally.

HMRC-recognised MTD software

HMRC-recognised MTD software, or 'functional compatible software', is what you must use to comply with MTD. This can be accounting software, a product, or an application that can store digital records and send and receive information from HMRC through an API.

All VAT-registered businesses have been required to keep digital records and submit VAT returns using HMRC-recognised software since April 2022. From April 2026, sole traders and landlords with qualifying income above £50,000 will need to use MTD-compatible software for Income Tax.

Income Tax Self Assessment (ITSA)

Income Tax Self Assessment (ITSA) is the system where you report your income and expenses to HMRC if you're self-employed, a sole trader, or a landlord. Under MTD for Income Tax, you'll need to submit quarterly updates and a final declaration using digital software instead of completing an annual Self Assessment tax return.

MTD

Making Tax Digital (MTD) is the UK government's initiative to move the entire tax system online, requiring businesses and individuals to keep digital records and submit tax returns using approved software. MTD aims to reduce errors, make tax administration more efficient, and help you get your tax right first time. The programme affects VAT, Income Tax, and potentially Corporation Tax, with different implementation dates for each.

MTD exemptions

MTD exemptions allow certain businesses and individuals to avoid digital record-keeping requirements if they meet specific criteria.

You may be exempt if you:

• are over a certain age and struggle with digital technology
• have a disability that prevents digital record keeping
• live in a remote area without reliable internet access
• belong to a religious society that prohibits computer use
• earn below the qualifying income threshold

Check your eligibility for MTD exemptions or speak to an accountant to understand your options.

MTD bridging software

Many businesses and sole traders currently keep their accounting data in spreadsheets and manually enter their tax returns onto a government portal. Under MTD, this manual entry is no longer permitted.

MTD bridging software connects your existing spreadsheets to HMRC's systems, enabling digital submission without changing your current workflow. However, bridging software offers limited functionality compared to comprehensive MTD accounting software.

MTD compliant

To be MTD compliant, you must follow the rules set out by HMRC for Making Tax Digital. This involves keeping and maintaining your records digitally and sending returns to HMRC via MTD-compatible software. You may face penalties if you fail to comply with MTD, unless you're exempt.

MTD for Income Tax (MTD for IT)

MTD for Income Tax (also called MTD for IT or Making Tax Digital for Income Tax) applies to self-employed individuals, sole traders and landlords. If you have qualifying income above £50,000, you'll need to comply from April 2026. Those with income above the threshold of £30,000 will be mandated to join from April 2027, and those above £20,000 will be mandated to join from April 2028.

MTD penalties

Making Tax Digital penalties are HMRC's points-based system for late tax submissions and payments. From January 2023, this replaced the previous VAT penalty system, where penalties were calculated as a percentage of the outstanding VAT amount for the default period.

Making Tax Digital for Corporation Tax

MTD for Corporation Tax was the government's initiative to digitalise how corporation tax is handled by businesses and agents, just like MTD for VAT and MTD for Income Tax, but it is not moving forward at this time. However, HMRC is committed to digital transformation, so changes to corporation tax may be introduced in the future.

Making Tax Digital deadlines

Making Tax Digital deadlines refer to the key milestones of the roll out of Making Tax Digital, including when different groups of businesses and individuals need to start complying.

Making Tax Digital (MTD) for VAT

All VAT-registered businesses must now comply with MTD for VAT rules unless exempt. This means keeping digital records and submitting VAT returns using HMRC-recognised software.

Multi-factor authentication (MFA)

Multi-factor authentication (MFA) is a security procedure that requires you to verify your identity using at least two separate factors: something you know (your password) and something you have (your mobile device). This extra layer of security is designed to prevent anyone other than you from accessing your account, even if they know your password. MFA is also known as two-factor authentication (sometimes called 2FA).

OAuth (Open Authorisation)

OAuth (Open Authorisation) is a technology that lets you securely grant one website or application access to another without sharing usernames and passwords. OAuth is used to grant access to accounting software, such as Xero, to information in your HMRC account.

Online Agent Authorisation (OAA)

Online Agent Authorisation (OAA) is the online service that you must use to allow an agent to manage your tax via your Government Gateway account. You can read more about this here.

Quarterly updates

Quarterly updates are digital submissions you must make to HMRC four times a year under MTD for Income Tax. Each update summarises your income and expenses for that three-month period. These replace the single annual Self Assessment tax return, helping you spread your tax reporting throughout the year.

Qualifying income

Qualifying income is the total income from your self-employment and property rental that determines whether you need to follow MTD for Income Tax rules. If your qualifying income is above £50,000 (from April 2026) or £30,000 (from April 2027), you'll need to keep digital records and submit quarterly updates to HMRC.

Soft landing period for MTD

The soft landing period for MTD refers to when HMRC gave businesses extra time to sign up and comply with MTD for VAT without the risk of MTD penalties. This period ended in April 2021.

Tax gap

The tax gap is the difference between how much tax should be paid to HMRC and the amount that is actually paid. This can happen due to taxes not being filed, taxes owed being underreported or taxes being underpaid. Making Tax Digital aims to close the tax gap by making it easier for people to file their taxes more efficiently and accurately.

Taxable turnover

Taxable turnover is the total value of everything you sell that's subject to VAT, excluding the VAT itself.

Time of supply or tax point

For VAT purposes, the tax point (or 'time of supply') for a transaction is the date when the transaction occurs and VAT becomes due.

Unique Taxpayer Reference (UTR)

A Unique Taxpayer Reference (UTR) is a 10-digit number that HMRC uses to identify you or your business for tax purposes. You'll receive your UTR when you register for Self Assessment or set up as self-employed. You'll need this number to access your digital tax account and submit returns under MTD for Income Tax.

VAT account

A VAT account is a record businesses must keep of the VAT they charge on sales and the VAT they pay on purchases. The figures in a VAT account are used to complete VAT returns.

VAT Cash Accounting Scheme

This is a scheme by HMRC which means businesses only have to pay VAT when a customer pays them. This can be beneficial for your cash flow, as you don't have to pay VAT until customers pay you.

To join the scheme, your VAT taxable turnover must be £1.35 million or less. More information on the cash accounting scheme can be found here.

VAT threshold

The VAT threshold is £90,000, as of 1 April 2024. This means you must register for VAT if your VAT taxable turnover goes over £90,000. You don't need to register for VAT if you earn less than the £90,000 threshold, but if you do choose to register, you will need to comply with Making Tax Digital for VAT rules.

VAT retail schemes

VAT retail schemes are used to calculate how much VAT a retail business must pay. There are three standard VAT retail schemes in the UK: Point of Sale Scheme, Apportionment Scheme and Direct Calculation Scheme. Find out more about VAT retail schemes here. Your total daily gross takings if you use a retail scheme is an example of information you must keep digitally under MTD for VAT.

VAT652 form

The VAT652 form can be used to tell HMRC if you made an error with a VAT claim and have already submitted the claim. Find out more here.

Zero-rated VAT items

When items are zero-rated, they are still VAT-taxable, but the rate of VAT you must charge your customers is 0%. You must still account for them in your VAT records and include them on VAT returns.

VAT Notice 700/22

The VAT Notice 700/22 was published by HMRC in 2018 explaining the rules of MTD for VAT and what information businesses need to keep digitally to comply, as well as what counts as compatible software suitable for MTD for VAT.

How Xero can help you prepare for Making Tax Digital

If you want to know more about what Making Tax Digital means for you in practical terms, check out our resources for accountants and bookkeepers, or small business owners.

Learn more about what Making Tax Digital means, or sign up for a free 30-day trial to learn more about how Xero's HMRC-recognised MTD software can help you stay MTD compliant.