Is Your Accounting Software MTD-Compatible? A Four-Point Checklist

What “MTD-Compatible” Actually Means

The legal definition of functional compatible software

The Income Tax (Digital Obligations) Regulations 2026 define “functional compatible software” as software that can maintain digital records, submit quarterly updates and annual returns through the HMRC API, and receive information back from HMRC. All three functions must be present, meaning software that supports MTD VAT alone but lacks ITSA quarterly update functionality does not meet the standard.

HMRC also maintains separate recognised software lists for VAT and ITSA. A product must appear on the ITSA list to qualify as MTD-compatible for income tax purposes, regardless of vendor claims such as “MTD-ready.” To verify a product’s status, use HMRC’s official guide to choosing software for MTD for Income Tax.

Why VAT-compatible is not ITSA-compatible

The MTD VAT recognised list includes over 400 products, while the ITSA list is much smaller and still evolving; thus, MTD ITSA is a more recent regime, and many developers are rolling out full functionality. A client may therefore be using VAT-compatible software that does not appear on the ITSA list.

The two regimes have separate technical requirements and API connections, so firms must check the ITSA list specifically. Managing this crucial transition requires additional team alignment to establish precise understanding of the quarterly workload within the staff.

What to Do Before 7 August 2026

1. What MTD Obligations Apply to This Client
2. Does the Software Cover the Client’s Income Sources
3. Is the Digital Link Chain Complete
4. Does the Software Handle Cumulative ITSA Updates

Check 1: What MTD Obligations Apply to This Client

Which clients are in scope from April 2026

MTD ITSA applies from April 2026 to sole traders and landlords with qualifying income above £50,000, combining both trade and property income. Firms should use 2024/25 figures to confirm which clients are in scope now.

The threshold falls to £30,000 in April 2027, making it sensible to review clients just below the current limit ahead of next year. Making Tax Digital for small businesses covers the full rollout. The approved threshold will fall even further to £20,000 in April 2028.

Clients with both VAT and ITSA obligations

A VAT-registered client below the ITSA income threshold needs MTD compatible software for VAT only. Clients with both obligations need software covering both regimes, or two products linked digitally. The VAT-only audit is straightforward. For clients with both, start with income source coverage in Check 2.

Check 2: Does the Software Cover the Client’s Income Sources

How income sources are categorised under ITSA

Not all MTD ITSA-recognised products support every income source type. Sole trade and property income are treated as separate categories under the regulations, and some products cover one but not the other. A client with both a trade and a rental portfolio needs software covering both sources, or a separate recognised product for each. Check the vendor’s published income source details, not just the product’s overall HMRC recognised status.

The one product per separate submission

Each income source can only be submitted through one software product. Clients may use separate products for different income sources, such as one for sole trade and another for property income, but they cannot split the same income source across multiple products. Where spreadsheets and bridging software are used together, the spreadsheet must contain the complete income source data to avoid incomplete quarterly updates.

Check 3: Is the Digital Link Chain Complete

What qualifies as a digital link

A digital link means data moves between software without manual re-entry. This can include API connections, spreadsheet formulas, or structured imports such as CSV files. Copying, pasting, or retyping figures does not qualify. The same standard applies under MTD VAT, where VAT Notice 700/22, Section 10.8, defines digital links, and businesses should not assume the same grace period will apply to ITSA.

How the chain breaks in practice

A client may use a spreadsheet for record-keeping and separate software for quarterly submissions, but if figures are retyped instead of transferred digitally, the digital link is broken. Even where both products appear on the HMRC recognised list, the setup can still fail compliance checks due to underlying MTD registration and operational issues, such as data mismatches or incomplete onboarding.

Review every stage of the client’s workflow and confirm how data moves between systems. If figures are manually re-entered at any point, that gap should be resolved before 7 August 2026.

Check 4: Does the Software Handle Cumulative ITSA Updates

Year-to-date figures, not period returns

The quarterly MTD ITSA updates are cumulative, meaning that each submission replaces prior submissions based on its year-to-date income and expenses. Whereas MTD VAT returns operate in a completely different way, VAT updates are period-specific. Software designed primarily for VAT may still apply period-based logic, creating errors from Q2 onward.

Such issues might only become evident at the end-of-year tax return stage; if the cumulative return is not reconciled with the quarterly submissions, it may require revisions across multiple filings.

Final Thoughts

Before submission of the first quarterly update, make sure your software is supportive of ITSA submission; also ensure it submits precise figures and allows you to make revisions before end-of-year tax submission. If the system only supports VAT, it wouldn’t support ITSA submissions.

If you deal with clients who still rely on spreadsheets, ensure the software serves as a bridge for smooth submissions.

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