To comply with Making Tax Digital in Sage, you need an MTD-compatible Sage product, a linked Government Gateway connection, and tax codes mapped correctly to the nine VAT return boxes. After that, each period is mostly a review-and-submit exercise: Sage compiles your digital records into the return, transmits it to HMRC through the API, and stores the receipt. The setup is where mistakes get baked in, so it is worth doing carefully once rather than fixing quarterly.
What MTD Requires of Your Software and Records
MTD imposes two obligations: keep your tax records digitally in compatible software, and submit returns to HMRC directly from that software.1HM Revenue & Customs. Making Tax Digital for VAT All VAT-registered businesses are already in scope. Paper returns and manual portal submissions are no longer accepted for VAT.
Beyond storing transactions digitally, HMRC requires “digital links” throughout the record-keeping chain. Once data enters any piece of software, every subsequent transfer or modification must happen without manual intervention. You cannot copy and paste figures from a spreadsheet into Sage, and you cannot retype totals from one system into another.2GOV.UK. VAT Notice 700/22 – Making Tax Digital for VAT Automated imports, API connections, and linked spreadsheet formulas qualify. Manual retyping does not.
For each sale, your digital records must include the tax point, the net value excluding VAT, and the VAT rate charged. For each purchase, the tax point, the value, and the input tax you intend to claim. You also need designatory data: business name, principal address, VAT registration number, and any VAT schemes you use.2GOV.UK. VAT Notice 700/22 – Making Tax Digital for VAT
Which Sage Products Support MTD
Not every version of Sage supports MTD. The products that handle MTD for VAT include Sage Accounting (the cloud product, formerly Sage Business Cloud Accounting), Sage 50 Accounts, and certain editions of Sage 200. Older, unsupported desktop versions need upgrading before you can file digitally. Confirm MTD compatibility before purchasing any tier, since some legacy versions do not include the submission module.
Income Tax is a different story. HMRC currently lists Sage 50cloud Accounts as a software product still in development for MTD for Income Tax.3GOV.UK. Choose the Right Software for Making Tax Digital for Income Tax Check Sage’s compatibility status before you rely on it for ITSA submissions in 2026.
What Changes in April 2026
From 6 April 2026, sole traders and landlords with qualifying income above £50,000 from self-employment and property must use MTD for Income Tax Self Assessment.4GOV.UK. Making Tax Digital for Income Tax for Sole Traders and Landlords – Step by Step The threshold drops to £30,000 from April 2027. A further extension to those with income above £20,000 has been announced but not yet legislated.5GOV.UK. Find Out if and When You Need to Use Making Tax Digital for Income Tax
Unlike VAT, MTD for Income Tax requires quarterly updates throughout the tax year. For 2026–27, the deadlines are 7 August, 7 November, 7 February, and 7 May.6Making Tax Digital. MTD for Income Tax Dates You Need to Know After the final quarterly update, you submit your tax return through MTD software by 31 January the following year. If you earn from both self-employment and property, keep separate records and send separate quarterly updates for each; they feed into a single tax return.
Setting Sage Up for MTD
Turn On the MTD Module
Once you have an MTD-compatible Sage product installed or subscribed, the MTD features need switching on. In Sage 50, look in the VAT settings area; in Sage Accounting, under the tax or compliance settings. The exact menu path varies by version, but you are looking for an option labelled “Making Tax Digital” or “MTD Submissions.” Until this is enabled, the software will not show the option to file directly with HMRC.
Connect to the Government Gateway
After enabling MTD, link Sage to your HMRC Government Gateway account. The software will prompt you to sign in to HMRC through the Sage interface. When you authenticate, HMRC issues an authorization token that lets Sage communicate with its systems via API. That token is time-limited, so you will periodically need to re-authenticate. Sage will prompt you when the connection lapses.
Agents and accountants filing on behalf of clients go through a different route: sign into your agent services account and add client authorisations, linking your Self Assessment agent codes so authorisations carry over for MTD.7GOV.UK. Add Your Client Authorisations for Making Tax Digital for Income Tax
Map Your Tax Codes
This is where the most damage gets done. Every transaction code in Sage must map correctly to the right HMRC category so the VAT return calculates accurately across all nine boxes. If you have custom tax codes or use special schemes such as the flat rate scheme or partial exemption, verify those mappings before your first submission. Incorrect mappings will not necessarily trigger an error. The return will simply be wrong, and you will be filing inaccurate figures without knowing.
Filing a VAT Return Through Sage
When a filing period ends, Sage compiles your digital records into the nine-box VAT return automatically.8GOV.UK. How to Fill In and Submit Your VAT Return – VAT Notice 700/12 Review every box before filing. Sage provides a breakdown of which transactions feed into each total, so use that to spot anything unexpected. A suddenly higher Box 1 might indicate a misposted transaction or a duplicated invoice. A Box 4 figure that looks too low might mean a purchase invoice was entered without VAT.
If you need an adjustment before filing, such as a partial exemption calculation or fuel scale charge, use Sage’s adjustment function rather than editing transaction records. In Sage 50, calculate the VAT return first, then click “Make adjustments,” select the box to adjust, enter the value and reason, and save. The adjustment only applies when you reconcile the return; if you close without reconciling, it is lost.9Sage KB. Adjust Your VAT Return
Once everything looks right, click “Submit to HMRC.” Sage transmits the data through the API, and you receive a confirmation receipt with a unique reference number. Every submission is logged, so you can pull up past returns and their receipts at any time. If the submission fails, Sage will display the error, usually a lapsed authorization or a Government Gateway credential issue. Fix the underlying problem and resubmit.
Correcting Errors After Filing
Errors with a net value of £10,000 or less can be adjusted on your next VAT return. Errors between £10,000 and £50,000 can also go on the next return, but only if the error is less than 1% of your total sales for the correction period.10GOV.UK. Sending a VAT Return – Correct Errors in Your VAT Return Anything above those thresholds must be reported directly to HMRC as a separate disclosure.
In Sage, a correction that qualifies for the next-return method is entered as a VAT adjustment on the new period’s return, using the same adjustment process as above. Keep supporting documentation explaining the original error and the corrective calculation, both for your audit trail and in case HMRC asks.
Penalties for Late Filing and Late Payment
Late Submissions
HMRC uses a points-based system. Each missed VAT filing deadline earns one penalty point. The threshold depends on filing frequency: 4 points for quarterly filers, 5 for monthly, 2 for annual.11GOV.UK. Penalty Points and Penalties if You Submit Your VAT Return Late Once you reach the threshold, you receive a £200 penalty, plus another £200 for every subsequent late submission while you remain at the threshold. MTD for Income Tax uses the same structure, with a threshold of 4 points.12GOV.UK. Penalties for Making Tax Digital for Income Tax
Late Payments
Late payment penalties are separate and depend on how long the money is overdue. For VAT:
- Up to 15 days late: no penalty.
- 16 to 30 days late: a first penalty of 3% on the VAT owed at day 15.
- 31 days or more: the 3% first penalty, plus a further 3% on what is still outstanding at day 30, plus a second penalty at a daily rate of 10% per year on the remaining balance from day 31 until paid.
MTD for Income Tax follows a similar tiered structure. For the 2026–27 tax year, no penalty applies for payments up to 30 days late, provided it is your first year under the new regime. After that, the 15-day grace period applies.12GOV.UK. Penalties for Making Tax Digital for Income Tax
Record-Keeping Failures
Failing to maintain proper digital records or breaking digital links within your software chain can attract a penalty of up to £3,000. HMRC does not hand these out casually, but if an audit finds that figures were manually retyped between systems rather than digitally linked, this is the penalty in play.
How Long to Keep Your Records
HMRC requires digital records for at least six years, but the clock starts at different points depending on the document. Invoices run six years from date of issue. Summary records like balance sheets and trading accounts run six years from the date they were prepared. Ongoing records such as ledgers and daybooks follow the same rules whether stored electronically or on paper.14HM Revenue & Customs. CH15200 – Record Keeping – How Long Must Records Be Retained For – VAT – Determining the 6-Year Period
The digital links between records and submitted returns must survive the full retention period. If HMRC audits you three years after a submission, you need to show the unbroken automated chain from initial transaction entry to the figure that appeared on the return. Document any adjustments: what was changed, why, and how the revised figure was calculated.
Sage’s cloud products handle backups automatically. Sage 50 desktop users are responsible for their own backup strategy. Store copies off-site or in a secure cloud environment. A corrupted or lost data file six years from now means you cannot satisfy HMRC’s record-keeping requirements.
Spreadsheets and Bridging Software
Spreadsheets are not banned under MTD. Many businesses legitimately use them for calculations like partial exemption or fuel scale charges. The restriction is on how the data moves. If you calculate a figure in a spreadsheet and type it into Sage, you have broken the digital link. The figure needs to flow automatically, through a formula link, an import function, or bridging software that connects the spreadsheet to the submission software without manual intervention.2GOV.UK. VAT Notice 700/22 – Making Tax Digital for VAT
Bridging software acts as a go-between, pulling data from spreadsheets and feeding it into MTD-compatible submission systems. It works, though most accountants treat it as a stopgap. If your business leans heavily on spreadsheets for VAT accounting, moving fully into Sage would simplify both the compliance process and the audit trail over time.
Who Can Be Exempt
Not everyone has to comply. HMRC grants exemptions case by case for people who are “digitally excluded”: unable to reasonably use digital tools due to age, health, disability, location (such as areas without reliable broadband), or religious beliefs that prohibit the use of technology.15GOV.UK. Apply for an Exemption From Making Tax Digital for Income Tax Unfamiliarity with accounting software, having only a small number of records, cost, or a preference for paper will not qualify.
To apply, contact HMRC using the Self Assessment general enquiries details. If writing, use the subject line “Making Tax Digital for Income Tax — digitally excluded application” for digital exclusion, or “Making Tax Digital for Income Tax — exemption application” for other grounds. If you are applying on behalf of someone else, that person must provide authorisation, either by co-signing the letter or being present on the phone to give verbal consent.15GOV.UK. Apply for an Exemption From Making Tax Digital for Income Tax If you need to use MTD from April 2026, apply now rather than waiting.