E-invoicing and
Making Tax Digital

If you run a small business, two digital changes are heading your way from HMRC and the government: Making Tax Digital (MTD) and mandatory e-invoicing. They are easy to confuse. Both involve software, both are about moving away from paper and spreadsheets, and both come from the same push to modernise the tax system. But they are separate requirements, with different scopes and different start dates. This guide sets out what each does, who each reaches, and how they connect.

Side by side

The short version: MTD governs the line between you and HMRC. E-invoicing governs the line between you and other businesses.

Making Tax Digital in brief

MTD for VAT requires VAT-registered businesses to keep digital VAT records and file VAT returns through compatible software. MTD for Income Tax, for sole traders and landlords, launched in April 2026 for those with qualifying income over £50,000. HMRC's Transformation Roadmap update says it will extend to those with income over £30,000 from April 2027 and over £20,000 from April 2028. Under MTD for Income Tax you keep digital records and send quarterly updates, then finalise the year. The MTD for Income Tax glossary entry and the MTD requirement checker cover who it applies to and when.

E-invoicing in brief

From April 2029, all VAT invoices must be issued as e-invoices: structured data sent between the seller's and buyer's systems, not PDFs. The government has chosen a decentralised model, with Peppol as the core interoperability network, and a roadmap is due at Budget 2026. The e-invoicing hub covers it in full, and the e-invoicing glossary entry defines it.

Who meets which, and when

Because MTD for Income Tax follows your income and e-invoicing follows VAT registration, businesses meet them in different orders:

For most sole traders, MTD for Income Tax comes first, and e-invoicing arrives only if and when they are VAT registered. The guide on e-invoicing if you are not VAT registered looks at that path.

Where they connect

The two are separate, but they touch at several points:

• The same records. An invoice you issue is a sales record for MTD and, if it is a VAT invoice, an e-invoice from 2029. Software that raises the invoice once and uses it for both avoids double entry.
• Purchase invoices. E-invoices from your suppliers arrive as data, which flows into the digital purchase records MTD already requires, with VAT already split out.
• The same software market. The government's response notes that several MTD providers focused on small businesses already offer e-invoicing, and it wants the e-invoicing market to develop the way MTD's did, with products at a range of price points.
• The same direction. HMRC's Transformation Roadmap describes MTD as enabling a gradual extension of digital record keeping across the tax system, and places the e-invoicing mandate alongside it.

What e-invoicing will not do

It is tempting to assume e-invoices will flow straight to HMRC and fill in your returns. That is not the plan for 2029:

• No real-time reporting. The government will explore it, but will not introduce it alongside the 2029 mandate. If it comes later, it will build on the e-invoicing infrastructure.
• No pre-filled VAT return from e-invoices alone. The government's response agrees with respondents that e-invoicing data alone would not be enough, because VAT invoices are not issued for sales to consumers, so a large part of many businesses' sales would be missing. It says e-invoicing data might help feed such a product in future.
• No change to your MTD obligations. You still file VAT returns and, where it applies, MTD for Income Tax updates through your MTD software.

Bridging software and spreadsheets

MTD allows bridging software, which links spreadsheets to HMRC's systems. The consultation asked about it: around half of respondents said they do not use bridging software. E-invoicing is different, because invoices have to travel between businesses as structured data over the network, which a spreadsheet cannot do by itself. So a business that keeps MTD records in spreadsheets with bridging software will need a separate e-invoicing tool by 2029, or can move to software that does both. The guide to choosing e-invoicing software covers the options.

A worked example: one sole trader, 2026 to 2029

Daniel is a self-employed kitchen fitter who is not VAT registered. His qualifying income was £42,000 on his 2024 to 2025 tax return and £45,000 on his 2025 to 2026 return. HMRC uses the qualifying income on an earlier tax return to decide when MTD for Income Tax starts, which is why the dates below follow his returns rather than the current year.

Because Daniel chose MTD software in 2027 that also raises invoices and has a Peppol plan, each step is a setting rather than a new system: VAT is switched on when he registers, and e-invoicing is switched on for his business customers in 2029.

Penalties: known and unknown

MTD for Income Tax uses a points-based system for late submissions, where penalty points build up with each missed deadline and lead to a financial penalty once a threshold is reached. For e-invoicing, no penalty regime has been announced. Consultation respondents asked whether penalties would mirror MTD's, and the government has not yet said. Expect the answer in the roadmap or the detailed rules that follow it.

Records and how long to keep them

Both regimes rest on the same record-keeping duties. VAT-registered businesses normally keep VAT records for 6 years, and sole traders keep business records for at least 5 years after the 31 January submission deadline for the tax year. E-invoices you send and receive are part of those records. Make sure whichever software handles your e-invoices lets you keep and export them for as long as the rules require. The guide on how long to keep invoices sets out the periods.

Preparing for both at once

If you are VAT registered, or might be by 2029, the most efficient path is software that:

1. Keeps your digital records and submits MTD returns and updates.
2. Raises your invoices, so each sale is recorded once.
3. Sends and receives e-invoices over Peppol, or has a clear plan to.
4. Records payments against invoices, so you can see what is owed and plan with the quarterly planner.

If you are not VAT registered, focus on MTD for Income Tax first; your invoicing can stay as it is, but choosing software that could do e-invoicing later saves a second switch if you register.

Common questions

Do I need two separate products? Not necessarily. Many businesses will be able to use one product for both, if it supports MTD and e-invoicing.

Will e-invoicing make MTD quarterly updates automatic? Your updates draw on your records, and e-invoices make those records more complete and accurate, particularly for purchases. But MTD updates also include income and expenses that never involve a VAT invoice, and you still review and submit them.

Does my accountant need to change anything? Probably their software and processes, over time. The government expects accountants and bookkeepers to play a vital role in helping businesses adopt e-invoicing, as they did with MTD. The Making Tax Digital glossary entry and the VAT registration checker are useful starting points for that conversation.