The most frequent errors businesses make when setting up Making Tax Digital from incorrect HMRC authorisation to broken digital links. Avoid these pitfalls and get your MTD setup right the first time.
Why MTD Setup Matters
Getting your Making Tax Digital setup right from the start saves you from headaches later. We’ve seen hundreds of businesses scramble to fix setup issues when their first quarterly deadline (5 August 2026) arrives — only to discover their software can’t submit to HMRC, their records are incomplete, or they’ve been claiming expenses they shouldn’t.
These five mistakes account for over 80% of MTD setup problems we encounter. Fix them now, before they cause compliance issues.
Mistake #1: Skipping HMRC Authorisation
What Goes Wrong
You choose MTD software, set up your business details, connect your bank but forget the final step: authorising the software to submit data to HMRC.
Without this authorisation, your software cannot file quarterly updates. You’ll spend three months recording transactions perfectly, then discover on deadline day that you can’t submit.
Why It Happens
The authorisation step isn’t obvious. It requires logging into your HMRC Business Tax Account from within your software and granting permission. Many people assume that “signing up for MTD software” is the same as “authorising with HMRC” it’s not.
How to Fix It
Step-by-step:
- In your MTD software, go to Settings → Tax/MTD → HMRC Connection
- Click “Authorise with HMRC” or “Connect to HMRC”
- You’ll be redirected to HMRC’s website
- Log in with your Government Gateway credentials
- Grant permission for the software to submit on your behalf
- You’ll be redirected back with a confirmation message
Mistake #2: Using Personal & Business Accounts Together
What Goes Wrong
You use one bank account for both business and personal spending. Your MTD software imports everything groceries, Netflix, gym membership alongside genuine business expenses.
If you don’t meticulously separate personal transactions, you end up claiming personal expenses as business deductions. That’s tax fraud, even if accidental.
Why It Happens
Many sole traders and landlords never opened a separate business account. They’ve been using their personal account for years and see no reason to change.
How to Fix It
Best solution: Open a dedicated business bank account (most banks offer free business accounts for sole traders).
If you can’t/won’t switch accounts:
- Mark every personal transaction as “Personal” or “Not Business-Related” in your software
- Create a rule for recurring personal expenses (e.g., “Netflix subscription → Personal”)
- Review every single transaction before submitting quarterly updates
- When in doubt, don’t claim it
Pro tip: Set up your bank feed to import from your business account only. If you must use one account, reconcile weekly (not quarterly) so you don’t forget which transactions are personal.
The risk: HMRC can request proof of any expense going back 5+ years. Claiming a £500 personal expense as business leads to tax bills, penalties, and potentially criminal investigation.
Mistake #3: Forgetting Opening Balances
What Goes Wrong
You start using MTD software on 6 April 2026 but don’t enter your opening balances your financial position as of 5 April 2026.
Your software thinks you had £0 in the bank, £0 owed to customers, and £0 owed to suppliers on 5 April. Every report from that point forward is wrong.
Example:
- Your actual bank balance on 5 April: £8,000
- Software shows: £0
- You record £5,000 in income during Q1
- Software calculates your Q1 bank balance as: £5,000
- Your actual bank balance: £13,000
- Discrepancy: £8,000
This error compounds every quarter, making your reports increasingly inaccurate.
Why It Happens
People assume that “starting MTD on 6 April” means starting from scratch with zero balances. But MTD is about reporting your actual business activity, which doesn’t reset to zero just because MTD begins.
How to Fix It
Before recording any transactions, enter your opening balances as of 5 April 2026:
Minimum required:
- Bank balance (check your bank statement for 5 April 2026)
If you have them:
- Outstanding customer invoices (money owed to you but not yet paid)
- Unpaid supplier bills (money you owe but haven’t paid)
- Loans (business loans, director’s loans)
- Assets (vehicles, equipment, property)
Where to enter this: Most software has an “Opening Balances” or “Starting Balances” section under Settings or Chart of Accounts. Enter the 5 April 2026 date and your figures.
How to verify it worked: Run a Balance Sheet report as of 5 April 2026. Your bank balance should match your actual statement. If it doesn’t, your opening balance is wrong.
Mistake #4: Not Categorising Transactions
What Goes Wrong
Your bank feed imports 200 transactions. You see they’ve imported, think “great, job done,” and submit your quarterly update without categorising them.
Your software dumps everything into “Uncategorised” or guesses categories incorrectly. Your “office supplies” includes motor fuel. Your “travel expenses” includes Amazon purchases.
HMRC’s systems flag unusual expense patterns (e.g., a plumber claiming £0 in materials but £10,000 in “miscellaneous”). You get audited.
Why It Happens
People assume bank feed integration is the full job import transactions and you’re MTD compliant. But imported transactions still need human review and categorisation.
Software can guess categories based on merchant names, but it’s often wrong. “Amazon” could be office supplies, tools, inventory, or personal purchases the software can’t tell.
How to Fix It
Weekly reconciliation routine (20 minutes per week):
- Review imported transactions from the past week
- Categorise each one (assign to income or expense category)
- Mark personal transactions as “Not business-related”
- Attach receipts (photo via mobile app or upload PDF)
- Add descriptions for context (e.g., “Client meeting — coffee shop”)
Create rules for recurring transactions:
- “Xero subscription → Office costs”
- “Shell petrol station → Motor expenses”
- “Tesco → Personal” (if you don’t buy business supplies at Tesco)
Before submitting quarterly updates:
- Run an Uncategorised Transactions report
- If anything shows up, categorise it
- Don’t submit until everything is categorised
The penalty: Miscategorised expenses mean incorrect tax calculations. HMRC can disallow wrongly categorised expenses and charge back-tax + interest + penalties.
Mistake #5: No Testing Before Go-Live
What Goes Wrong
You set up your software in March 2026 and assume everything works. On 25 July 2026 (deadline is 5 August), you try to generate your first quarterly update and discover:
- Your HMRC authorisation expired
- Your bank feed stopped syncing in May
- You have 100+ uncategorised transactions
- The software shows errors you don’t understand
- HMRC’s systems are down (happens every deadline)
You’re now rushing to fix everything with 10 days until the deadline.
Why It Happens
People treat MTD setup as a “one and done” task. They configure it once and don’t touch it until the deadline forces them to.
How to Fix It
Do a practice run in March/April 2026:
Step 1: Record dummy transactions
- Create a fake invoice for £500
- Record a fake expense of £200
- Let these sit for a few days (simulates a quarter’s activity)
Step 2: Generate a practice quarterly update
- Go to MTD → Quarterly Updates
- Select a practice period
- Click “Generate Update”
- Review the summary (income, expenses, profit)
Step 3: Check for errors
- Does the update generate successfully?
- Are the figures correct?
- Any error messages?
Step 4: Verify HMRC connection
- Check your HMRC authorisation status is still “Connected”
- Confirm your software shows the right UTR and business details
DO NOT SUBMIT THIS PRACTICE UPDATE TO HMRC it’s just a test.
Step 5: Delete dummy transactions
- Remove the test invoice and expense
- Your software is now ready for real data
Monthly check (5 minutes):
- Log into your software once a month
- Verify your bank feed is still syncing
- Check for any software notifications or errors
- Confirm HMRC authorisation hasn’t expired
By the time 5 August arrives, you’ll know the process works.
What Happens If You Get It Wrong?
Short term:
- Stress and panic when the first deadline arrives
- Rushed submissions with errors
- Potential late filing penalties (1 point per missed deadline, £200 at 4 points)
Long term:
- Incorrect tax calculations (leading to underpayment or overpayment)
- HMRC enquiries and audits
- Disallowed expenses (leading to tax bills + interest + penalties)
- Damaged relationship with HMRC (increased scrutiny on future submissions)
The fix: Get setup right now, before April 2026. The businesses that struggle with MTD are the ones that rush setup or skip critical steps.
Need Help With MTD Setup?
We offer done-for-you MTD setup covering:
✓ Software selection and installation
✓ HMRC registration and authorisation
✓ Bank feed connection
✓ Opening balances and data migration
✓ Categories and rules configuration
✓ Testing and verification
✓ Training (so you know how to use it)
Setup fee: £500 one-off (includes 2 hours of training)
Or full managed service: We handle setup and all quarterly submissions (from £100/quarter).
Book a free MTD setup consultation — we’ll assess your current position and create a setup checklist.
Call: 03301 332 533
About This Guide
Written by the MTD Compliance Team at MakingTaxesDigital.com — UK accountants who’ve completed over 500 MTD setups since 2024 with a 100% successful submission rate.
Questions? Email hello@makingtaxesdigital.com
Last updated: 1 February 2026