If your agency has some income streams that are VAT registered and others that aren't, you're in a minority that HMRC's MTD rules don't handle elegantly. The system was designed for straightforward cases: you're either VAT registered or you aren't. But many agency founders operate with a mix.
A common scenario: you run a digital agency through a limited company (VAT registered) but also take on freelance consulting work as a sole trader (below the £90,000 VAT threshold). Or you have a partnership that handles non-VATable income alongside your main agency. In these cases, MTD for mixed VAT and non-VAT agencies creates a genuine compliance puzzle.
This article explains exactly what you need to do, what software you need, and where the traps are. We work exclusively with agency founders, and we see this issue more often than most people realise.
What MTD Actually Means for Your Agency
Making Tax Digital (MTD) is HMRC's programme to move tax reporting onto digital systems. It started with VAT in 2019 and is now rolling out for Income Tax Self Assessment (ITSA) from April 2026.
For MTD mixed VAT and non-VAT agencies, the complication is simple: MTD for VAT requires digital records and digital submission for your VAT-registered entity. MTD for ITSA will require the same for your self-assessment income. If those are different legal entities (a limited company and a sole trade, for example), you need separate MTD-compliant records for each.
Let's be specific about the timelines:
- MTD for VAT: Already mandatory if your VAT taxable turnover exceeds £90,000. You must use MTD-compatible software (Xero, QuickBooks, FreeAgent, Sage) to keep digital records and submit VAT returns digitally.
- MTD for ITSA: Mandatory from April 2026 for sole traders and partnerships with qualifying income over £50,000. From April 2027, it drops to over £30,000.
If your agency is a limited company, MTD for ITSA does not apply to the company itself. But it does apply to you personally if you have self-assessment income outside the company.
The Two Common Mixed Structures
Limited Company (VAT Registered) + Sole Trade (Non-VAT)
This is the most common mixed structure we see. You run your main agency through a limited company. It turns over £200,000, so it's VAT registered. But you also do some independent consulting or speaking work as a sole trader, earning £25,000 a year. That sole trade income is below the VAT threshold, so you're not VAT registered on it.
Under MTD for ITSA, from April 2026, your sole trade income will need to be reported digitally. Your limited company's VAT is already digital. But these are two separate MTD obligations, handled in different ways.
The limited company files its VAT returns through MTD-compatible software. The sole trade will need to file its self-assessment through MTD-compatible software too. You cannot combine them into one return because they are separate legal entities.
Partnership (Non-VAT) + Personal Self-Employment (VAT)
Less common but it happens. A partnership that provides services below the VAT threshold, while one partner also runs a separate VAT-registered agency. Same split problem: the partnership's MTD for ITSA obligations are separate from the individual's VAT obligations.
Software Requirements for Mixed Agencies
Here is where it gets practical. You need software that can handle both MTD for VAT and MTD for ITSA, potentially for different entities. Not all software does both well.
Xero: Handles MTD for VAT natively. For MTD for ITSA, Xero has a partnership with third-party bridging software. You can export your digital records and submit through a compatible tool. Xero works well if your limited company and sole trade are both on the same subscription (you can have multiple organisations under one login).
QuickBooks: Similar to Xero. MTD for VAT is built in. MTD for ITSA requires a bridging app or QuickBooks' own submission tool. QuickBooks handles multiple business types under one account.
FreeAgent: Built specifically for freelancers and small businesses. It handles MTD for VAT and MTD for ITSA. If your sole trade is straightforward, FreeAgent is often the simplest option. But it is less suited to larger agencies with complex payroll or multi-entity structures.
Sage: More strong for larger agencies. MTD for VAT is included. MTD for ITSA requires Sage's add-on or a third-party bridging tool. Sage is overkill for a small sole trade but works if your main agency already uses it.
The key point: do not assume one software subscription covers both entities. You may need separate subscriptions for your limited company and your sole trade, or a single subscription that allows multiple organisations. Check before you commit.
Record-Keeping: The Practical Reality
Under MTD for ITSA, you must keep digital records of all income and expenses for your sole trade. That means no more Excel spreadsheets unless they feed into MTD-compatible software. No more shoeboxes of receipts. Every transaction must be recorded digitally.
For your limited company, you already need digital records for VAT. But the company's MTD obligation stops at VAT. Its corporation tax return (CT600) is not yet under MTD. That will come later, likely from 2027 or 2028.
So your record-keeping looks like this:
- Limited company: Digital records for VAT. Paper or digital for corporation tax (for now).
- Sole trade: Digital records for MTD for ITSA from April 2026 (if income over £50k) or April 2027 (if over £30k).