Making Tax Digital (MTD): A Guide for Small Businesses

Making Tax Digital (MTD) is a key part of the government’s plan to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. It represents a fundamental shift in how HMRC administers tax, moving away from annual paper returns to digital record-keeping and quarterly updates.

MTD for VAT

MTD for VAT is already in full force. All VAT-registered businesses, regardless of their turnover, must now keep digital records and use MTD-compatible software to submit their VAT returns. If you are VAT-registered and not yet complying, you must take immediate action to avoid penalties.

MTD for Income Tax Self Assessment (ITSA)

The next major phase is MTD for ITSA, which will significantly impact sole traders and landlords. Under MTD for ITSA, you will need to keep digital records of your income and expenses and send quarterly updates to HMRC using compatible software, followed by an end-of-period statement and a final declaration.

The rollout is phased based on income:

• From April 2026: Mandated for sole traders and landlords with a qualifying income over £50,000.
• From April 2027: Mandated for those with a qualifying income over £30,000.

The government is currently reviewing the needs of smaller businesses (those earning under £30,000) before mandating MTD for them.

What Do You Need to Do?

If your business falls into the upcoming MTD for ITSA categories, preparation is key:

1. Adopt Compatible Software: You cannot use spreadsheets alone to submit your updates. You must use HMRC-recognised accounting software (like Xero, QuickBooks, or FreeAgent) or bridging software that links your spreadsheets to HMRC's systems.
2. Digitise Your Records: Start keeping digital records of all your transactions. This means recording the date, value, and category of every sale and expense.
3. Understand the Timetable: Instead of one annual tax return, you will be submitting four quarterly updates, plus a final declaration. Ensure you understand these new deadlines to avoid late filing penalties.

The Benefits of MTD

While the transition may seem daunting, keeping digital records offers several benefits. It provides a real-time view of your business finances, reduces the risk of errors associated with manual data entry, and makes it easier to estimate your tax bill throughout the year, preventing nasty surprises come January.