Since it was first introduced for VAT reporting in 2019, Making Tax Digital (MTD) has marked a major shift in how British businesses manage their tax affairs. The purpose of the ongoing HMRC initiative is to drag the tax system into the 21st Century, making it less cumbersome, more accurate, and – importantly for businesses – more streamlined and easier for businesses to get their tax right. However, many of the details of MTD are still shrouded in ambiguity and confusion, making it essential for small business owners to understand the core requirements of the scheme as the first step towards making a smooth transition. Let’s examine the main obligations that Making Tax Digital places on small businesses.
The most fundamental change from previous systems introduced by MTD is the requirement to keep financial records on a digital platform. For many smaller companies and those in traditional sectors (e.g. construction, facilities maintenance etc) this has been marked by a shift away from paper-based ledgers, in-house software systems and simple spreadsheets. Under MTD rules, your business must record all transactions, including sales, expenses, and VAT information, in an HMRC approved digital format.
Unfortunately, this doesn’t just mean scanning and storing your PDFs and receipts on a computer rather than keeping them in a drawer. It requires you to invest in a structured digital system in which data can be easily accessed and transferred to HMRC over the Internet. Maintaining these records digitally gives HMRC a clearer view of your financial position and tax liabilities, while also reducing your administrative and reporting burden. Ideally, MTD is a winner for both small businesses and our friends at His Majesty’s Revenue & Customs.
To comply with MTD requirements, you must use a software platform that is compatible with HMRC systems. This software will store your digital records and allow you to send updates directly to HMRC. Fortunately, there are a wide range of software options available to suit all budgets, from comprehensive accounting platforms to simpler budgeting tools that connect your existing spreadsheets to HMRC’s portal. Choose a solution that fits with your business size, budget, industry, and needs. Popular choices for smaller businesses include Xero, Sage, and QuickBooks, all of which are designed to streamline your record-keeping and automate MTD submissions.
Under the MTD rules for income tax self-assessment (ITSA) which affects self-employed individuals and landlords with an income over £50,000 from April 2026, you will need to submit summary updates of your business income and expenses to HMRC every quarter, not annually as previously. This replaces the single annual self-assessment tax return for this income, and is the biggest change associated with MTD for many self-employed people.
These quarterly submissions don’t mean you have to pay tax four times a year – this is still twice, in January and July. Instead, they provide HMRC with a more regular flow of information, while also giving you a clearer view of your estimated tax bill as the year progresses. This can help you plan your tax payments more effectively and avoid any unpleasant surprises when the final, year-end declaration is due.
As a business owner, this will depend on how you pay yourself. The MTD requirements apply to individuals who earn £50,000 or more per year through self-employment or private rental income. This does not include money from dividends and pensions. Payroll income doesn’t count either. Money you pay yourself through company shares/dividends should be reported through an annual self-assessment using the current rules. Most SME company directors are paid through a mixture of PAYE and dividend earnings. However, if you also have additional self-employed income from consultancy worth over £50,000, or you earn rental income on a property that nudges you over that threshold, you’ll need to transition to quarterly submissions after next April.
The digital changes have led some business owners to wonder do I need a bookkeeper or accountant to manage the MTD transition? Despite the software being designed to be user-friendly and intuitive in most cases, professional guidance can be a valuable tool to help you keep on top of your digital record-keeping and ensure that all your transactions are correctly categorised.
If you’d like to find out more about the benefits of bookkeeping and accountancy services for small businesses, please contact one of the team at Vanilla Accounting today by clicking here.
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