What is Making Tax Digital?
Making Tax Digital (MTD) is a government initiative designed to streamline the UK tax system by digitising tax reporting and filing. Its ultimate goal is to reduce errors, improve efficiency, and make it easier for businesses and individuals to manage their tax affairs.
MTD is an important step in the context of the modern, digital world. The aim is to phase out paper-based filing and replace it with more efficient, digital tax processes.
Who does MTD apply to?
If you have a VAT registered business, you are now required to keep digital records and file your tax returns using compatible software. HMRC will sign up all remaining businesses to MTD for VAT automatically unless they are exempt or have applied for exemption. You can find the software here.
You need to follow the requirements for Making Tax Digital for Income Tax if you are self-employed or a landlord from:
- 6 April 2026 if you have an annual business or property income of more than £50,000
- April 2027 if you have an annual business or property income of more than £30,000
So, what is required of you?
You will need to maintain accurate, digital records of all transactions (sales, expenses, etc.). This can be done using MTD-compliant software – which automatically syncs financial data and generates reports.
Quarterly updates will be required, meaning businesses and individuals will need to report their income and expenses to HMRC four times a year, rather than just once annually.
After the quarterly updates, an annual declaration will still be required to finalise the tax position for the year.
What is MTD-Compliant Software?
If you are concerned about which software is best for MTD, here are some things to look out for. Ensure the software can:
- Record transactions in real-time
- Submit VAT returns and other reports to HMRC
- Integrate with bank accounts and other tools
- Provide reports and dashboards to assist with business insights
What are the benefits?
With real-time data recording and automatic calculations there is less risk of human error, leading to more accurate tax filings. Traditionally, manual data entry on paper and spreadsheets leaves room for mistakes, whereas MTD-compliant software automates many of these processes, helping to ensure accuracy in calculations and reporting. Digital systems often offer built-in checks and balances, alerting businesses to potential mistakes before data is submitted to HMRC.
MTD reduces the need for paper records and manual process, helping businesses save time and reduce administrative burdens. Businesses can spend less time sorting receipts and invoices and more time focusing on running their businesses. Also, VAT returns are now simplified, as MTD allows businesses to send their VAT returns directly from their accounting software with just a few clicks.
Digital records give businesses better insight into their financial position, enabling more proactive management and decision-making. By tracking transactions and tax obligations in real-time, businesses gain a clearer understanding of their cash flow and profitability, helping them to manage expenses and investments more effectively. These regular updates also allow businesses to adjust their strategy throughout the year to optimise their tax liability and avoid surprises.
Common challenges
Let’s take a look at some of the common challenges with MTD, and how you can overcome them.
If you are still using spreadsheets or paper records, switching from a manual system to a fully digital one can seem like a significant change. The best way to overcome this is to plan ahead. Begin the transition early and you’ll have more time to solve any problems. A gradual, phased approach is best if you are worried about the switch – start by entering basic information like sales and purchases, and then gradually move into other aspects of tax reporting.
The cost of MTD-compliant software can also be a challenge for smaller businesses. However, the benefits that we have outlined above will ultimately save you money in the long run. For example, automated VAT filing and quarterly updates can reduce the risk of penalties or interest charges from HMRC due to late or inaccurate filings.
As always with new changes, it can take some time to get used different processes and systems, which can lead to temporary inefficiency. As with any new system, it’s important to continue learning and adapting. Many software providers offer video tutorials or have community forums that can help answer common questions. Of course, if you need any help with reviewing or managing your taxes – contact me for support!
What are your next steps?
Now that you’ve got a good idea of what MTD is all about, here are some ideas of what you can do to prepare:
- Review your current systems – assess how they currently manage their tax reporting and what needs to change to comply with MTD
- Set up MTD software – choose and implement the right MTD-compliant software, ensuring it’s integrated with their existing systems
- Stay informed – stay up to date with any changes to MTD regulations, as HMRA is continuously updating its guidance and rules
So there you have it! Whilst MTD may seem like a big change, it’s designed to make tax reporting simpler, more efficient, and more accurate.
If you need any assistance with the transition to MTD, for advice on suitable software, or for a consultation on how MTD will impact your business operations – please do not hesitate to reach out for support!