Making Tax Digital (MTD) is an important change that’s gradually being introduced across the UK tax system. While the term might sound like technical jargon, it’s actually something that will affect how many businesses handle their tax records, so it’s worth understanding what’s involved.
What is Making Tax Digital?
MTD is the government’s initiative to modernise the UK tax system by moving it into the digital age. The main idea is relatively simple: businesses will need to keep their tax records digitally and submit them to HMRC using approved software. This represents a shift away from traditional methods like spreadsheets, paper ledgers, and manual VAT returns.
The system involves maintaining digital records throughout the year and submitting quarterly updates to HMRC, rather than just completing an annual return. This approach gives HMRC better visibility into business finances and aims to make tax compliance more streamlined for everyone.
The timeline to be aware of
MTD is being introduced gradually across different areas:
MTD for VAT
This has been in place since April 2019 for VAT-registered businesses with a turnover above £90,000. If you’re VAT registered and haven’t yet made the transition, it would be wise to address this soon.
MTD for income tax
This is the next major phase coming up:
- From April 2026, sole traders and landlords with annual business and/or property income over £50,000 for the year 2024/25 will need to report quarterly.
- The threshold reduces to £30,000 from April 2027, based on the tax year 2025/26.
- The threshold then reduces again in April 2028 to £20,000 based on the tax year 2026/27.
- Business partnerships will also need to use MTD for income tax in the future, though the specific timeline hasn’t been confirmed yet
What this could mean for your business
The practical impact will vary depending on your current setup, but many businesses may need to make some adjustments:
Software considerations
You’ll need MTD-compatible accounting software, as basic spreadsheets won’t meet the requirements without additional software. The software needs to be able to create and submit digital records directly to HMRC.
Quarterly reporting
Rather than annual returns, you’ll be submitting updates four times per year. This encourages more consistent bookkeeping throughout the year rather than leaving everything until the year-end rush.
Record keeping
All transactions will need to be recorded digitally and reconciled regularly. Businesses that currently rely primarily on cash transactions and manual record-keeping may need to consider new approaches.
Bank integration
Most MTD software can connect directly to your bank accounts and automatically import transactions. While this can make bookkeeping more efficient, it does mean HMRC will have more detailed access to your financial information.
Steps you might want to consider
It’s generally helpful to start thinking about this transition well in advance of your compliance date. Early planning tends to make the process less stressful and more cost-effective.
Review your current approach
Take a look at how you currently manage your books. If you’re using basic spreadsheets or paper records, you may need to consider some changes.
Explore software options
MTD-compatible software varies widely, from basic packages costing £7-20 per month to more comprehensive systems. The best choice will depend on your business size, complexity, and budget.
Tidy up existing records
Any gaps or inconsistencies in your record-keeping may become more apparent when you start using accounting software, so it can be helpful to address these in advance.
Think about training
You may want someone in your business to become familiar with the new system, so it’s worth factoring in time and potentially some costs for learning new software and processes. Alternatively, we can offer you a competitively priced record-keeping service.
Consider cash flow implications
Quarterly reporting provides more frequent, up-to-date information, which can help you plan your cash flow throughout the year.
Understanding the compliance requirements
HMRC takes MTD compliance seriously, initially operating a points system approach with late filing penalties starting at £200 and potentially increasing from there.
However, HMRC has suggested a supportive approach for the first year of implementation, focusing on helping businesses rather than penalising them. While this initial period offers some reassurance, it’s still beneficial to establish good practices from the beginning.
Getting support
MTD represents a significant change in how small businesses handle tax compliance. While the government frames it as simplification, the reality involves some complexity. Selecting unsuitable software, implementing incorrect processes, or misunderstanding the requirements could create challenges later on.
Businesses that manage this transition most successfully tend to be those that start planning early and seek appropriate guidance. This isn’t just about purchasing software – it’s about adapting how you approach your business finances more broadly.
At Smethurst & Co, we’ve been supporting businesses through MTD implementation since it began. We’re familiar with the various software options, compliance requirements, and practical aspects of making the transition. We can also help you view MTD not just as a regulatory requirement, but as an opportunity to gain better financial insight and control over your business.
Rather than leaving this until the last moment, the businesses that adapt most successfully to MTD tend to be those that embrace the changes early and implement them thoughtfully.
Ready to explore Making Tax Digital?
If you’d like to discuss Making Tax Digital for your business, Smethurst & Co is here to help. We can review your current situation, suggest appropriate approaches for your specific circumstances, and support you through the implementation process.
You can reach us on 01472 357125 or email advice@smethurstandco.com to arrange an MTD consultation.
