Making Tax Digital has been a hot topic for some time, but it can be confusing to figure out how MTD applies to your business and understand what you need to do to become MTD-compliant. In this guide, we’ll break down what Making Tax Digital is, explain who it applies to, and outline the steps you need to take in order to make the digital transition.
What is MTD?
Making Tax Digital (MTD) is a UK government initiative aimed at transforming the tax system to simplify the process. It promises to make it easier for taxpayers to get their tax right by creating a more efficient and effective system.
To be MTD compliant, all eligible businesses and individuals must:
- Keep digital records
- Use software that works with Making Tax Digital
- Submit quarterly updates
This means that manual submissions through the HMRC website are no longer accepted for MTD-compliant businesses.
Who does MTD apply to?
All VAT-registered businesses are already required to be MTD compliant.
However, in the coming years, individuals who pay income tax on their profits will also be required to comply with MTD. From 2026, Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will apply to small businesses, sole traders and landlords with an annual turnover of £50,000 or more. In 2027, this threshold will be lowered to £30,000.
It’s important that you’re aware whether you need to conform to MTD, as there are some exemptions – you can check your eligibility on the HMRC website.
These deadlines may seem far in the future, but when it comes to making the transition to MTD, a lot of careful planning and implementation is required. The sooner you start the process, the smoother it will be.
It might sound like a daunting task, but you’ll reap the benefits: the automated calculations and data transfers will reduce errors; the process of maintaining records and filing returns will be streamlined, saving you time; and you’ll get more up-to-date information on your tax liabilities.
So, here’s what you’ll need to do to be MTD compliant:
How to make sure you’re compliant
Choose the right software
You’ll need to use software that is HMRC compatible. It must be able to retain and preserve records digitally, create and send VAT returns to HMRC, voluntarily provide VAT data to HMRC, and receive conformation from HMRC that your business is compliant.
There are a number of third-party software providers such as Xero, Sage and Quickbooks that offer HMRC-recognised MTD software.
HMRC also provides guidance on software that works with MTD for Income Tax.
Once you’ve selected your software, you’ll need to authorise it by entering your Government Gateway user ID and password. Make sure you know this information; you will have received your Government Gateway user ID when you signed up for Self Assessment.
Digitise your records
After you’ve set up your software, you should use it to track your income, expenses and other tax-related information. This information will need to include more detailed income and expenses rather than simply the VAT you’ve paid and charged.
Submit quarterly updates
Currently, you’re required to submit an annual tax return, but when MTD comes into force you’ll need to submit returns every quarter – so you can no longer wait until 9 months after the deadline! On top of these quarterly updates, you’ll be required to submit an end-of-year return by the 31st of January. These returns must also be submitted via your MTD-compatible software.
Stay informed
The deadlines, thresholds and requirements for MTD are always subject to change. Therefore, it’s important to stay on top of any new regulations to avoid unnecessary penalties. As well as the HMRC website, resources like ATT provide regular MTD updates.
Consider seeking professional advice
The process of becoming MTD-compliant can be confusing and time-consuming – to ensure a smooth transition for your business, it might be worth involving a professional accountant. The team at Benson Wood can advise you on what software to use, set it up for you, and provide you with ongoing MTD advice. We can take care of your bookkeeping while you focus on your business, so you won’t have to stress about taking care of your filing every quarter.
To get started, contact us at mail@benson-wood.co.uk or give us a call on 01236 756161 to book a free consultation.
Summary
If you’re a business owner making the MTD transition, you should:
- Understand how MTD applies to your business
- Choose and implement MTD-compatible software
- Digitise your records
- Stay up to date with MTD compliance requirements
- Consider professional advice or services for a smooth transition
