MTD, or Making Tax Digital, is an initiative by the UK government, starting in April 2026, designed to make life easier for businesses and sole traders by getting their tax right.
MTD is legislation requiring that all tax data and submissions to HMRC be made digitally.
What happens from April 2026?
Only sole traders and landlords in the UK with a taxable income of over £50,000 will be required to keep digital records, and also provide quarterly updates of their income and costs to HMRC, which will be done through MTD-compatible software. And starting in April 2027, this requirement will also include those with an income of £30,000 to £50,000.
Understanding Making Tax Digital
Making Tax Digital (MTD) is a transformative initiative aimed at revolutionising tax administration in the UK. Its goal is to make it easier for individuals and businesses to manage their tax affairs while enabling HMRC to receive information more efficiently.
MTD will be rolled out gradually and will initially apply to VAT-registered businesses, self-employed individuals, landlords, partnerships, and companies in the coming years. The implementation of MTD for VAT is already in effect, and businesses have been required to register for the service since April 2022.
The Implications for Your Business
As a business owner, you may wonder how MTD will impact your operations. Let’s delve into the key aspects of MTD that you need to know:
Making Tax Digital for VAT
If you run a VAT-registered business, you are already required to comply with MTD. This means you need to keep digital financial records using compatible software and connect that software directly to HMRC for filing your VAT returns. Make sure to include the following information in your digital accounts:
- Business name and address
- VAT registration number
- VAT accounting schemes
- Amount of VAT on goods and services supplied and received
- Adjustments made to your returns
- Source of VAT transactions (UK, Europe, and Rest of World)
- Time of supply and value of supply for all your purchases and sales
- Rate of VAT charged on goods and services supplied
- Reverse charge transactions
- Total daily gross takings (if you use a retail scheme)
- Items you can reclaim VAT on (if you use the Flat Rate scheme)
It’s important to note that the regular VAT return deadlines remain the same under MTD.
Making Tax Digital for Sole Traders and Self-Employed
MTD for income tax will significantly change the way sole traders and landlords handle their taxes. All eligible businesses and landlords will need to maintain digital records of their income and expenses using compatible software. To ensure compliance, you’ll need to purchase or use free software specifically designed for MTD.
HMRC is working with software providers to ensure that affordable options are available to small businesses. Additionally, free software is being made accessible to small businesses with simple financial affairs.
However, some exemptions to MTD exist, including cases where it is not reasonable to use digital tools due to factors such as age, disability, lack of internet access in remote locations, or religious beliefs incompatible with electronic communication. Trusts, Estates, Trustees of Registered Pension Schemes, and Non-Resident Companies are also exempt from MTD.
If you believe you qualify for an exemption, you must apply directly to HMRC with your reason.
Making Tax Digital for Corporation Tax
The introduction of MTD for corporation tax is still in progress, with a pilot scheme available for companies willing to participate. However, mandatory compliance is not expected until at least 2026.
Advantages of Making Tax Digital
MTD offers several advantages for businesses and individuals in managing their tax obligations. Let’s explore the benefits:
- Efficient Record-Keeping: MTD streamlines the storage, submission, and access of financial information, making it easier for businesses to keep track of their records.
- Regular Updates: By submitting information digitally, you can provide HMRC with regular updates, ensuring that your tax affairs are up to date and accurate.
- Simplified Reporting: MTD simplifies the reporting process by eliminating the need for manual data transfer. Instead, data is electronically transferred between software programs or applications, reducing the risk of errors.
- Enhanced Accuracy: Digital records help minimise errors and ensure accurate reporting, improving the overall accuracy of your tax filings.
- Improved Efficiency: The digital nature of MTD eliminates paperwork and streamlines the tax administration process, saving businesses time and effort.
While MTD offers significant benefits, there are practical challenges that businesses may face, such as software requirements, skill acquisition for using the software, and adapting to new reporting periods when working with international suppliers and partners.
How to Register for Making Tax Digital
To register for Making Tax Digital, you or your accountant can visit the HMRC website and complete the registration process. If you don’t have a Government Gateway account for your business, you’ll need to create one.
In addition to registration, you need to find compatible software for MTD. Here are some top picks:
- Xero: Xero’s cloud-based accounting software is popular among medium to large-sized businesses. It provides a comprehensive accounting solution that allows you to track accounts, income, purchases, expenses, inventory, payroll, and VAT.
- QuickBooks: QuickBooks offers a range of software products suitable for businesses of all sizes. It provides an easy-to-use solution for MTD compliance and features such as payroll management and VAT support.
- FreeAgent: FreeAgent is a user-friendly option, particularly for smaller clients. It simplifies accounting processes and helps businesses stay MTD compliant.
- Sage Business Cloud Accounting: Sage offers on-the-go accounting software that enables you to comply with MTD regulations. It provides features like tax tracking, invoicing, payroll management, and VAT submission.
In addition to these paid options, there are free or low-cost software solutions available for small businesses with straightforward affairs, including FreeAgent, #GoFile, Brightbook, Federation of Small Businesses MTD, PWC spreadsheet, QuickFile, SafeAccounts, and Zoho.
For help and advice on the upcoming changes to MTD, get in touch with DabHand Accountancy today.