Making Tax Digital: What Small Businesses Need to Know
The UK tax system is evolving, and Making Tax Digital (MTD) is at the heart of this transformation. Designed to simplify tax management and increase accuracy, MTD is gradually becoming mandatory for small businesses, landlords, and the self-employed. But what exactly does Making Tax Digital mean for your business? How will it impact your tax returns and record-keeping? This guide provides everything small businesses need to know about MTD — from digital records to deadlines like April 2027 — delivered with clarity and practical advice.
What is Making Tax Digital?
Historically, businesses have relied on manual processes and paper records to manage their tax affairs. This method often leads to errors, lost paperwork, and delays in submitting tax returns.
To modernise and streamline the tax system, HMRC launched Making Tax Digital — a move to digitalise tax records and submissions, making the process more accurate and less time-consuming. However, adapting to this new system can be daunting, especially for small businesses unfamiliar with digital tools.
What Does MTD Entail for Small Businesses?
Making Tax Digital requires businesses to keep digital records and submit their VAT, income tax, or corporation tax information using MTD-compatible software in near real-time.
The Core of Making Tax Digital Explained
Under MTD, small businesses must maintain digital records of their transactions and submit tax returns digitally, rather than through paper forms or manual online entries. The goal is to make the tax system more efficient and reduce errors in tax returns.
Who Must Comply with Making Tax Digital?
VAT Registered Businesses
MTD for VAT became compulsory in April 2019 for businesses with a taxable turnover above the VAT threshold. These businesses must keep digital VAT records and submit VAT returns using MTD-compatible software.
MTD for Income Tax and Corporation Tax
The scope of MTD is expanding:
- MTD for Income Tax will apply to self-employed individuals and landlords with income over £10,000 from April 2026.
- By April 2027, more small businesses will need to keep digital records and file income tax self assessment digitally under the digital for income tax initiative.
- Corporation tax is also expected to follow suit, though the timeline is still being confirmed.
This phased approach helps businesses gradually adjust to the new digital requirements.
What Does “Digital Records” Mean Under Making Tax Digital?
Digital Records vs Paper Records
Under MTD, businesses must keep records in a digital format, such as spreadsheets or software systems, that can communicate with HMRC systems. This is a shift from traditional paper-based records and manual bookkeeping.
Real-Time Updates and Accuracy
One key benefit of MTD is the ability to update tax records in real-time. Businesses can track income, expenses, and tax liabilities more accurately throughout the year, rather than waiting until tax season.
What Records to Keep Digitally
Small businesses should maintain:
- Sales and purchase invoices
- Receipts
- Bank statements
- Expense records
- Payroll information (if applicable)
All records must be kept digitally and easily accessible for tax submission purposes.
How to Submit Tax Returns Digitally with MTD
Using MTD Compatible Software
To comply with Making Tax Digital, businesses need to use software that can send tax data directly to HMRC. This includes popular accounting packages and cloud-based systems that are MTD compatible.
Integration and Automation
Many modern accounting solutions allow integration with banking data, automating much of the bookkeeping process and reducing errors. This automation can save small business owners time and help keep tax records up to date.
Records and Submit: What’s Required
Under MTD, it’s not just about submitting the final tax return digitally. You must regularly update your digital records and submit periodic updates or summaries to HMRC, keeping your tax information current and compliant.
What Are the Deadlines Small Businesses Should Know?
Dates to Remember
- April 2027: The government plans to extend MTD to all businesses and landlords for income tax self assessment, meaning digital record-keeping and tax returns digitally will be mandatory by then.
- For VAT registered businesses above the threshold, MTD compliance has been mandatory since April 2019.
Planning ahead for these deadlines ensures you avoid penalties and can transition smoothly to the new tax system.
Expert Tips for Small Businesses Preparing for MTD
- Choose the Right Software: Select MTD compatible software that suits your business size and complexity. Look for cloud-based options that offer automatic bank feeds and easy HMRC integration.
- Start Digital Record-Keeping Early: Even if MTD isn’t mandatory for you yet, begin maintaining digital records to familiarise yourself with the process.
- Regularly Update Your Records: Don’t leave your tax records to the last minute. Make it a habit to update transactions weekly or monthly to reduce errors and stress.
- Seek Professional Advice: Consult with your accountant or tax advisor about MTD requirements, especially if you handle corporation tax or complex income streams.
- Stay Informed About Changes: MTD regulations continue to evolve. Keep up to date with HMRC announcements to ensure ongoing compliance.
Common Questions About Making Tax Digital for Small Businesses
Will MTD Make Tax Filing More Complicated?
Initially, it may seem daunting, but MTD is designed to simplify tax affairs over time by reducing errors and the need for corrections.
What If I’m Not VAT Registered Yet?
Currently, MTD applies mainly to VAT registered businesses above the threshold, but plans to extend to income tax mean all businesses should prepare for digital record-keeping.
Can I Use Spreadsheets?
Yes, but only if your spreadsheet software can connect digitally to HMRC via compatible bridging software.
Conclusion
Making Tax Digital is transforming the way small businesses interact with HMRC. By adopting digital records and using MTD-compatible software, businesses can enjoy greater accuracy, easier tax submissions, and up-to-date insight into their tax liabilities. Preparing early for deadlines like April 2027 ensures your small business stays compliant and benefits from the streamlined tax system.
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