Making Tax Digital (MTD) is a UK government initiative designed to modernise the tax system, making it more efficient, effective, and easier for taxpayers to comply with. Introduced by HM Revenue & Customs (HMRC), MTD aims to phase out paper-based tax reporting and encourage businesses and individuals to keep digital records and submit their tax returns using compatible software. With Making Tax Digital (MTD) well underway and due for full implementation in 2026, now is an ideal moment to collaborate with an accountant and ensure your finances are well-organised.
Why Was Making Tax Digital Introduced?
The primary reason for introducing MTD is to reduce tax errors caused by manual calculations, lost paperwork, and misreporting. By requiring digital record-keeping, the government hopes to minimise tax gaps and ensure more accurate reporting. Additionally, MTD streamlines the tax process, making it easier for businesses to stay compliant and up to date with their tax obligations.
Who Does Making Tax Digital Apply To?
MTD currently applies to businesses, self-employed individuals, and landlords with taxable income above certain thresholds. The key groups affected include:
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- VAT-registered businesses: Since April 2019, all VAT-registered businesses with taxable turnover above the VAT threshold (£85,000) have been required to follow MTD rules. From April 2022, MTD for VAT became mandatory for all VAT-registered businesses, regardless of turnover.
- Self-employed individuals and landlords: From April 2026, MTD for Income Tax Self-Assessment (MTD for ITSA) will apply to self-employed individuals and landlords earning over £50,000 per year. Those earning between £30,000 and £50,000 will need to comply from April 2027.
- Corporation Tax: MTD for Corporation Tax is expected to be introduced later, but no firm date has been set.
How Does Making Tax Digital Work?
Under MTD, businesses and individuals must:
- Keep digital records: Maintain accurate and up-to-date digital records of income and expenses using compatible accounting software.
- Use MTD-compatible software: Submit tax returns via approved software, such as Xero, QuickBooks, Sage, or FreeAgent. HMRC provides a list of recognised software providers.
- File returns quarterly: For MTD for ITSA, taxpayers will need to submit updates every quarter instead of one annual tax return. This allows for more frequent and accurate tax reporting.
Benefits of Making Tax Digital
- Reduced errors: Automation minimises mistakes that occur with manual data entry.
- Better financial oversight: Real-time updates help businesses track their tax liabilities and manage cash flow more effectively.
- Less paperwork: Digital record-keeping eliminates the need for storing physical receipts and invoices.
- Easier compliance: MTD simplifies tax submissions, reducing the stress of last-minute filing.
How to Prepare for Making Tax Digital
Check if MTD applies to you
Identify whether your business falls within the MTD requirements based on its type and income level. Keeping up with HMRC’s latest guidelines will ensure you remain compliant and aware of any updates.
Choose MTD-compatible software
Invest in an accounting solution that meets MTD standards and suits your business needs. Platforms like Xero, QuickBooks, and Sage provide automation and real-time tax updates, making compliance more manageable.
Start keeping digital records
Transition to digital bookkeeping ahead of MTD deadlines. Keeping accurate and up-to-date records of income, expenses, and VAT submissions will not only ensure compliance but also help improve financial planning and reporting.
Seek professional advice
Consulting an accountant or tax advisor can be invaluable in understanding MTD requirements and ensuring your tax affairs are handled correctly. A professional can help you set up software, review records, and ensure you are fully prepared before MTD becomes mandatory.
Stay informed and proactive
HMRC frequently updates its MTD guidelines, so regularly reviewing new developments and deadlines will help you stay ahead of any changes. Proactively preparing now will prevent last-minute stress and potential penalties.
Working With an Accountant to Transition into Making Tax Digital
Making Tax Digital is a significant shift in how UK businesses and individuals handle tax reporting. While the transition to digital record-keeping may seem daunting, embracing MTD can lead to improved accuracy, efficiency, and financial management. With the right software and preparation, businesses can stay compliant and benefit from a more streamlined tax system.
At BM and Co Accountants, we’re here to help you every step of the way. Book a free appointment with us today to discus further about how we can help you transition into the new era in accounting.