If you’ve been hearing the term Making Tax Digital (MTD) a lot recently and feeling a bit lost, you’re not alone!
The UK government’s shift to digital tax filing may seem like a daunting task, but once you break it down, it’s not so complicated.
In this post, we’re going to answer the burning question: How does Making Tax Digital work?
Whether you’re self-employed, a small business owner, or managing a larger company, understanding MTD is crucial to keeping your tax filings on track. So, let’s dive into how it works, step by step, and what you need to do to stay compliant.
What is Making Tax Digital (MTD)?
Well, MTD is a government initiative designed to make the UK tax system more efficient and accurate. It’s a move away from paper-based tax returns and toward digital submissions.
The idea is simple: businesses and self-employed individuals will now have to digitally record their transactions and submit tax information online using MTD-approved software.
The goal? To reduce errors, improve transparency, and make tax filing easier.
How Does Making Tax Digital Work in Practice?
You’re probably wondering, What do I actually have to do differently? Well, let’s take a look at the practicalities of MTD.
1. Keeping Digital Records
One of the biggest changes MTD brings is that businesses must keep their financial records digitally. No more shoe boxes full of receipts or hand-written ledgers. Instead, you’ll need to record income and expenses using accounting software.
The benefit? No more scrambling to find that missing receipt at the last minute! By keeping everything in one place and in a digital format, your records are far more organised, and accessible, whenever you need them.
2. Using MTD-Approved Software
Not just any software will do! HMRC has approved a range of digital tools for businesses to use to comply with MTD. This software can automatically generate the reports that HMRC needs, saving you time and reducing errors. Popular MTD-approved tools include:
- Xero
- QuickBooks
- Sage
- FreeAgent
These platforms help you track your income, expenses, and taxes automatically, meaning fewer chances to make mistakes. They also allow you to file your taxes digitally, straight to HMRC.
3. Submitting Digital Tax Returns
Instead of manually filling out paper forms or spreadsheets, MTD means you’ll now submit tax returns online. This applies to VAT returns, income tax, and eventually other tax filings.
No more waiting for the post office or filing at the last minute!
For VAT-registered businesses, quarterly submissions will be the norm, helping you stay on top of your tax obligations throughout the year.
Why is Making Tax Digital Important?
So why is the government pushing for this change all of a sudden? Well, their intention is all about improving efficiency and reducing human error. As scary as change can be, here are some reasons MTD will be a positive alteration for you and your business:
More Accuracy:
With digital submissions, you’re less likely to make mistakes. Automated processes mean fewer chances for errors in your calculations.
Better Record-Keeping:
MTD encourages better financial management, ensuring that businesses stay organised year-round.
Faster Processing:
Digital submissions can be processed more quickly, reducing delays and the need for paperwork.
Improved Compliance: Keeping everything digital makes it easier to stay on top of deadlines, ensuring you submit your taxes on time every time.
How Does MTD Work for Different Businesses?
• Self-Employed Individuals
If you’re self-employed and VAT-registered, MTD requires you to submit quarterly VAT returns digitally. If you’re not VAT-registered, you’ll still need to submit your annual tax return using MTD-approved software, starting in April 2026.
• Small and Medium Businesses
Businesses that are VAT-registered and meet the £85,000 turnover threshold will need to submit their VAT returns digitally via MTD-approved software. However, non-VAT registered businesses can still benefit from using digital tools to keep records and submit annual tax returns.
• Limited Companies
For limited companies, MTD will require you to submit digital VAT returns if you’re VAT-registered. The full digital tax filing system for corporation tax will be rolled out in 2026, so it’s a good idea to start preparing now.
What’s the Timeline for MTD?
The switch to MTD is being rolled out in phases. Here’s what to expect:
VAT Returns:
MTD for VAT has already been live for VAT-registered businesses with a turnover of £85,000 or more.
Income Tax:
MTD for Income Tax Self-Assessment will start in April 2026. If you’re self-employed or have income from property, you’ll need to submit your tax return through MTD-approved software.
Corporation Tax:
MTD for Corporation Tax will be rolled out in 2026 (no exact date yet), but it’s worth preparing for it in advance.
What Happens if I Don’t Comply with MTD?
As with any tax system, failing to comply with MTD can result in penalties. If you miss the deadline for submitting your digital tax returns or fail to keep proper records, HMRC may impose fines or interest on overdue payments.
But don’t worry! We’re here to help make sure everything is in order. If you’re unsure where to start, consider reaching out to an accountant or tax professional for guidance.
We're Here To Help You Prepare!
MTD may seem like a big change, but once you get the hang of it, it’s a straightforward way to make sure you’re on top of your tax responsibilities. Start by choosing MTD-approved software, organize your financial records digitally, and be ready for the transition.
As the system continues to evolve, it’s essential to stay ahead of the curve. If you’re feeling overwhelmed, consider working with an accountant who can help you navigate the shift and ensure your business stays compliant.
The Right Click Accounting team is here to guide you through every step of the process, making sure your transition is as smooth and stress-free as possible. Contact us today to ensure your business is fully prepared for the MTD rollout!
It’s time to say goodbye to paper forms and hello to a more efficient, error-free tax process with Making Tax Digital!
