A Guide for Small Business Owners

If you’re a small business owner, juggling your tax deadlines alongside everything else can feel like a full-time job. And just when you think you’ve got the hang of it HMRC introduces Making Tax Digital (MTD).

In this guide, we’ll walk you through everything from what MTD actually is, to who it affects, what software you need, and what happens if you don’t comply.

What Is Making Tax Digital?

Making Tax Digital is a UK government initiative designed to modernise the tax system. The idea is to make tax easier to get right, reduce errors, and cut down on paperwork by requiring businesses and individuals to:

• Keep digital records

• Submit quarterly tax returns (quarterly reporting is a key requirement under MTD)

• Use MTD-compatible software for all tax submissions, meaning businesses must use making tax digital software (also known as tax digital software) to comply with the new requirements for submitting VAT returns, maintaining digital records, and to submit returns digitally to HMRC as part of MTD compliance

Instead of one annual tax return, MTD aims to help businesses and individuals see their tax liability in real time. MTD is gradually replacing the traditional Self Assessment system with a new digital assessment system.

The Benefits of Making Tax Digital

Making Tax Digital (MTD) brings a host of benefits for businesses looking to simplify and modernise their tax affairs. By moving to digital tax records and using MTD-compatible software, you can significantly reduce the risk of errors that often come with manual data entry or paper-based systems. This government initiative is designed to make tax digital, streamlining the entire process from record keeping to tax submissions.

With digital tax records, you’ll have instant access to your financial information, making it easier to monitor your tax liability and stay on top of your business finances. MTD-compatible software can automate many of the routine tasks involved in managing your taxes, such as calculating VAT or preparing quarterly updates, freeing up valuable time to focus on growing your business. Plus, by submitting your tax information digitally, you can avoid last-minute scrambles and reduce the likelihood of missing key deadlines.

Ultimately, making tax digital means less paperwork, fewer mistakes, and a more efficient way to manage your tax affairs. The UK government’s push for tax digital MTD is all about helping businesses like yours stay compliant, save time, and gain greater control over your finances.

Preparing for MTD: What You Need to Do Now

Getting ready for Making Tax Digital doesn’t have to be overwhelming, but it does require some planning.

1) Start by checking if your business falls under the MTD legislation, this applies to VAT registered businesses and those with income above the current thresholds. It’s important to determine if the legislation applies to your specific business circumstances, as this will dictate your compliance steps and key deadlines. If you’re in scope, the next step is to choose MTD-compatible software that fits your business needs, ensuring you can maintain digital records and submit your tax returns digitally. View our list of who will affect in table 1.

2) Review your current accounting systems and processes to make sure they align with MTD requirements. If your existing systems are not compatible, you may need to upgrade to new software that meets HMRC’s MTD standards. If you work with an accountant or tax agent, you may need to set up an agent services account to allow them to manage your tax affairs on your behalf. Don’t forget to register for MTD with HMRC, as this is essential for submitting your returns under the new rules. View our list of MTD compatible software systems in table 2.

3) Familiarise yourself with the key deadlines for quarterly submissions and final declarations, so you can avoid any penalties. By taking these steps now, you’ll ensure a smooth transition to the new digital tax system and keep your business running efficiently.

Who MTD will affect

MTD has already rolled out in stages, and its reach is growing. Here’s who’s affected now, and who will be next:

The income thresholds for MTD for Income Tax are based on gross income, that is, your total business or property income before expenses. For VAT, the vat threshold is currently £85,000 in taxable turnover; businesses above this must comply with MTD for VAT.

The vat threshold is £85,000 in taxable turnover.

If you’re not sure where you fall, feel free to get in touch, we’ll walk you through it.

Quarterly Tax Returns: What You Need to Know

Quarterly tax returns are a central part of Making Tax Digital (MTD) for Income Tax Self Assessment, and they represent a significant change for small business owners, sole traders, and landlords. Instead of waiting until the end of the tax year to submit a single annual tax return, you’ll now need to send quarterly updates to HMRC. These quarterly tax returns must be submitted using MTD-compatible software and should include details of your business income, property income, and any other relevant income sources.

By maintaining digital records throughout the year, you’ll be able to keep your tax affairs up to date and ensure that each quarterly tax return is accurate and complete. This approach not only helps you stay on top of your income tax obligations, but also gives you a clearer picture of your tax liability as the year progresses. Using compatible software makes it easier to track your business income and expenses, reducing the risk of errors and helping you avoid penalties for late or incorrect submissions.

For small businesses, sole traders, and landlords, embracing quarterly tax returns means you can manage your tax digital responsibilities more efficiently. It’s essential to keep digital records, use the right software, and submit your quarterly updates on time to stay compliant with the new MTD for income tax rules. By doing so, you’ll simplify your self assessment process and gain better control over your business finances throughout the tax year.

Choosing the Right Software

Okay, here’s the bit that often confuses people: the software.

To comply with MTD, you’ll need to use MTD-compatible software to submit your returns and keep your records. The good news is—there are plenty of great options.

We’ve compiled our top MTD software providers to help you figure out what might suit your needs best:

If I Have an Accountant, Do I Still Need to Worry About MTD?

The honest answer? Not really, but you still need to stay informed.

Here’s what we mean:

• We handle the submissions – As your accountant, we can register you, manage your quarterly updates, help choose and set up your MTD-compatible software, and deal with HMRC on your behalf.

• But you’re still legally responsible – HMRC holds you accountable for your tax, even if we act on your behalf. That means your digital records must be accurate, and your final tax declaration still needs your approval.

• You may still need to keep digital records – Whether that’s uploading invoices, scanning receipts, or using a bookkeeping app, you’ll need to make sure your day-to-day records are ready for digital reporting.

• We’ll make software work for you – You don’t need to worry about choosing software alone, we’ll recommend the right tool and help you get set up. But it’s still helpful to understand how it works and what information it needs.

Bottom line: if you’re a CRASL client, we’ve got you covered, but staying engaged and organised will make the process easier.

Keeping Your Digital Records Secure

As you move to digital record keeping under MTD, keeping your digital records secure should be a top priority. Accurate and secure digital records are essential not only for compliance with MTD legislation, but also for protecting your business from data breaches and cyber threats. Make sure your MTD-compatible software uses robust security features, such as encryption, firewalls, and user access controls, to safeguard your sensitive tax information.

Regularly back up your digital records and store copies in secure, offsite locations or cloud services to prevent data loss in case of system failures. It’s also wise to have a disaster recovery plan in place, so you can quickly restore your records if something goes wrong. By taking these precautions, you’ll ensure your tax affairs remain in order and your business stays compliant with all MTD requirements.

MTD and Business Efficiency: How Going Digital Can Help You

Switching to digital tax records and MTD-compatible software isn’t just about compliance, it’s also a smart move for boosting your business efficiency. By automating routine tax tasks, such as data entry and tax submissions, you can save hours each month and reduce the risk of costly mistakes. Compatible software can help you streamline your accounting processes, improve your credit control, and keep a closer eye on your cash flow.

For small business owners, going digital means you can access real-time financial data, make faster decisions, and respond quickly to changes in your business. MTD also makes it easier to collaborate with your accountant, as your records are always up to date and accessible online. Ultimately, embracing MTD can help you simplify your tax affairs, cut down on admin, and focus on what matters most—growing your business and staying competitive in today’s fast-paced market.

FAQ'S

Can I Submit VAT Returns Without MTD?

Not anymore. HMRC now requires all VAT registered businesses to submit an MTD VAT return using compatible software. The process for submitting a VAT return has changed under MTD, and all VAT returns must now be filed digitally through MTD-compliant software. Paper submissions or manual entry through the old HMRC portal are no longer accepted (unless you have an exemption). In some cases, individuals without a national insurance number may be eligible for exemption from MTD requirements.

So if you haven’t already switched, now’s the time.

What’s Changing for Income Tax?

MTD for Income Tax Self Assessment (ITSA) is the next big phase. From April 2026, if your combined property income and/or self-employment income is over £50,000, you’ll need to:

• Keep digital tax records

• Submit quarterly tax returns

• Make one final declaration per tax year (to replace the annual self assessment tax return)

From April 2027, the same rules will apply to those earning between £30,000 and £50,000.

Eventually, MTD may even replace self assessment for everyone. 

Is Making Tax Digital Compulsory?

Short answer: yes, if you're in the groups above.

Longer answer: Making Tax Digital is compulsory for VAT-registered businesses and soon will be for most self-employed individuals and landlords. The goal is to eventually bring most tax types, including corporation tax into the MTD system.

So, if you’re not required yet, you likely will be in the near future.

How Do I Know If I’m Registered for MTD?

You can check your MTD registration status by logging into your HMRC Government Gateway account. If you see “Making Tax Digital for VAT” or “Making Tax Digital for Income Tax” listed under your services, you’re already registered.

Not there? You’ll need to sign up or speak to your accountant to get set up correctly.

What Happens If I Don’t Comply with MTD?

MTD compliance isn’t optional once you're in scope. Missing deadlines or failing to use digital record keeping can lead to penalties.

HMRC has introduced a new points-based penalty system, meaning repeated failures to submit quarterly updates on time will trigger fines. So it's best to get ahead of it now.

MTD Resources: Where to Find Help and Guidance

Navigating Making Tax Digital can feel daunting, but there’s plenty of help available to support small business owners and anyone new to digital tax record keeping. The UK government and HMRC offer a wealth of resources, including step-by-step guides, webinars, and online forums where you can get answers to your questions about tax digital and making tax digital requirements. These resources cover everything from key deadlines and new rules to practical tips for using accounting software and maintaining digital records.

Many accounting software providers also offer dedicated support for businesses making the switch to MTD. They provide training, tutorials, and customer service to help you get the most out of your MTD-compatible software and ensure your tax returns are submitted correctly. If you prefer more personalized guidance, working with a tax advisor or accountant who understands the ins and outs of making tax digital can be invaluable, they can help you interpret the legislation, choose the right software, and keep your business compliant.

Don’t forget to check the UK government website for the latest updates on MTD, including changes to qualifying income thresholds, taxable turnover requirements, and other important legislation. By taking advantage of these resources, you’ll be better equipped to manage your tax digital obligations and keep your business running smoothly.

Key Takeaways

To stay MTD compliant and make the most of the new digital tax system, businesses should:

• Maintain accurate digital records of all income and expenses throughout the tax year

• Use MTD-compatible software to submit quarterly tax returns and keep up with income tax self assessment requirements

• Monitor key deadlines and stay informed about new rules and legislation that affect your business

• Seek help and guidance from HMRC, accounting software providers, or experienced tax advisors to ensure you’re meeting all your obligations

• Choose the right accounting software to manage your tax digital needs and streamline your tax returns process

• Understand the qualifying income thresholds and taxable turnover that determine when MTD for income tax applies to your business

• Take advantage of available MTD resources to navigate the process confidently and avoid unnecessary penalties

By following these steps, you’ll be well-prepared to manage your tax affairs under Making Tax Digital and keep your business compliant with the latest UK tax system requirements.

Still feeling lost? Book a free consultation today and let’s get your business MTD-ready.