Your Guide to Making Tax Digital

Making Tax Digital, or MTD for short, is an initiative actioned by HMRC to create a simpler, more efficient tax system for everyone involved. The scheme significantly changes the way businesses record and report tax information in a bid to streamline both processes and systems.

MTD rules are rolling out in stages, with VAT-registered businesses already expected to comply. It’s anticipated that the next stage will focus on overhauling the existing Self Assessment system to become MTD Income Tax Self Assessment.

Why was Making Tax Digital introduced?

Although the transition period may be annoying – after all, change isn’t always easy or fun – HMRC’s plan to introduce Making Tax Digital was made with good intentions.

How does Making Tax Digital work?

Under Making Tax Digital rules businesses are required to record and store financial data digitally, and then use compliant software (like Pandle!) to share this information with HMRC on a quarterly basis.

Don’t worry, this doesn’t mean you’ll need to submit four separate tax returns every year. You’ll just need to share your bookkeeping figures with HMRC every three months and then submit a confirmation at the end of the tax year.

It might sound like a whole lot of extra work right now but once you get the hang of it, it’s pretty simple. Plus, working with regular milestones like this will help keep your bookkeeping and financial reporting in check.

MTD will help you avoid nightmare situations like landing a bigger tax bill than you were expecting, whilst also minimising the risk of submitting errors (and the penalties that follow).

How do I know if I am affected by MTD?

VAT-registered businesses are already subject to Making Tax Digital requirements. So, if your business is registered for VAT, it’s a legal requirement that you keep digital records of all the transactions which happen in your business.

You’ll also need to submit this information to HMRC via MTD-compatible software or, if it doesn’t have that function, with bridging software.

Do MTD rules apply to me if I registered for VAT voluntarily?

MTD applies to all VAT-registered businesses regardless of your turnover or whether you registered for VAT on a voluntary basis.

Failure to comply with MTD rules will result in a penalty, alongside the points-based penalty system for overdue submissions and payments.

Does MTD affect Self Assessment?

The existing system for Self Assessment will gradually be replaced by MTD for Income Tax Self Assessment (MTD ITSA for short).

From April 2026, Making Tax Digital will apply to businesses, self-employed individuals, and landlords whose income is over £50,000. It will be introduced for those with income over £30,000 from April 2027.

If you’re unsure about your MTD eligibility and compliance, check in with an accountant who will be able to steer you in the right direction.

Will MTD affect Corporation Tax?

Eventually, yes – HMRC will be rolling MTD rules out to businesses paying Corporation Tax too, although there isn’t a launch date for this at the moment.

For now, Corporation Tax is calculated and paid once a year when a business submits its Company Tax Return. Once MTD comes into play, limited companies will need to transition to making more frequent submissions. Again, this will require the use and registration of MTD-compliant, HMRC-approved accounting software.

Preparing your small business for MTD rules

Using digital bookkeeping software is a big part of MTD compliance, but has lots of other benefits for businesses too. If you’re yet to make the transition, it’s well worth moving your accounts over to online accounting software as soon as possible. This will help ensure that you’re compliant once the time comes, but also means you can start to make your business more efficient.

For example, by automating more of your recordkeeping by connecting your bank account to your software, rather than spending a lot of time on data entry.

If you’re already part of the digital revolution, then double-check that your current provider is MTD compatible (or will be by the time the MTD rules come into play for you.

VAT-registered businesses are automatically registered for MTD these days, but MTD ITSA customers will need to register separately, even if you’re already signed up to send a tax return.

Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.