Making Tax Digital Software for Small Business Owners

Definition and purpose of Making Tax Digital Software

Making Tax Digital (MTD) is a UK government initiative to create a fully digital tax system. Its main aim is to simplify tax compliance and make it more efficient for individuals and businesses by requiring digital record-keeping and submissions to HMRC.

Key Dates for Making Tax Digital

Understanding the timeline for Making Tax Digital (MTD) is crucial for businesses and individuals aiming to comply with the new digital tax system. The UK government has set specific dates by which various groups must transition to MTD, ensuring a streamlined approach to tax submissions and record-keeping.

These key dates mark significant milestones in implementing MTD, affecting VAT-registered businesses, self-employed individuals, and landlords. Let’s explore these important dates to help you prepare for a seamless transition to digital tax compliance.

• April 2022: Making Tax Digital for VAT returns applies to all VAT-registered businesses.
• April 2026: Making Tax Digital for Income Tax will apply to self-employed individuals and landlords with income over £50,000.
• April 2027: Making Tax Digital for Income Tax will apply to self-employed individuals and landlords with income over £30,000.
• As yet, there is no official date for income below £30,000.

The income figures are based on your previous self-assessment tax return. For example, if you had an income of £55,000 in the 24/25 tax year, you are required to submit returns from April 2026.

If you start as a sole trader or become a landlord after 6 April 2026, you aren’t required to adopt Making Tax Digital for Income Tax immediately. After filing your first self-assessment tax return, you’ll only need to do so.

MTD Corporation Tax

It is expected that all companies that pay corporation tax will be required to submit it via compatible software, replacing CT600 forms. Currently, no dates are planned, but it will be after April 2026.

MTD Submission Dates

Once enrolled in MTD for Income Tax, you must submit a summary of your business’s income and expenses to HMRC every quarter using MTD-compatible software. The deadlines for these quarterly updates are uniform for all individuals adhering to the MTD for Income Tax regulations. Starting from the tax year’s commencement on 6th April, these deadlines are:

• 7th August
• 7th November
• 7th February
• 7th May

You must also submit the final figures before 31st January for any adjustments. This will also include allowances, child benefits, and marriage allowances.

Benefits of Making Tax Digital Software

Using accounting software not only complies with MTD but also has the following benefits:

Time-saving automation and efficiency

Automating tasks like VAT calculations and submissions to HMRC is a significant advantage of using Making Tax Digital (MTD) software. By using these digital tools, businesses can reduce the time spent on manual data entry and complex calculations, increasing efficiency and productivity.

MTD software ensures that tasks are streamlined, allowing businesses to focus more on their core operations while remaining compliant with HMRC regulations.

Confidence in accurate numbers and compliance

Using Making Tax Digital (MTD) software ensures accurate and up-to-date digital records, minimising the risk of errors and mistakes through automated calculations and submissions.

By staying compliant with HMRC regulations, businesses can avoid potential penalties. The software’s automated features streamline processes, allowing businesses to focus on core operations while maintaining peace of mind in their tax compliance efforts.

Improved organisation and management of digital records

By using Accounting software, businesses can store digital records safely and securely, ensuring compliance with MTD rules. This software provides easy access to digital records and enhances organisation and management.

Choosing the Right MTD Compatible Software

Factors to consider: compatibility, features, and pricing

• Consider compatibility with HMRC online services and VAT software. Ensure that the software you choose seamlessly integrates with HMRC’s online services and VAT-specific software, allowing for smooth data transfers and submissions. If you are unsure if the software is MTD compliant, check the Government website for a complete list.
• Evaluate features such as invoicing, expense tracking, payroll, stock control, bank feeds and software integrations. When selecting Making Tax Digital (MTD) software, assessing its features beyond essential compliance is crucial. Ensure the software integrates seamlessly with other tools you use, like CRM systems or e-commerce platforms, creating a cohesive digital ecosystem.
• Compare pricing and plans to find the best fit for your business. Consider factors such as the size of your business, the complexity of your tax needs, and your budget. Doing so allows you to select a software solution that offers the best value while meeting your specific requirements for Making Tax Digital compliance.

Compatible Software for Making Tax Digital

Here is our top list of HMRC-recognised MTD compatible software providers:

QuickBooks Online

QuickBooks simplifies financial management for small businesses and self-employed individuals. Its easy-to-use interface helps track income and expenses, ensuring accurate digital records. Integrating with HMRC online services, QuickBooks offers compliant VAT returns and income tax submissions.

Automation features save time, reduce errors, and boost productivity, making MTD compliance effortless. Additionally, QuickBooks provides insights into key financial metrics, aiding informed business decisions and efficient financial management.

XERO

Small businesses can significantly benefit from Xero’s user-friendly interface, comprehensive MTD features and unlimited users. This software simplifies submitting VAT returns and maintaining digital records by integrating with HMRC.

Its automation capabilities save valuable time and reduce errors, allowing business owners to focus on growth rather than administrative tasks. Additionally, Xero provides real-time insights into key financial metrics, aiding in informed decision-making and efficient financial management.

Sage

Sage is a leading choice for businesses aiming for Making Tax Digital (MTD) compliance, thanks to its user-friendly features and strong support. Its intuitive interface simplifies the MTD VAT return submissions and digital record-keeping, ensuring compliance with HMRC.

The software’s automation capabilities save time and reduce errors, allowing businesses to focus on growth rather than manual tasks. Sage also offers valuable insights into financial health through its analytics tools, aiding informed decision-making.

MTD Bridging Software Explained

Bridging software is crucial for businesses transitioning to Making Tax Digital (MTD) compliance without overhauling their existing systems. It bridges traditional record-keeping software and HMRC’s digital requirements, ensuring seamless integration and compliance.

By creating a digital link, bridging software allows businesses to continue using their familiar systems while meeting the new digital submission standards. This software automates the transfer of VAT and self-assessment data, reducing the risk of errors and ensuring timely submissions.

Tips for a Smooth Transition to MTD

Making Tax Digital (MTD) is no longer a prospect – it’s the current reality for VAT-registered businesses and a looming one for those under self-assessment. While digital record-keeping and submissions might seem daunting, a well-planned transition to MTD-compatible software can be surprisingly smooth. Here are some key tips to navigate this shift with minimal disruption:

1. Start Early – Don’t Wait Until the Last Minute:

It’s crucial to start early. Waiting until the last minute can lead to hurried decisions, mistakes, and added stress. Begin researching software options and understanding your obligations well before the MTD deadline applicable to your business. This gives you ample time for:

• Research and Comparison: Evaluating different software features, pricing, and suitability for your business needs.
• Data Migration: Transferring your existing financial data accurately.
• Learning the New System: Familiarising yourself with the software’s interface and functionalities.
• Troubleshooting: Addressing any technical issues or data discrepancies early on.

2. Understand Your Specific MTD Obligations:

Don’t assume a one-size-fits-all approach. Your MTD requirements will depend on whether you deal with VAT, Self Assessment (or both), and your business turnover.

• VAT: Ensure you understand the rules for digital record-keeping and electronic submissions.
• Self Assessment: Familiarise yourself with the requirements for quarterly updates and the final declaration.

Knowing your exact obligations will help you choose software with the necessary features and avoid unnecessary complexities.

3. Choose the Right Software for Your Business:

Selecting the appropriate software is crucial for a seamless transition. Consider factors like:

• MTD Compatibility: This is non-negotiable. Ensure the software is officially recognized by HMRC for MTD compliance for both VAT and Income Tax (if applicable).
• Ease of Use: Opt for software with an intuitive interface and good user support. A steep learning curve can hinder adoption.
• Features: Identify the features that are essential for your business, such as bank feeds, invoicing, reporting, and integration with other tools you use.
• Scalability: Consider if the software can grow with your business.
• Cost: Evaluate the pricing structure and ensure it fits your budget. Many providers offer free trials, which are highly recommended.

4. Plan Your Data Migration Carefully:

Moving your existing financial data to the new software requires meticulous planning.

• Clean Up Your Existing Records: Before migrating, ensure your current records are accurate and up-to-date. This will prevent errors from being transferred.
• Choose the Right Migration Method: Most software offers tools for importing data from spreadsheets or other accounting systems. Understand the process and ensure you have backups.
• Verify Data Accuracy: After migration, thoroughly check that all your data has been transferred correctly.

5. Take Advantage of Training and Support:

Most software providers offer various training resources, such as tutorials, webinars, and documentation. Use these resources to get familar with the new system. Don’t hesitate to contact their support team if you encounter any issues.

6. Start with a Trial Period:

Many MTD-compatible software providers offer free trials or discounted plans. This is an excellent opportunity to test the software’s features, ease of use, and suitability for your business before committing to a subscription.

7. Run Parallel Systems (Initially, if Feasible):

If possible, consider running your old system alongside the new MTD software for a short period. This allows you to compare data, identify any discrepancies, and build confidence in the new system before fully transitioning.

8. Seek Professional Advice if Needed:

If you’re unsure about any aspect of MTD or the software transition, don’t hesitate to consult with your accountant or bookkeeper. They can provide personalised guidance based on your specific business circumstances.

9. Stay Updated:

The MTD landscape can change. Keep abreast of any updates or changes announced by HMRC and ensure your software remains compliant. Software providers usually release updates to address regulatory changes.

10. Be Patient and Persistent:

Learning a new software system takes time and effort. Don’t get discouraged if you encounter initial challenges. Be patient and persistent, and use the available resources. The long-term benefits of MTD, such as streamlined processes and reduced errors, will make the initial transition worthwhile.

By following these tips, you can navigate the transition to MTD software smoothly and efficiently, ensuring compliance and potentially improving your business’s financial management. Embrace the digital future of tax with a well-prepared approach!