Understanding the Impact of Making Tax Digital on Small Businesses

Making Tax Digital (MTD) is an initiative by HMRC to modernise the UK tax system, making it easier for businesses to get their tax right. By moving away from paper-based records, MTD requires the use of digital tools to maintain and submit tax records, helping businesses stay organised and reduce errors. While this change might seem daunting at first, it offers numerous benefits to small businesses, including making the tax process easier and more efficient. If you need assistance at any stage of the transition, please reach out to us—we’re here to guide you through every step.

When Do I Need to Transition to MTD?

As of August 2024, MTD applies to VAT-registered businesses with a taxable turnover exceeding £90,000 or those who opt to self-register. Due to some delays, MTD for other business types will begin on April 6, 2026 (click here for a full timeline of dates). For businesses or individuals earning less than £30,000 annually from self-employment or property letting, there is currently no set deadline.

If you’re unsure about your MTD eligibility, you can check and register here. Even if don’t currently have to transition to MTD, we recommend signing up early to get used to the process before it becomes mandatory.

Benefits of MTD for Small Businesses

MTD has been designed to make things easier and more efficient for businesses. Digital tools streamline the process, making it less time-consuming and more straightforward. By automating the recording and submission of tax data, MTD ensures your records are accurate and up-to-date, reducing the risk of mistakes and potential penalties. With digital tools, you will also have real-time access to your financial data, enabling better financial planning and cash flow management, helping you make informed business decisions.

Common Misconceptions About MTD

There are several myths surrounding MTD that can cause unnecessary worry:

MTD will increase your tax bill

This is not true. MTD is changing how records are kept and submitted, not about increasing taxes. By automating and digitising your records, MTD actually helps improve accuracy, reducing the risk of errors and penalties.

Complete digitisation of payments

Don’t worry, you will still be able to handle cash transactions. Simply scan or enter the paper receipts into your MTD-compliant software to keep your records right.

Spreadsheets are sufficient for MTD

Spreadsheets alone won’t make your business MTD-compliant. However, if you are already using spreadsheets there is bridging software available that can connect your spreadsheets to MTD-compliant software, ensuring that your data can be submitted correctly to HMRC.

You have to submit tax in real-time

MTD does not require real-time tax submissions. You will still submit your returns by the usual deadlines. The software simply provides real-time financial information, helping you stay informed.

Preparing for MTD

Follow these three simple steps to get you started:

Step One – Choose your software

This first step is crucial for ensuring that your business is MTD-compliant. Once you have the right software in place, maintaining your digital records becomes much more manageable. Here are the top 5 HMRC-approved tools we recommend:

• QuickBooks: Ideal for all business sizes, QuickBooks is a cloud-based platform that automates accounting, tax submissions, payments, and employee management.
• Xero: Known for its user-friendly interface and extensive app integrations, Xero helps you manage your finances and access accounting on the go.
• FreeAgent: With its intuitive design and automation features, FreeAgent simplifies business admin, including financial reports and to-do lists.
• IRIS KashFlow: Designed for small businesses, IRIS KashFlow offers easy account management, quoting, invoicing, and timely payments.
• Sage: Sage Accounting and Payroll provides accurate, compliant software for managing accounts, payroll, and cash flow, with features for capturing receipts and tracking performance.

Step Two – Set up your digital records

To comply with Making Tax Digital (MTD), you’ll need to store the following information digitally:

• Organisation Details: Name, address, and VAT registration number.
• VAT Accounting Schemes: Any VAT accounting schemes you use.
• Transaction Details: VAT on goods and services supplied or received.
• Supply Information: The ‘time of supply’ and ‘value of supply’ (excluding VAT) for all transactions.
• VAT Rates: The rate of VAT charged on goods and services supplied.
• Reverse Charge Transactions: Details of any reverse charge transactions.

If you are part of a specific VAT scheme, you’ll also need to provide the following information:

• Retail Scheme: Total daily gross takings if you use a retail scheme.
• Flat Rate Scheme: Items you can reclaim VAT on if you use this scheme.
• Gold Accounting Scheme: Total sales and VAT on sales if you trade in gold.

Additionally, you’ll need digital copies of documents covering multiple transactions made on behalf of your organisation by volunteers, third-party organisations, and employees’ expenses in petty cash.

Step Three – The submission process

To sign up for Making Tax Digital (MTD) on the Government website, you’ll need:

• Email Address
• VAT Registration Number
• Latest VAT Return

First-time users will also need to sign up for a Government Gateway ID.

Additional information needed:

• Sole Traders: Your National Insurance number.
• Limited Companies or Registered Societies: Your company registration number and Unique Taxpayer Reference (UTR).
• Limited Partnerships: Your company registration number, UTR, and the postcode where you registered for self-assessment.
• General Partnerships: Your UTR and the postcode where you registered for self-assessment.

If you have any questions or need any advice or support during your transition to MTD, don’t hesitate to reach out to us at mail@mmgca.co.uk. Remember, this change is designed to make tax administration more efficient, effective, and easier for you.