What is Making Tax Digital?

Most businesses will have heard of Making Tax Digital in some form or another.

Making Tax Digital (MTD) is HMRC’s initiative to digitise record keeping to ensure they are receiving the most accurate and up to date tax information from businesses. It was also designed to make the administration surrounding tax more effective and efficient for you, the taxpayer.

We are all under no illusions that HMRC have also brought this into play to get a closer look at your data and this subsequently puts businesses at much higher risk of enquiry if they do not comply.

However, there are many positives to come out of Making Tax Digital for you as the business owner. It encourages you to keep your records up to date, resulting in more accurate, meaningful information available to you in a timely manner enabling informed business decisions to be made.

The focus has previously been on VAT registered business (with the first phase having started back in April 2019 and the second phase from April 2022). HMRC are now moving away from VAT and will be looking to mandate other taxes, which will explore in more detail below. 

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The facts you need to know

MTD for Income Tax Self Assessment (ITSA)

From April 2026

From April 2026, any sole traders or landlords earning over £50,000 per year will be required to submit their income tax information on a quarterly basis. From April 2027, the threshold will reduce to any sole traders and landlords earning between £30,000 and £50,0000 per year.

You will also be required to make a final year end submission summarising full self-assessment details and tax due to HMRC.

To make it easier for sole traders to keep track of their records whilst on to go, Xero have brought out their new mobile app Xero Go’.

The next phase

There are talks of Making Tax Digital for all other businesses i.e. limited companies and LLPs being mandated to submit quarterly information from April 2026 at the earliest.

Given that both MTD for VAT and for income tax self-assessment were postponed previously multiple times, it is likely that this phase will also be, but as there are no guarantees this will happen it is best to be prepared early.

Does this mean increased administration?

In short, yes.

There are more submissions needing to be made per year, resulting in increased admin time. However, my implementing Xero and any available apps and add-ons, it will streamline your processes and significantly reduce the burden.

man using Xero on laptop

Does this mean I’ll pay more tax?

No – your tax bill will be the same as what it usually would, you are simply updating HMRC on a more regular basis. Quarterly submissions will actually help you prepare earlier for upcoming tax bills as you will have more clarity on forecast liabilities.

MTD for ITSA woman using xero on phone

Will there be additional costs?

As there is an increased amount of work required, it is likely that most businesses will see a slight increase in accountancy and bookkeeping costs. However, having access to more regular data will help your advisors to give you more relevant information and advice and you should see increased value in the services provided.

Business owner using Xero on iPad

What data will HMRC get?

At present, HMRC only see a summary of the information you submit. For VAT, this is the front page of the VAT return, and we suspect that for income tax, this will be a profit and loss report and balance sheet (although this has not yet been confirmed).

It is likely that as MTD progresses, the information HMRC wants to see will become more detailed. We believe they will be able to access more granular information about source transactions leading to increased likelihood of an enquiry.

tax planning specialists

Smart businesses are using MTD to get ahead

Our forward-thinking clients are taking advantage of the call for quarterly submissions by receiving management accounts from us on a quarterly basis.

Having regular understanding and analysis of your financial data in real time will allow you make key decisions and unlock the potential for growth in your business:

Take advantage of Making Tax Digital by:

  • Being better informed all year round, putting you in the driving seat of your business
  • Seeing the early warning signs of cash-flow problems
  • Making long term strategic decisions based on real time performance
  • Putting yourself in a more appealing position to potential lenders

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Get in control of your business before HMRC start poking around

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