What is Making Tax Digital (MTD)?
It’s a UK-based initiative overhauling how business tax is collected. The aim is to modernise the system, making it solely online and removing the paper option. What this means is that paper forms or records are no longer accepted by the HMRC in the UK. It also means that digital quarterly updates on your business finance become mandatory. With fines for late or skipped submissions.
MTD begin in 2019 and is gradually rolling out and including different types of businesses each year. MTD applies to income tax and VAT, so it impacts most businesses. It will also be applicable to most sole traders by 2026.
Does MTD apply to your startup?
Understanding whether MTD applies to your business is crucial when complying with the law. However, the fact that the initiative roll out was staged can be confusing. For example, even some european companies will need to understand these rules. Also, currently, the rules must be met by VAT registered businesses and the self-employed, but not other types of businesses. Although there are financial thresholds for this. These are currently as follows:
- VAT registered business with turnover of 90K
- The self-employed and sole traders with incomes over £50,000 (April 2026) and over £30,000 (April 2027).
It’s also important to note that landlords are also included. Although partnerships, and limited companies are still waiting on their MTD deadlines.
Choosing the right MTD software
Startups will also need to know how to choose the right software to help them stay up to date and submit accurate taxes according to the MTD initiative. Firstly, HMRC software is essential. This is because it’s the only type of tool that meets the legal requirements for this task. Secondly, it’s a good idea to consider using cloud based tools. The main benefits of these types of tools is that they allow you to access the information and data you need at any time and any location.
Many of the most popular accounting software, such as QuickBooks, FreeAgent, and Xero, should be MTD compatible. This means you may not even have to change what you are using to keep the MTD regulations. There are now even business bank accounts that offer integrated HRMC-compliant MTD for income tax, as well as a list of other benefits. Services that automate not only completing your MTD taxes but filing for you as well!
Things you can do now to prepare for MTD
The key to MTD in the UK is not to panic. Instead, start preparing now for the inevitable. First, register with the HMRC now, and ensure that your records are digitised. Also, remember to set an alert to complete and submit quarterly updates, as well as your annual return.
