Making Tax Digital: What Small Businesses Must Do

A missed receipt, a notebook left in the cab or a pile of invoices dealt with only in January can quickly turn tax into a bigger job than it needs to be. Making Tax Digital changes how many UK businesses keep records and send information to HMRC. For some, it is already part of everyday VAT admin. For others, particularly sole traders and landlords, the next stages mean it is time to get organised well before the deadline.

The practical point is simple: HMRC increasingly expects tax records to be kept digitally, using compatible software rather than figures being pulled together manually at the end of the year. Done properly, this can mean less last-minute pressure, clearer records and fewer surprises when your tax bill is due. Done badly, it can add another task to an already busy working week.

MTD will effect you

What Making Tax Digital means in practice

Making Tax Digital, often called MTD, is HMRC's system for receiving tax information through compatible software. It is not just about filing a return online. The software needs to keep the required digital records and send updates directly to HMRC through its approved connection.

For a VAT-registered business, this normally means recording sales and purchases in accounting software and submitting VAT Returns through that software. Copying totals from a spreadsheet into the HMRC VAT portal is no longer the standard route for most businesses.

For income tax, MTD for Income Tax Self Assessment changes the rhythm of the year for affected sole traders and landlords. Instead of gathering everything once for a Self Assessment return, you will maintain digital records and send quarterly updates. You will then complete a final declaration after the tax year, confirming all other income, reliefs and adjustments.

That does not mean you will pay tax four times a year. The normal income tax payment dates remain in place. Quarterly updates are primarily about reporting, although they can give you a more regular view of likely tax due.

Who needs to use Making Tax Digital now?

All VAT-registered businesses are generally required to follow MTD for VAT, regardless of turnover. This applies to sole traders, limited companies, partnerships and landlords who are registered for VAT. There are limited exemptions where it is not reasonably practical to use digital tools, for example because of disability, age, location or religious beliefs. An exemption must be agreed with HMRC - it should not be assumed.

MTD for Income Tax Self Assessment is being introduced in stages. From 6 April 2026, it applies to sole traders and landlords with qualifying income above £50,000. From 6 April 2027, the threshold falls to more than £30,000. The government has also set out plans for those with qualifying income above £20,000 to join from April 2028.

Qualifying income means your gross income from self-employment and property before expenses are deducted. If you run a trade and receive rental income, the figures are combined to test the threshold. A taxi driver with £45,000 of fares and £8,000 of rental income, for example, may be within the first group even if their actual profit is much lower after vehicle, fuel, insurance and property costs.

For the April 2026 start, HMRC uses information from the 2024-25 tax return to identify people whose qualifying income exceeded £50,000. That is why an accurate Self Assessment return matters even more. It helps establish whether you are required to join and avoids confusion later.

Limited company directors are not brought into MTD for Income Tax simply because they receive dividends or salary from their company. However, the company may already have MTD obligations for VAT, and directors with separate sole-trade or property income may fall within the income tax rules.

The records you will need to keep

The best approach is not to treat MTD as a quarterly form-filling exercise. Treat it as a better way of running the financial side of the business. Each transaction should be recorded close to the time it happens, with enough detail to support the income or expense category used.

For many self-employed clients, that means recording takings, business purchases, mileage or motor costs, subcontractor payments, tools, materials, insurance and phone costs as they arise. For landlords, it includes rental income, repairs, agent fees, insurance, finance costs and other property expenses. The rules on what can be claimed have not disappeared simply because the records are digital. A cost must still be allowable, supported by evidence and correctly treated.

Keep your receipts and invoices too. A photograph or scanned copy is often far easier to find than a faded paper receipt at year end. The same applies to bank statements, CIS deduction statements and VAT invoices. Digital records are useful only when the information going into them is complete.

If you use spreadsheets, do not assume they are automatically enough. A spreadsheet can form part of an MTD process, but it normally needs compatible bridging software to send the required information to HMRC. For a straightforward trade, dedicated bookkeeping software is often easier and gives a clearer day-to-day picture. The right choice depends on the number of transactions, whether you need payroll or VAT support, and how much of the bookkeeping you want to do yourself.

Quarterly updates are not four tax returns

This is the part that worries many people unnecessarily. Quarterly updates give HMRC a running record of your business income and expenses. They are not a final calculation of your tax position, and mistakes can be corrected in a later update or at the end of the year.

Under the standard tax-year quarters, the periods run from 6 April to 5 July, 6 July to 5 October, 6 October to 5 January and 6 January to 5 April. The updates are normally due by 7 August, 7 November, 7 February and 7 May respectively. There is an option to use calendar quarters, which can suit businesses that already prepare monthly or quarterly accounts to month-end.

After the fourth update, you may need to make year-end adjustments. These can cover matters such as stock, accruals, private use, capital allowances or an accountant's adjustments. You then submit your final declaration by 31 January following the end of the tax year, much like the existing Self Assessment deadline.

For a construction subcontractor, one useful benefit is that CIS deductions can be checked throughout the year rather than discovered months later. For a black cab driver or other sole trader, regular records make it easier to see whether running costs are rising and whether enough money is being put aside for tax. For landlords, it can bring rental figures into view before a repair bill or a void period causes a cashflow problem.

A sensible way to prepare without creating more admin

Start with the bank account. Using a separate business account is not compulsory for every sole trader, but it makes bookkeeping much cleaner. When business takings and private spending are mixed together, every quarter becomes a sorting exercise. A separate account gives you a clearer record of income and costs from the outset.

Next, choose a routine you can realistically maintain. Some people enter transactions once a week; others use bank feeds and check them every few days. The ideal system is not necessarily the one with the most features. It is the one you will use consistently during a busy week, rather than abandon until the filing deadline approaches.

You should also check that your software can handle the areas relevant to you. A VAT-registered builder may need CIS and VAT reporting. A limited company may need payroll alongside bookkeeping. A landlord with more than one property may need clear income and expense records by property. The software should reduce duplication, not force you to enter the same figures in several places.

Finally, build a tax reserve into your routine. Seeing income arrive in your account is not the same as having money available to spend. Setting aside a proportion of takings for income tax, National Insurance, VAT or corporation tax helps prevent a payment on account or VAT bill from disrupting the business.

Common problems to avoid

The most common issue is waiting for a letter from HMRC before taking action. By the time a mandatory start date arrives, you need functioning software, accurate opening records and a process you understand. Leaving it until the first quarterly deadline creates avoidable stress.

Another problem is assuming bank feeds make bookkeeping automatic. They save time, but transactions still need checking and categorising properly. A payment to a builders' merchant could be materials for a job, a capital purchase or a private item. Software cannot always know the difference.

Be careful with cash income as well. If you take cash fares, cash payments or rent paid in cash, those records still need to be captured in the digital system. The move to MTD does not change the obligation to declare all taxable income.

There is also a trade-off between doing everything yourself and getting support. Basic bookkeeping can be manageable if your records are simple and you have the time. But where VAT, CIS, payroll, rental income, multiple income streams or a growing limited company are involved, a regular review can prevent small errors becoming expensive corrections. Short And Sons Accountants can help clients set up a workable MTD process, keep records in order and deal with the filing requirements without turning tax into a second job.

Making Tax Digital should work around your business

MTD is not designed around the realities of a day on site, a shift on the road or managing a property after work. Your system therefore needs to be practical: quick enough to keep up with, clear enough to understand, and accurate enough to stand behind if HMRC asks questions.

A little time spent putting the right process in place now can protect your evenings later. Keep the records moving, ask for help before a deadline becomes urgent, and let your accounts support the work you are doing rather than constantly getting in its way.