Making Tax Digital is becoming a bigger part of small business tax

Making Tax Digital, often shortened to MTD, is one of the biggest changes to the way many small businesses, sole traders and landlords deal with tax. It is designed to move tax records and submissions away from paper records, spreadsheets and manual uploads, and towards digital record keeping and compatible software.

For many VAT-registered businesses, Making Tax Digital is already part of normal business life. VAT records must be kept digitally and VAT Returns must be submitted using compatible software. HMRC guidance says all VAT-registered businesses should now be using Making Tax Digital for VAT, with compatible software used to keep VAT records and file VAT Returns.

The next major change affects Income Tax for many sole traders and landlords. HMRC is rolling out Making Tax Digital for Income Tax in phases. The current timetable says it starts from 6 April 2026 for sole traders and landlords with qualifying turnover above £50,000, from 6 April 2027 for those above £30,000, and from 6 April 2028 for those above £20,000.

For small businesses, this means Making Tax Digital should not be treated as a last-minute admin change. It affects how records are kept, how often information is sent to HMRC, which software is used, and how confidently a business can manage its tax position throughout the year.

What is Making Tax Digital?

Making Tax Digital is HMRC’s programme for modernising the tax system. Instead of relying on manual records and annual summaries prepared close to a deadline, MTD encourages businesses and individuals to keep more accurate digital records throughout the year.

In practical terms, this usually means using accounting software or bridging software that can connect with HMRC. The software records income and expenses digitally, stores the necessary information, and submits tax information to HMRC in the correct format.

For a small business, MTD is not just about pressing a different button when it is time to submit a return. It changes the rhythm of tax administration. Records need to be kept up to date more regularly, business owners need better visibility of income and expenses, and accountants need access to accurate information earlier in the year.

This can sound like extra work at first, especially for businesses used to gathering receipts and bank statements once a year. However, when set up properly, digital record keeping can make tax easier to manage. It can reduce lost paperwork, improve bookkeeping accuracy, and give business owners a clearer view of profit, cash flow and upcoming tax liabilities.

Who does Making Tax Digital affect?

Making Tax Digital already affects VAT-registered businesses. If your business is registered for VAT, you should be keeping VAT records digitally and submitting VAT Returns through compatible software.

The next stage is Making Tax Digital for Income Tax. This affects individuals who are self-employed as sole traders, landlords with property income, and people who have both self-employment and property income. HMRC looks at total qualifying turnover before expenses, rather than profit after costs. This means a business could be within scope even if its taxable profit is much lower than its sales.

For example, a sole trader with annual sales of £55,000 and expenses of £25,000 may only have a profit of £30,000, but their gross self-employment income may still bring them into MTD for Income Tax from April 2026.

Limited companies are not currently part of the MTD for Income Tax rollout. However, company directors and shareholders may still be affected personally if they also have self-employment income or property income that falls within the rules.

Because thresholds and eligibility depend on the nature and level of income, it is sensible to check your position before the rules apply. Waiting until the first deadline arrives can make the transition more stressful than it needs to be.

What will small businesses need to do differently?

The biggest difference is that records need to be kept digitally. This does not simply mean typing figures into a spreadsheet at the end of the year. Businesses will need to use compatible software to keep records and submit information to HMRC.

For VAT, this already means digital VAT records and software-based VAT Return submissions. For Income Tax, the new process will require digital records and regular updates to HMRC. Businesses and landlords in scope will need to keep their income and expenses recorded digitally during the year rather than leaving everything until the Self Assessment deadline.

This is a significant change for anyone who currently relies on paper receipts, manual notebooks, basic spreadsheets or annual bookkeeping catch-ups. The more transactions a business has, the more important it becomes to get the right system in place early.

Making Tax Digital also puts greater emphasis on regular bookkeeping. Instead of seeing accounts as something that happens once a year, business owners will need to keep their financial information more up to date. This can be a positive change, because it gives a better understanding of what is happening in the business while there is still time to make decisions.

Why software matters

Choosing the right software is one of the most important parts of preparing for Making Tax Digital. The software needs to be compatible with HMRC systems, but it also needs to suit the way the business works.

A sole trader with a small number of monthly transactions may not need the same system as a VAT-registered business with stock, payroll, multiple bank accounts and regular supplier invoices. A landlord with a few properties will have different needs again.

Good accounting software can help record sales, track expenses, reconcile bank transactions, store receipts, prepare VAT Returns, monitor profit and provide reports. Many platforms also allow accountants to access the records directly, which can make year-end accounts and tax returns more efficient.

However, software only helps if it is set up properly. Categories need to make sense, bank feeds need to be connected correctly, and the business owner needs to understand what information should be recorded. Without the right setup, digital records can still become messy or incomplete.

This is where professional support can make a real difference. LDF Accountants can help small businesses choose appropriate software, move from manual records to digital bookkeeping, and keep records in a way that supports both tax compliance and better business decisions.

Making Tax Digital and VAT

For VAT-registered businesses, MTD is already an established requirement. Businesses need to keep digital VAT records and submit VAT Returns using compatible software.

This means the figures on a VAT Return should come from digital records, rather than being manually retyped into HMRC’s old online VAT portal. The purpose is to create a more reliable digital link between business records and VAT submissions, reducing errors and improving consistency.

Small businesses should make sure their VAT records include the necessary sales and purchase information, that VAT codes are being used correctly, and that adjustments are properly recorded. Common VAT issues can include claiming VAT on the wrong expenses, applying the wrong VAT treatment to sales, missing reverse charge rules, or misunderstanding partial exemption.

MTD does not remove the need to understand VAT. It changes how the information is recorded and submitted. A business still needs accurate bookkeeping and sensible checks before each VAT Return is filed.

For businesses that are already VAT registered but still feel uncertain about their bookkeeping process, Making Tax Digital is a good reason to review the system. LDF Accountants can support with VAT Returns, digital records and ongoing bookkeeping so that the business is not relying on rushed checks close to each deadline.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax is the change many small business owners are now preparing for. It will affect many sole traders and landlords who currently submit one Self Assessment tax return each year.

Under MTD for Income Tax, those within scope will need to keep digital records and use compatible software to send updates to HMRC. HMRC’s current rollout timetable starts with people whose qualifying self-employment and property turnover is above £50,000 from 6 April 2026, then extends to lower thresholds in later years.

This means the annual Self Assessment process will become more regular and digital for many people. Instead of only gathering information after the tax year has ended, business owners and landlords will need to keep records updated throughout the year.

For small businesses, this has practical implications. Bank accounts should be organised, receipts should be captured promptly, sales invoices should be recorded accurately, and expenses should be categorised correctly. If records are left incomplete, each update becomes harder to prepare.

Preparing early is especially important for sole traders who have always handled their own tax returns manually. Moving to software, learning how to use it and checking that the information is accurate all take time.

What records should be kept digitally?

The exact records depend on the type of business, but small businesses should expect to keep digital records of income and expenses. This usually includes sales invoices, customer payments, supplier invoices, receipts, bank transactions, mileage records, business expenses and any other information needed to calculate taxable profit.

For landlords, records may include rental income, letting agent fees, repairs, insurance, mortgage interest, service charges and other property-related costs. For sole traders, records will usually include sales income, materials, software, travel, phone costs, professional fees, subscriptions and home office costs where relevant.

The key point is that digital records should be accurate, complete and maintained regularly. A shoebox of receipts handed to an accountant once a year is unlikely to fit comfortably with the direction of Making Tax Digital.

Digital records can also make it easier to understand the business. When records are current, business owners can see whether revenue is rising, whether costs are increasing, whether cash flow is tightening and whether tax liabilities are building up.

Common mistakes small businesses should avoid

One common mistake is assuming that Making Tax Digital only affects larger businesses. The Income Tax rollout is aimed directly at sole traders and landlords once their qualifying income passes the relevant threshold.

Another mistake is waiting until the deadline is close before choosing software. Although software can be set up quickly in some cases, it takes longer to clean up old records, connect bank feeds, learn the system and make sure categories are being used correctly.

Some business owners also assume that using software means everything is automatically correct. Software can save time, but it still needs accurate information. If bank transactions are categorised incorrectly or personal costs are mixed with business costs, the records may still be wrong.

A further issue is using software without taking advice on tax treatment. For example, not every cost paid from a business bank account is automatically an allowable expense. Some costs may be partly personal, some may need special treatment, and some may not be deductible for tax purposes.

Good bookkeeping and good tax advice need to work together. Making Tax Digital makes the process more digital, but it does not remove the need for judgement.

How to prepare for Making Tax Digital

The best time to prepare is before the rules apply to you. Even if your business is not yet within scope, moving to digital records early can make the transition smoother.

Start by checking whether your income may bring you into MTD for Income Tax. Look at your gross income from self-employment and property, not just your profit. If you are near a threshold, it is worth planning ahead rather than assuming the rules will not apply.

Next, review how your records are currently kept. If you rely on paper, spreadsheets or annual catch-ups, consider whether this will still be practical. Think about how many transactions you have each month, how you store receipts, how you invoice customers and how easily your accountant can access the information.

Then choose software that suits your business. This should be compatible with HMRC but also practical for your day-to-day work. The right choice depends on whether you are VAT registered, whether you employ staff, whether you have property income, whether you invoice customers, and how much reporting you need.

Finally, speak to an accountant before the change becomes urgent. LDF Accountants can help you understand whether Making Tax Digital applies to you, choose the right bookkeeping process, and prepare for digital submissions in a way that works for your business.

Making Tax Digital can also improve business decisions

Although MTD is often discussed as a compliance issue, it can also help small businesses make better decisions. When financial records are kept up to date, business owners are not relying on guesswork.

Digital bookkeeping can show which months are strongest, which costs are increasing, whether customers are paying on time, and how much money should be set aside for tax. This can be particularly useful for seasonal businesses, growing businesses and sole traders with irregular income.

Instead of discovering the tax position months after the year has ended, business owners can plan earlier. That can make it easier to manage cash flow, invest at the right time, avoid tax surprises and make confident decisions about pricing, expenses and growth.

Making Tax Digital may be driven by HMRC, but the benefits can go beyond compliance when the right system is in place.

How LDF Accountants can help

LDF Accountants supports small businesses, sole traders, landlords and VAT-registered businesses with tax, bookkeeping and digital accounting. Whether you are already using software or need to move away from manual records, the right advice can make the process much easier.

Support can include reviewing whether MTD applies to you, helping you choose suitable software, setting up digital bookkeeping, preparing VAT Returns, dealing with tax returns, reviewing allowable expenses and keeping your accounts organised throughout the year.

Making Tax Digital is not something small businesses should ignore until the last minute. With the right preparation, it can become part of a cleaner, more efficient way to manage business finances.