Making Tax Digital

Making Tax Digital is HMRC's initiative to digitise tax records and submissions, affecting how businesses and individuals report taxes. It aims to reduce errors and improve efficiency, with phased rollouts starting from 2019.

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How Making Tax Digital Works

Making Tax Digital requires you to keep digital records and submit tax returns using HMRC-approved software like Xero. This shift from paper-based systems aims to streamline processes and reduce administrative burdens for taxpayers.

The rollout began with VAT-registered businesses above £85,000 turnover in 2019. From 2026, it extends to Self Assessment for incomes over £50,000, with further phases planned for corporation tax and other taxes.

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Key Requirements and What You Need to Do

To comply with Making Tax Digital, you must understand several essential aspects. Here are the detailed requirements and steps to take:

Use HMRC-approved software: Digital records must be kept in compatible software like Xero, which can submit data directly to HMRC.
Quarterly submissions for MTD for VAT: Submit VAT returns every quarter through the software, not via the old Government Gateway.
Digital links: All data transfers between software must be digital, with no manual re-entry allowed to prevent errors.
Record retention: Keep digital records for at least six years, including invoices, receipts, and transaction details.
Deadlines: MTD for VAT deadlines match your VAT return dates; for Self Assessment from 2026, new quarterly deadlines will apply.
Exemptions: Apply for exemption if you have digital exclusion reasons, such as age, disability, or remote location, but approval is not guaranteed.
Software setup: Ensure your accounting software is properly configured for MTD, with all necessary integrations and backups in place.
Training and adaptation: Train yourself or your team to use the software effectively, as manual processes will no longer suffice.
Penalties for non-compliance: Late submissions or incorrect records can lead to fines, so regular checks and updates are crucial.
Future preparedness: Stay informed about upcoming MTD extensions to other taxes to avoid last-minute scrambles and ensure ongoing compliance.

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Common Mistakes and When to Seek Help

A common mistake is delaying preparation until deadlines approach, as MTD requires significant process changes. Also, assuming all software is automatically compliant can lead to issues; always verify with HMRC's approved list.

If your tax situation is complex, such as multiple income sources or international transactions, professional advice can prevent errors and save time. Firms like Unique Accountancy offer setup support and ongoing compliance checks to ensure you meet all requirements smoothly.

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Unique Accountancy provides virtual finance office and accountancy services for SMEs across Gillingham and Kent. Contact us for a free consultation to achieve financial clarity and growth.