Making Tax Digital: What SMEs Need to Know

Making Tax Digital (MTD) represents the biggest change to the UK tax system in a generation. If you're running a small business, it affects you—and the deadlines are approaching faster than many realise.

Here's what you need to know and how to prepare.

What is Making Tax Digital?

MTD is HMRC's initiative to move the tax system online. The goal is to make tax administration more effective, more efficient, and easier for taxpayers. In practice, it means businesses must keep digital records and submit tax information to HMRC using compatible software.

The rollout has been phased:

•       MTD for VAT is already mandatory for most VAT-registered businesses

•       MTD for Income Tax Self Assessment (ITSA) is being phased in from April 2026 for self-employed individuals and landlords with income over £50,000

•       MTD for Corporation Tax timeline is still being finalised

What Does This Mean for Your Business?

Digital record keeping is essential. Spreadsheets can still be used, but they must link digitally to your submission software. In practice, most businesses find it easier to use dedicated accounting software like Xero or QuickBooks from the start.

Quarterly submissions become the norm. Under MTD for Income Tax, you'll need to submit quarterly updates to HMRC, plus an end-of-period statement and final declaration. This is a significant change from the annual self-assessment cycle many are used to.

Software costs may increase. If you're currently using manual methods or basic spreadsheets, you'll need to invest in MTD-compatible software. The good news is that many cloud accounting packages are affordable and often improve efficiency enough to offset their cost.

How to Prepare

1.    Understand your timeline. Check which MTD requirements apply to you and when they come into effect. Don't leave preparation to the last minute.

2.    Choose the right software. Select MTD-compatible accounting software that suits your business. Consider ease of use, features, integrations with your bank and other tools, and cost.

3.    Clean up your records. Before migrating to new software, ensure your existing records are accurate and complete. This is a good opportunity to address any historical issues.

4.    Build new habits. MTD works best when records are kept up to date. Implement processes for capturing transactions as they happen, rather than in periodic catch-up sessions.

5.    Get professional support. If this feels overwhelming, you're not alone. A good bookkeeper can handle the technical requirements while ensuring you remain compliant.