Making Tax Digital: what is Making Tax Digital (MTD)?

Getting your taxes right and filing them on time is an essential part of successfully running a small business. However, according to recent research, far too many companies struggle with filing taxes correctly, with the tax gap currently standing at a staggering £31 billion or 4.7% of all tax liabilities.

The tax gap is the difference between the amount of tax that should theoretically pay to HMRC and the tax that’s paid. This tax gap happens for several reasons, such as simply making an error on your self-assessment, not taking enough care when submitting your tax returns, or more sinister reasons like tax evasion, avoidance and criminal attacks.

Making Tax Digital is a government initiative to change how businesses file their taxes by enforcing digital record-keeping through MTD-compliant accounting software. By encouraging companies to move away from paper-based and manual processes, the government hopes it’ll become easier, more efficient and effective for individuals and businesses to get their taxes right. Companies should also gain a better awareness of their tax liabilities and approaching tax deadlines. 

Making Tax Digital also feeds into HMRC’s ambitions to become one of the world’s most digitally advanced tax administrations.

Keep reading to discover:

  • Who needs to register for Making Tax Digital, and by when
  • Why Making Tax Digital matters and benefits for small businesses
  • How to register for Making Tax Digital

Who needs to register for Making Tax Digital and when

Making Tax Digital is being rolled out across a number of different taxes, including VAT, income tax, and corporation tax. When you need to register for Making Tax Digital largely depends on your turnover levels.

Making Tax Digital for VAT

Small businesses need to register for VAT when their turnover reaches the VAT threshold of £85,000. At the same time, small businesses will also need to register for Making Tax Digital by maintaining digital records and using accounting software to submit their VAT returns. 

Small businesses need to register for Making Tax Digital by April 2022 and can register earlier voluntarily.

Making Tax Digital for Income Tax

Making Tax Digital also applies to self-employed business owners and landlords with property income above £10,000. Self-employed businesses and landlords will need to register for MTD for Income Tax and follow the associated rules by April 6th 2023.

HMRC are currently running a live pilot to test and develop MTD for income tax. Some companies and estate agents are already using accounting software to keep digital records and submit tax returns to HMRC. You can take part in this trial and send Income Tax updates to HMRC instead of filing self-assessment tax returns.

Making Tax Digital for Corporation Tax

HMRC and the UK government finished a consultation for Making Tax Digital for Corporation Tax in March 2021. This consultation looked at how MTD might be implemented for companies that need to file Corporation tax returns across various industries and sectors. However, MTD for Corporation Tax isn’t expected to become mandated before 2026.

Benefits of Making Tax Digital for small businesses

While Making Tax Digital primarily looks to close the tax gap by making sure companies pay the correct amount of tax, it also benefits small businesses. Implementing accounting software and keeping digital records helps your company.

Keep accurate records

Accounting software reduces the chances of errors by automating calculations and even tax returns. You’re also more likely to stay on top of your bookkeeping, submit your returns by the tax deadlines and avoid costly mistakes as accounting software will send your information directly to HMRC. 

Reduce your paperwork

Digital record-keeping naturally minimises the amount of physical paperwork you’ll need to sort through each year. Rather than keeping a shoebox of receipts, business owners can reconcile accounts on the go. 

MTD-compliant accounting software also helps you get greater transparency over all your company’s expenses and income, so you have a better understanding of your cash flow.

Simplified bookkeeping

Accounting software automates bookkeeping to make it even easier to stay on top of tax deadlines, repayments and outstanding invoices or payments owed. With immediate access to your financial information, you’ll be better equipped to make decisions about your business and avoid running into financial problems.

Updated information

Rather than simply doing your accounts once a year, MTD-compliant accounting software gives you visibility over your finances year-round. Done gradually as you spend and receive money not only ensures you have access to up-to-date information but also reduces the amount of time you’ll need to spend leading up to tax deadlines.

How to register for Making Tax Digital

Registering for Making Tax Digital is relatively straightforward, but you will need to:

Once registered, you can simply submit your tax returns electronically through your accounting software and become one of the 1.1 million businesses already registered for Making Tax Digital.

Make MTD simple with the Countingup app

When you sign up for a Countingup business current account, you get free MTD-compliant accounting software that allows you and your accountant to keep track of your books with ease. 

We’ve automated the time-consuming aspects of bookkeeping and tax planning so you can focus on running your business. You also receive real-time insights into your profit and loss, cash flow, tax estimates, and the ability to create invoices in seconds.

Keep your finances running like clockwork. Download the Countingup app today. 

Related Resources

Read more