A Guide to Making Tax Digital for Small Businesses

A Guide to Making Tax Digital for Small Businesses

A lot of things we used to do physically, like shopping, filing tax returns, and booking travels, are now done online. As part of efforts to shift everything in the UK from paper-based work, the HMRC introduced Making Tax Digital (MTD), a new digital tax initiative, on April 1, 2019.

 This means small businesses will no longer be required to type VAT figures and transactions into the HMRC website. They will submit these returns digitally through a software compatible with the system.

What is Making Tax Digital?

The MTD initiative by the HMRC involves getting the self-employed and small businesses to complete their digital tax records and returns in a paperless way. It aims to make it easier for individuals and enterprises to submit their returns seamlessly.

HMRC ultimately wants to revolutionise the UK Tax system to join the list of top advanced tax administrations globally. MTD is making this dream come true.

Initially, the government is reportedly losing billions of pounds each year from unpaid taxes and unnecessary submission errors. Small businesses, on the other hand, spend lots of time and energy during tax submissions.

The UK government believes tax digitisation will play a major in solving these issues.

When doing this, you have to send relevant data to the government using software that is integrated with the HMRC's Application Programming Interface (API).

The government will not provide any software for this initiative. As a small business owner, you must take it upon yourself to find the right solution to do this.

Deadlines for Making Tax Digital                                                

HMRC has gradually introduced Making Tax Digital from 1 April 2019, which immediately was in effect for all VAT-registered businesses with a taxable return above £85,000.


Here are key deadlines for MTD.

  • October 2019: Complex business put on hold in the initial plan to comply with MTD.


  • April 2022: MTD will be mandatory for all businesses with a turnover of less than £85,000
  • April 2023: Compulsory for landlords and self-employed individuals with income above £10,000 annually.
  • 2026: MTD for Corporation Tax may be applicable upon confirmation by the HMRC.


Making Tax Digital for Small VAT Businesses

Going by the deadlines mentioned earlier, it will be mandatory for small businesses to file their tax returns digitally. Failure to comply can attract penalties. It is essential to plan early and find suitable software before the deadline.

Small businesses with a taxable turnover of above £85,000 need to keep and update their records then send digital returns to the government. The accounting period for most businesses to make digital tax starts on April 1, 2019.

If your business's turnover is below the threshold, you can voluntarily start Making Tax Digital. It will help you understand the software and monitor your business performance.

You can otherwise prepare to use Making Tax Digital from April 2022.


HMRC lists several digital records you need before the MTD:

  • Business name and its contacts
  • Tax point                          
  • VAT number and schemes used
  • VAT details on supplies received and made
  • Returns adjustment
  • Rate of VAT on supplies
  • Reverse charge transactions for both supplies made and received
  • Purchase of assets
  • Daily gross taking for retail scheme users
  • Value of sales
  • Relevant documents that cover multiple supplies


Handling tax affairs can be a daunting experience for any business. This new strategy, however, is simple and less time-consuming. Prior preparation will see you submit your digital tax returns effortlessly.

Here is a checklist for small business owners.

  • Identify the Making Tax Digital deadline that applies to your company.
  • Determine a Making Tax Digital software solution that is compatible with the HMRC system.
  • Choose the system that perfectly suits your needs and requirements.
  • Plan your budget appropriately, keeping MTD in mind
  • Make sure all staff members are aware of the MTD and understand how the process works.

Making Tax Digital Software

Like mentioned, all businesses will need compatible software to submit their digital tax returns. While all the records and data don't have to be on one software, HMRC recommends that you link all your records regardless of the system used after 1 April 2021.

You can link software through emailing records, downloading/ uploading files, and spreadsheets.

HMRC has listed several compatible software like Zoho, Xero, and Quickbooks. You can easily access them on their website and find out what suits your needs.

Businesses that haven't been using accounting software before will likely face ongoing costs for the same. They also have to train their staff on how to use the software in compliance with MTD.

The government had initially estimated a cost of £70 annually for small businesses to implement Making Tax Digital. The Institute of Chartered Accountants in England and Wales, however, estimates it to about £1,250.

Benefits for Making Tax Digital

Making Tax Digital in this era of technology comes with its fair share of benefits, as explained below.

  1. Very Efficient: Using software to file digital tax returns is easier and quicker since everything is automated. It saves you the hassle of filling several papers for tax.
  2. Environmental Friendly: This initiative is friendly to the environment as it reduces the number of people using paper.
  3. Future-proofing your business: Making Tax Digital ensures your business is safeguarded against any future shocks or stresses since tax digitisation is inevitable.
  4. Fewer mistakes: Digital software and computer systems significantly reduce occurrences of errors as compared to physical paperwork.
  5. More control over your business: Frequent access to digital tax accounts enables business owners to control their affairs fully. They can easily check what they owe the government at any time. This is unlike papers done once a year and could be daunting with little to no records.


Making Tax Digital will soon be compulsory for all businesses and self-employed people. While the government won't provide software for this, companies will receive a unique digital account where they can frequently submit and monitor their taxes. Be sure to watch out on the government website in case dates change.