How to Stay Compliant with Making Tax Digital (MTD) Requirements

Introduction

Making Tax Digital (MTD) is transforming the way businesses manage their tax obligations in the UK. The government initiative requires businesses to keep digital records and submit tax returns using approved software. Whether you’re VAT-registered or a company that needs to file corporation tax, staying compliant with MTD is essential. This blog explains what MTD compliance means for businesses and how you can ensure your business is ready for the digital transition.

1. What is Making Tax Digital (MTD)?

Making Tax Digital is an HMRC initiative designed to modernize the tax system by requiring businesses and sole traders to use digital record-keeping and submit tax returns electronically. Initially rolled out for VAT-registered businesses, MTD will soon cover income tax and corporation tax as well.

  • Key Requirement: Businesses must use MTD-compatible software to record financial transactions and submit tax returns.
  • Example: A VAT-registered business with turnover over £85,000 must use MTD software to submit VAT returns.

2. Key MTD Deadlines for VAT and Income Tax

Businesses should be aware of upcoming MTD deadlines to stay compliant:

  • VAT: VAT-registered businesses with a turnover above £85,000 must already comply with MTD for VAT. From April 2022, all VAT-registered businesses must follow MTD rules, regardless of turnover.
  • Income Tax: Self-employed businesses and landlords earning over £10,000 must comply with MTD for income tax from April 2026.

Failing to meet these deadlines can result in penalties and fines from HMRC, so it’s crucial to prepare early.

3. How to Ensure Compliance with MTD Requirements

To comply with MTD, businesses must:

  1. Use MTD-compatible software: HMRC requires businesses to use approved software to record transactions and submit returns.
  2. Maintain digital records: Paper-based record-keeping is no longer acceptable. All transactions must be recorded digitally.
  3. Submit returns electronically: Submitting paper tax returns or manually inputting figures into HMRC’s portal is no longer allowed under MTD rules.
  • Key Tip: Popular accounting software such as Xero, QuickBooks, and Sage are MTD-compatible and make it easier to stay compliant.

4. Benefits of MTD for Businesses

While MTD compliance is mandatory, it also offers benefits to businesses, including:

  • Improved accuracy: Digital record-keeping reduces the risk of errors when submitting tax returns.
  • Better financial visibility: Using digital tools allows businesses to track their finances in real-time, improving cash flow management.
  • Time savings: Automating tax submissions frees up time to focus on other business tasks.

Conclusion

Making Tax Digital is an important step in the future of UK tax management. By ensuring your business complies with MTD requirements, you can avoid penalties, improve the accuracy of your tax returns, and streamline your financial processes. If you’re unsure about how to get started with MTD, an accountant can help you transition to compliant digital tools and manage your tax submissions with ease.