Making Tax Digital (MTD) in the UK: What Small Businesses Need to Do

Reading time: 8 minutes

Ever felt overwhelmed by the prospect of digitizing your tax records? You’re definitely not alone. Making Tax Digital represents one of the most significant changes to UK tax administration in decades, and small businesses are scrambling to understand what it means for their daily operations.

Here’s the straight talk: MTD isn’t just another compliance hurdle—it’s a fundamental shift that could either streamline your business processes or create unnecessary headaches, depending on how well you prepare.

Table of Contents

• Understanding MTD: The Digital Revolution
• Current Requirements and Deadlines
• Choosing the Right MTD Software
• Common Implementation Challenges
• Your MTD Compliance Checklist
• Your Digital Tax Roadmap
• Frequently Asked Questions

Understanding MTD: The Digital Revolution

Making Tax Digital isn’t just about moving from paper to pixels—it’s HMRC’s ambitious vision to create one of the world’s most advanced tax systems. But what does this actually mean for your small business?

Key MTD Insights:

• Mandatory digital record-keeping for qualifying businesses
• Quarterly submission requirements replacing annual returns
• Integration between accounting software and HMRC systems
• Real-time visibility into your tax obligations

The Three Pillars of MTD

Digital Record Keeping: Gone are the days of shoebox accounting. Your business records must be maintained digitally using MTD-compatible software. This means spreadsheets, unless part of an integrated system, won’t cut it anymore.

Quarterly Reporting: Instead of scrambling once a year, you’ll submit updates every quarter. Think of it as regular health check-ups for your business finances rather than emergency surgery.

API Integration: Your software must communicate directly with HMRC’s systems through Application Programming Interfaces (APIs). No more manual data entry or paper submissions.

Real-World Impact: Sarah’s Café Story

Sarah runs a small café in Brighton with an annual turnover of £95,000. Before MTD, she’d gather receipts in a drawer, panic in January, and spend weeks with her accountant preparing returns. Now, with MTD-compatible software, she spends 15 minutes weekly updating her records and receives quarterly insights that help her make better business decisions. Her accountant now focuses on strategic advice rather than data entry.

Current Requirements and Deadlines

Understanding who needs to comply and when is crucial for avoiding penalties and maximizing benefits.

MTD for VAT (Already Mandatory)

If your business is VAT-registered with taxable turnover above £85,000, you’re already required to use MTD for VAT. This has been mandatory since April 2019, with some exceptions for businesses using complex VAT accounting methods.

MTD for Income Tax Self Assessment

The big change coming affects sole traders and landlords with annual business or property income over £10,000. Originally scheduled for April 2023, implementation has been delayed, but preparation remains essential.

Business Type	Income Threshold	Current Status	Key Requirement
VAT-registered businesses	£85,000+ turnover	Mandatory since 2019	Quarterly VAT returns via MTD software
Sole traders	£10,000+ annual income	Delayed implementation	Digital records + quarterly updates
Landlords	£10,000+ rental income	Delayed implementation	Digital property records
Partnerships	£10,000+ partnership income	Future implementation	Digital partnership records

Understanding the Numbers

According to HMRC data, approximately 2.6 million businesses will eventually need to comply with MTD for Income Tax. Currently, only 31% of eligible businesses have begun preparation, creating a significant compliance gap.

Choosing the Right MTD Software

Selecting MTD-compatible software isn’t just about meeting minimum requirements—it’s about finding a solution that grows with your business and actually makes your life easier.

Essential Software Features

HMRC Recognition: Your software must appear on HMRC’s official list of MTD-compatible products. This isn’t negotiable—non-recognized software could leave you non-compliant despite your best efforts.

Integration Capabilities: Look for software that connects with your bank accounts, payment processors, and existing business tools. Manual data entry defeats the purpose of going digital.

User Experience: The best software is the one you’ll actually use consistently. Prioritize intuitive interfaces and reliable customer support.

Software Cost Comparison

The Hidden Costs

Beyond monthly subscriptions, consider setup costs, training time, and potential integration fees. Mark, a freelance consultant, initially chose the cheapest option but spent £500 in accountant fees fixing data synchronization issues. Sometimes paying more upfront saves money long-term.

Common Implementation Challenges

Let’s address the elephant in the room: MTD implementation isn’t always smooth sailing. Understanding common pitfalls helps you navigate around them.

Challenge 1: Data Migration Headaches

Moving years of financial data from spreadsheets or legacy systems into MTD software can feel overwhelming. The key is starting with clean, current data rather than trying to migrate everything historically.

Pro Tip: Begin with your current financial year and gradually backfill historical data as needed. Focus on accuracy over completeness initially.

Challenge 2: Staff Training and Adoption

Even the best software is useless if your team won’t use it consistently. Budget time and resources for proper training, and consider appointing an internal “MTD champion” to support adoption.

Challenge 3: Integration Complexity

Connecting your new MTD software with existing business systems—from POS systems to inventory management—requires careful planning. Document your current processes before making changes.

Case Study: Tom’s Engineering Firm

Tom runs a small engineering consultancy and initially tried to implement MTD software himself over a weekend. Result? Three weeks of data chaos and stressed clients waiting for invoices. His second attempt involved hiring a consultant for one day of setup and training—money well spent that prevented future headaches and lost business.

Your MTD Compliance Checklist

Ready to transform compliance complexity into competitive advantage? Here’s your practical roadmap:

Immediate Actions (This Month)

• Assess your current position: Calculate your annual income to determine MTD requirements
• Audit existing systems: Document current record-keeping methods and identify gaps
• Research software options: Compare at least three MTD-compatible solutions
• Budget for implementation: Include software costs, training time, and potential consultant fees

Short-term Preparation (Next 3 Months)

• Select and purchase software: Choose based on your specific business needs, not just price
• Begin data cleanup: Organize current records and establish consistent categorization
• Plan staff training: Schedule dedicated time for learning new systems
• Test integrations: Ensure your chosen software connects properly with banks and other systems

Long-term Success (Ongoing)

• Establish weekly routines: Regular data entry prevents quarterly scrambles
• Monitor compliance: Stay updated on HMRC announcements and software updates
• Leverage insights: Use quarterly data for better business decision-making
• Plan for growth: Ensure your MTD system can scale with business expansion

Your Digital Tax Roadmap

MTD isn’t just about compliance—it’s about positioning your business for a digital-first future. The businesses thriving post-MTD implementation aren’t just meeting requirements; they’re using digital tools to gain competitive advantages.

Strategic Next Steps:

1. Start now, even if deadlines seem distant: Early adoption gives you time to optimize processes and train staff without pressure
2. Choose software that grows with you: Invest in solutions that offer additional features beyond basic MTD compliance
3. Build digital habits gradually: Transform one process at a time rather than attempting overnight transformation
4. Use data for decision-making: Regular financial insights help you spot trends and opportunities earlier
5. Stay connected with updates: Follow HMRC announcements and software provider communications for changes

The most successful small businesses will be those that view MTD as an opportunity to modernize operations and gain real-time financial visibility. As one business owner told us: “MTD forced us to get organized, and now we’re making better decisions faster than ever before.”

Consider this: In five years, will you look back on MTD implementation as the catalyst that transformed your business operations, or will you still be struggling with compliance? The choice—and the time to act—is now.

What’s your first step going to be this week?

Frequently Asked Questions

Do I need MTD if my business income is just over £10,000?

Yes, once MTD for Income Tax is implemented, any sole trader or landlord with annual business or property income exceeding £10,000 will need to comply. However, the current delay means you have extra time to prepare. Use this time wisely—start with software research and basic digital record-keeping practices now, rather than waiting for official implementation dates.

Can I still use Excel spreadsheets for my records?

Excel alone won’t meet MTD requirements because it cannot directly submit data to HMRC through APIs. However, some MTD-compatible software can import Excel data or integrate with Excel-based workflows. The key is ensuring your final submission method uses approved MTD software that can communicate directly with HMRC systems.

What happens if I miss the MTD compliance deadline?

Non-compliance can result in penalties starting at £200 for late submissions, with additional daily penalties for extended delays. More importantly, you’ll miss quarterly submission deadlines, potentially creating cash flow issues and making annual tax calculations more complex. The best approach is early preparation rather than last-minute scrambling when deadlines are announced.