What Is Making Tax Digital?

You may have heard whispers about new legislation set to change the way UK businesses, sole traders, and landlords handle their taxes. Making Tax Digital is a government initiative designed to make tax reporting quicker, easier, and more transparent by moving everything online.

It may sound like a big shift, but you can make the transition easier with the right tools and a little planning. Read on to learn about Making Tax Digital compliant accounting software, how to get started, plus some key dates for your diary.

Key Takeaways

• Businesses, landlords, and sole traders will need to register for Making Tax Digital at different times based on their taxable turnover.
• You’ll need to use Making Tax Digital-compliant software to store records and submit tax returns digitally.
• If the process becomes confusing, you can reach out to HMRC for free and impartial support via phone, email, or live chat.

What Is Making Tax Digital?

Making Tax Digital is legislation that was formed as part of the UK government’s tax administration strategy. It’s a 10-year initiative that aims to make tax returns paperless, modern, and transparent.

This government initiative asks business owners, landlords, and sole traders to:

• Comply with digital record-keeping, as opposed to paper-based, by creating digital links between your records and HMRC.
• Use Making Tax Digital compatible software.
• Submit quarterly updates on taxable turnover, as opposed to once a year.

The bill is being rolled out gradually across the 10-year timeframe, with VAT payers and higher turnover businesses being asked to comply first. It started publicly in July 2017 and will continue until April 2027.

Making Tax Digital Timeline

The key milestones of the legislation include:

• April 2017: Private rollout started.
• July to December 2017: HMRC started a private pilot of Making Tax Digital for VAT.
• April 2018: Live pilot of Making Tax Digital for VAT started.
• April 2019: Businesses with a turnover at the VAT threshold (over £90,000) must keep digital records of tax and VAT receipts through accounting software.
• April 2021: HMRC no longer accepts VAT submissions via Excel documents. All VAT submissions to HMRC must come through recognised accounting software.
• April 2022: All business records must be stored through Making Tax Digital-compliant software.
• April 2026: Making Tax Digital for Income Tax will be introduced, requiring any sole traders or business owners with an income of over £50,000 or landlords with a property income over £50,000 to submit their tax returns digitally.
• April 2027: Sole traders, business owners, and landlords with income over £30,000 will need to comply with Making Tax Digital.

Why Was Making Tax Digital Introduced?

Making Tax Digital was introduced for a number of reasons:

• To make tax administration simpler: Using government-approved accounting software makes tax administration quicker and simpler by reducing paperwork and minimising errors.
• Greater accuracy on tax bills: Digital records mean fewer miscalculations and less back-and-forth with HMRC by cutting down manual data entry.
• To give businesses better oversight of their finances: Submitting income updates every quarter instead of annually offers businesses a better understanding of cash flow and prevents nasty tax bill surprises.

Who Does Making Tax Digital Impact?

Making Tax Digital will impact a number of taxpayers. Let’s explore who they are below.

Business owners

Business owners with an annual turnover of £90,000+ should already use Making Tax Digital-compliant software to process their VAT and tax returns.

Business owners with a turnover between £50,000 and £90,000 per year still need to store business records through compliant software, but they don’t need to submit records using this tool until 2026. Those with a taxable income of over £30,000 can hold off until 2027.

Self-employed people

Sole traders and self-employed people making over £50,000 per year must submit their tax returns via compliant software by April 2026. Those making over £30,000 per year can wait until 2027. Those making under this amount still need to store business records through the correct software, but they won’t need to submit their tax returns digitally until the 2027 deadline.

Landlords

Landlords with a rental income of over £50,000 per year will need to digitise and input their business information into compliant software by April 2026. Those making over £30,000 per year must make the transition by April 2027, and those making over £20,000 per year will need to do so by circa April 2029 (this is still being debated in parliament).

Partnerships

There is currently debate around when registered partnerships will be asked to join Making Tax Digital. At the time of writing, there’s no current legislation dictating when this will begin, but it’s expected to be announced imminently.

Top 3 Tools for Making Tax Digital

Check out these three key tools that will help your business stay compliant with Making Tax Digital.

1. QuickBooks

Best for: Sole traders and business owners new to Making Tax Digital.
Features:

• Mileage tracking
• VAT calculations
• Invoice creation
• Subcontractor costs

QuickBooks is a popular accounting software that helps businesses manage their finances. With over 6.5 million users, it’s suitable for sole traders, landlords, and business owners looking to manage their finances and stay compliant with HMRC’s Making Tax Digital requirements.

QuickBooks provides tools like mileage tracking, VAT calculations, invoice creation, subcontractor costs, and more. It also offers a free trial, a promotional £1 account for the first six months, and free phone support. These handy features make QuickBooks a beginner-friendly and cost-effective option for those new to online accounting.

Intuit Quickbooks Online is registered as a Making Tax Digital-compliant tool on HMRC’s website.

2. Xero

Best for: Small- to medium-sized businesses looking for a scalable accounting solution.
Features:

• Online invoicing
• Bank reconciliation
• Customer quotes
• Invoice tracking

Xero is another option for business owners looking to automate their accounting processes while staying compliant with Making Tax Digital and UK GAAP.

Xero is best for small- and medium-sized businesses due to its range of features and scalable pricing plan. For example, you can pay business bills through Xero, accept payments, claim expenses, process payroll, track projects, and store important records like VAT documents, customer quotes, and invoices. Xero also has interesting analytics tools and a dedicated accountancy dashboard to give real-time insight into your finances.

Xero is also registered on HMRC’s website as a Making Tax Digital-compliant tool.

3. Sage Accounting

Best for: Those experienced with online accounting tools.
Features:

• Automatic VAT submissions
• Bank transfers
• Invoice creation
• Inventory management

Sage Accounting is a customisable and scalable online accounting tool for businesses of all sizes. With an online and mobile app, cloud-based backup, automated VAT submissions, and simple collaboration tools, it’s a great option for those looking for flexible, all-in-one accounting software.

We recommend Sage Accounting for those experienced with online accounting tools due to its advanced features like inventory management and multi-currency support. While handy, these features can come with a bit of a learning curve, which less experienced business owners don’t need the hassle of.

Transitioning Into Digital Filing

If you’re struggling with the transition to Making Tax Digital, try following these six steps to make the process smoother.

1. Collect your invoices

First things first—you need to collect your invoices, receipts, bills, and other tax documents and store them properly. You should collect paper and digital receipts and documentation and store them in a lockable filing cabinet or password-protected folder on your computer as appropriate. Categorise them by date and invoice type so that when you’re ready to file them, you’re already organised.

2. Choose your software

The next step is to choose the software that feels right for you. Create a shortlist of potential tools based on those listed on HMRC’s website. Compare their features, prices, and user reviews to find which one feels right for your business.

Be sure to consider the following:

• What features are essential to your business? Do you need invoice creation, expense tracking, the ability to pay bills, or any other features?
• Are you looking for something scalable? If you’re hoping to grow your business within the next one to five years, you may want to look for something with the capacity to grow with you.
• What’s your skill level? Are you a pro, or do you need more hands-on support? Tailor your choice to your comfort level—some software is super intuitive, while others might have a bit of a learning curve.
• What’s your budget? Beginners will likely benefit from tools with free trials, while larger businesses may benefit from the savings associated with enterprise plans.

3. Follow the tutorial

Whether you have experience with accountancy software or are a complete novice, it’s always a good idea to follow the tutorial of your new software.

A tutorial highlights the key features and functions of a tool, helping you get familiar with how it works. The tutorial usually walks you through basic tasks, like setting up an account, uploading an invoice, and navigating the homepage, as well as more advanced features.

It also highlights tips, shortcuts, and any hidden features that may not be obvious to a new user.

4. Upload your documents

The next step is to upload all your documents to your new accountancy tool. If you’re using a phone, you can simply snap a quick photo or use a scanning app that links to your computer. For desktops and laptops, you may need to upload your documents via a scanner or drag and drop files into your software. You can also use AirDrop if you’re using an iPhone/Mac combo.

We recommend starting with your oldest documents first. Be sure to name them accordingly so you can find them easily. Titles like ‘INVOICE_[business name]_[date received in DDMMYYYY format]’ are the simplest to find. While many tools will organise your documents on your behalf, it’s still good practice to keep things tidy from the start.

If possible, use a feature like Optical Character Recognition (OCR), which picks out the important parts of bills and invoices to create balance statements automatically. This is a feature found in many accountancy programs, so be sure to ask your provider if it’s included. OCR can pull out dates, account names, balances, invoice numbers, and more, which saves a ton of administration time.

5. Keep on top of deadlines

Good accountancy software should automatically notify you of any upcoming deadlines. However, if it doesn’t, you should be aware of:

• 31 January: Deadline to submit your online self-assessment tax return, pay your tax for the last tax year, and make your first payment for the following tax year.
• 5 April: End of the tax year.
• 6 April: Beginning of the new tax year.
• 3 July: Deadline for the second payment on your tax account.
• 5 October: Deadline for registering any new businesses for a self-assessment tax return.

VAT-registered businesses must process their VAT returns once every three months. These three months are called the ‘accounting period.’ The deadline to submit your quarterly VAT returns is one calendar month and seven days after the end of the accounting period. For example, you must submit your VAT returns for 1 January 2025 to 31 March 2025 by 7 April 2025.

6. Reach out if you need support

If you find yourself lost or confused at any point, reach out for help. Whether this is to your accounting software provider or HMRC directly, they can offer guidance to ensure you’re compliant with Making Tax Digital.

You can contact HMRC at 0300 200 3300 to ask any questions about Making Tax Digital. You can also set up payment plans, request a deadline extension, or get clarification on VAT rules if you’re unsure about anything. You can also contact HMRC via live chat.