For small business owners, managing finances can often be a daunting task. But with the advent of Making Tax Digital (MTD), staying on top of your taxes has become easier and more efficient.
In this blog post, we'll explore what MTD is, how it affects small businesses, and how you can prepare to make the most of this digital transformation.
What is Making Tax Digital (MTD)?
MTD is a government initiative designed to make the tax system more effective, efficient, and simpler for both businesses and HM Revenue and Customs (HMRC). The key goal of MTD is the requirement for businesses to keep digital records of their income and expenses and submit their tax returns using compatible accounting software.
The Government has pushed back the mandatory date for MTD. From April 2026, self-employed businesses and landlords with a business turnover above £50,000 must report under the MTD rules. Those with an income between £30,000 and £50,000 must do this from April 2027.
How Does MTD Affect You as a Small Business Owner?
Digital Record-Keeping: With MTD, paper-based record-keeping is becoming a thing of the past. You are now required to maintain digital records of your financial transactions, making it easier to track income, expenses, and tax liabilities. This shift to digital record-keeping can, in the long run, lead to better financial management and decision-making for you and your business.
Quarterly Reporting: Under MTD, as a business, you will need to report your income and expenses to HMRC on a quarterly basis using compatible accounting software. This means more frequent interactions with your financial data, requiring you to stay on top of your finances throughout the year. Once submitted, you will receive an estimate tax calculation.
Real-Time Information: MTD provides HMRC with access to real-time financial data. This enables them to provide more accurate tax calculations and reduce the chances of errors or discrepancies in your tax returns.
Penalties for Non-Compliance: Non-compliance with MTD regulations can result in penalties. It's crucial for you as a small business owner (or your Accountant if you use one), to ensure that you are using compatible software, keeping digital records, and submitting accurate and timely reports to avoid unnecessary fines.
How Can You Prepare for MTD?
Choose Compatible Software: The first step in preparing for MTD is selecting accounting software that is MTD-compatible. There are numerous options available, both paid and free, so choose one that suits your business needs. An Accountant will also be able to advise you on options.
Digitalise Your Records: Transitioning from paper-based record-keeping to digital systems is a huge ask for some businesses. It may mean you need to scan documents, digitise receipts, and organise your financial data in a way that can be easily imported into your accounting software.
Stay Informed: Keep yourself informed about MTD requirements and updates. The rules and regulations may change, so staying up-to-date will help you avoid compliance issues. Alternatively, if you work with an Accountancy firm, they will give you the most up-to-date advice.
Conclusion
Making Tax Digital is a significant shift in how you as a small business will manage your taxes. While it may require some adjustments in the way you handle your finances, it ultimately aims to simplify the process and reduce errors.
Our advice? Embrace MTD and take proactive steps to prepare for it. By choosing the right software, training relevant staff and considering using a professional Accountancy firm you will gain better control of your business's financial health.