Making Tax Digital: Explained For Business Owners

Making Tax Digital is a government-launched campaign that aims to make it much simpler for individuals and businesses to keep on top of their taxes. This includes making payments on time, ensuring that they’re paying the right amount of tax and making sure that personal affairs are kept well aligned.

Making Tax Digital is a ground-breaking, fundamental change to the ways in which the taxation process is carried out. Not only will it make it much easier for taxpayers and businesses, but it’ll also make the system more effective, efficient and will significantly lessen the chances of errors taking place.

If you’re not aware of what changes will occur from this system shift, this post will include everything you need to know about making tax digital.

We’ll cover:

• What is Making Tax Digital?

• How Can Businesses Ensure a Smooth Transition for Making Tax Digital?

• What are the Benefits of Making Tax Digital?

• Are There Any Drawbacks to Making Tax Digital?

What is Making Tax Digital?

Making Tax Digital is a plan aimed at businesses by the government to help them ensure that taxes are being paid correctly and that their bookkeeping is as tidy as possible. One of the main goals behind introducing this new system is to reduce the amount of tax lost per year due to avoidable errors.

Approximately £9 billion is lost per year as a result of easily avoidable tax errors and mistakes, which is obviously quite a substantial amount for the government to be losing out on.

To combat these errors, businesses will now have access to all of their own personal tax data via an online account. Businesses already make payments and carry out transactions online for different areas like banking and paying bills. So, the government decided to bring the taxation process up to the same speed and into familiar territory.

Making Tax Digital started with VAT. From 1 April 2019 it applied to VAT registered businesses with taxable turnover above the VAT registration threshold. Since 1 April 2022 it applies to every VAT registered business, whatever the turnover, and since 1 November 2022 VAT returns can no longer be sent through the old VAT online account. If your business is not registered for VAT, Making Tax Digital for VAT does not apply to you.

The next stage is Making Tax Digital for Income Tax. It applies to sole traders and UK property landlords. Not everyone who works for themselves is a sole trader, and the other ways of being self-employed are outside these rules for now. When you start depends on your qualifying income, which is your income from self-employment and property added together, before expenses: from 6 April 2026 if it was over £50,000 in the 2024 to 2025 tax year, from 6 April 2027 if it was over £30,000 in 2025 to 2026, and from 6 April 2028 if it was over £20,000 in 2026 to 2027.

How Can Businesses Ensure a Smooth Transition for Making Tax Digital?

Making Tax Digital is obviously going to take effect on your business and the way you operate, so there are various ways and changes you can adapt to so the transition is a smooth one. These are:

1. Invest in Top-Quality Accounting Packaging

After working in a set way for a long time or doing business under new legislation you’re not used to, your accounting and taxes can be tricky. Human error can land you in deep water if you miss a payment or don’t pay enough.

Top-quality accounting packaging that has the features you need can help you track your records much more efficiently and reduce the chance of any errors occurring.

2. Change Your Reporting Schedule

Along with the introduction of the new digital shift, HMRC has introduced a requirement that they need to be updated on your financial state on a more frequent, quarterly basis. This means that you’re going to have to adapt your own reporting schedule – if you don’t do that already.

3. Change the Way You Pay

Apart from the obvious change from manual to digital, the way you pay is also changing with regards to frequency. Making Tax Digital allows you to pay on a scheme that suits your business, which will let you see a more realistic position of your business’ finances, rather than paying in full annually at the end of your financial year.

The frequency of your pay is completely voluntary so this flexibility allows you to choose a suitable way for your business.

Benefits of Making Tax Digital

1. Less Paperwork to Sort

Making Tax Digital asks you to keep income and expense records in software. Keeping those records digitally can reduce the need to sort through piles of paper when a reporting date comes round, although you may still need supporting documents for your records. That is easier to review.

2. A Better Chance to Spot Mistakes Earlier

Checking digital records regularly can bring missing amounts, duplicate entries or incorrect categories to your attention sooner. Software cannot prevent every mistake, but a current set of records gives you more chances to correct a problem before you use the figures for an update or return. It is an earlier check.

3. Digital Records Can Make Bookkeeping Easier

Keeping each income and expense entry as a digital record can make your bookkeeping trail easier to follow. Instead of rebuilding the story from scattered notes at the end of the year, you can follow the figures you have recorded and check what needs attention. The trail stays visible.

4. A Regular Routine May Save Time

A short, regular check of your records may take less time than sorting out several months at once. The saving depends on how you keep your books, which software you use and how much information needs correcting, so it is not automatic. The work stays smaller.

5. A Clearer View of Your Finances

Current records can give you a clearer view of the income and expenses already entered for your business. That view may help you notice gaps, check a period and ask better questions before a deadline, but it does not guarantee that every figure is complete or that money will be available for a tax bill. The picture stays current.

6. A Current Tax Estimate, Not a Final Bill

This point applies only to Making Tax Digital for Income Tax. Those rules apply to sole traders and UK property landlords, not everyone who is self-employed. After a quarterly update, HMRC can provide an estimate of the tax bill based on the information it holds at that time. The estimate may help with budgeting, but it can change when more information or adjustments are added and it is not the final tax bill. It is a guide.

Are There Any Drawbacks of Making Tax Digital?

As with any new introduction to a change in business operation, there’s bound to be concerns surrounding the plan. Some of the main worries are:

• People don’t like change. If your current system is working, it’s likely that you’re not going to want to move away from it.

• There’s no proven track record. This is a completely new platform, so businesses may not want to have all their finances depending on it.

• New software mistakes. Learning new software can be tricky and it may be easy to make mistakes that could be costly.

• Daunting quarterly updates. Businesses may not be keen on quarterly updates as it requires a lot more work and they could be focusing their interests elsewhere.

Find Out More About Making Tax Digital

We understand that making tax digital may sound a little daunting at first, but you needn’t worry. We’ve put together a free summary sheet so that you’re completely clued up when the introduction finally affects your business at whatever stage.

Download it for free below and find out everything you need to know and more.