A Complete Guide on Making Tax Digital (MTD) For Businesses

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Published: January 31, 2023
Last Updated: March 5, 2025

Taxation is one of the most important factors for business operations. It is crucial for business owners to properly plan and manage their finances to remain compliant with the law and minimise their tax liability. Additionally, it would be difficult to maintain accurate financial records without a proper understanding of taxation. As a business owner, you can keep a check on your taxes and accounting system by investing in good accounting services from reputed outsourced service providers. However, tax season can be daunting for individuals and businesses, especially tax deadlines. Missing tax deadlines can create big blunders for business owners, so it is essential to have sufficient knowledge about important taxation deadlines for business owners in the UK.

Undoubtedly technology has made everything easier, and one such important implication of this digital revolution relates to Making Tax Digital (MTD) compliance – a requirement for businesses across the UK to submit their financial data in a digital format for tax purposes. Making Tax Digital (MTD) is a UK government initiative requiring taxpayers to digitally keep their tax records and submit VAT returns to Her Majesty’s Revenue & Customs (HMRC) via compliant software. In this blog, we will cover everything you need to know about MTD – so you can confidently navigate the tricky terrain of taxation. So, let us get started.

Introduction to Making Tax Digital

Making tax digital (MTD) is an initiative by the UK government that requires organisations to maintain digital records of their financial transactions and submit these to HMRC. This initiative is part of the government’s wider plan to modernise the tax system and make it more efficient.

The MTD initiative applies to businesses with an annual turnover above the VAT threshold (currently £85,000). These businesses will be required to use approved software to keep digital records and submit their VAT returns to HMRC using this software. MTD compliance became mandatory on 1st April 2019 for most VAT-registered businesses, and the next phase came into force on 1st April 2022.

While MTD may seem like a daunting change for businesses, it does not have to be difficult or expensive to comply with the new requirements. The UK government has said that the introduction of MTD will help to make the tax system more efficient and easier to comply with. They also hope it will lead to more accurate tax returns and help tackle tax avoidance and evasion. Keeping a check on business taxes is essential because well-managed taxation leads to better financial management for businesses. As a result, business owners will have a strong financial system altogether. Now, let us get into details to understand the importance of MTD for businesses.

Why is Making Tax Digital (MTD) Important?

The system behind MTD was first announced in 2015 to make it “easier for customers to get their tax right and keep on top of their affairs.” The thinking is that digitising the tax system will make it easier for people to comply with the law– meaning fewer mistakes and better revenue management. The main aim of MTD is to make the tax system more efficient and effective and to reduce the burden on UK businesses in terms of time and money spent on compliance. However, MTD is not just about submitting your returns digitally; it is also important that you record and store your data in a compatible format. This means using software that can connect to HMRC’s systems and allows electronic data submission. Fortunately, several outsourced service providers offer compatible software and reliable accounting services, so you must find the one that meets your business needs.

In addition to submitting digital records, businesses will also be required to provide certain information to HMRC quarterly. This includes details of income and expenditure and VAT returns, if applicable. The information must be submitted using a compatible software like Sage accounting software, ensuring businesses are fully MTD-compliant. With the help of reliable software like Sage, business owners can become relaxed concerning MTD compliance.

How Does MTD Affect Your Business?

Businesses of all sizes and in all sectors will be affected by Making Tax Digital (MTD). The changes will affect the way business owners keep their records, submit their VAT returns, and make payments to HMRC. Some businesses will need to take action to prepare for MTD. This includes businesses exempt from UK VAT or using accounting software incompatible with MTD. The government has said that MTD is an essential part of its plans to make the tax system simpler, more effective, and more efficient. Moreover, it will also help to tackle tax avoidance and fraud and ensure that businesses pay the right amount of tax.

Most businesses will be able to comply with the new requirements using existing accounting software. However, some businesses may need to upgrade their software or purchase new software to comply with MTD. For instance, if you are using any other software, you can migrate towards an HMRC-recognised software like Sage accounting software and simplify your tax processes. The UK government has said that it will provide support to businesses during the transition to Making Tax Digital. This includes guidance on what businesses need to do to prepare for MTD and practical support in using the new systems. But does your business fall into the category of MTD compliance? Let us dig deeper to get answers.

Key Requirements For MTD Compliance

As of April 2019, all businesses with a taxable turnover above the VAT threshold of £85,000 are required to comply with Making Tax Digital (MTD). However, if you are unsure whether your business is affected by MTD, you can use HMRC’s online tool to check. Once you have registered for MTD, you will need to:

Keep digital records of your sales and purchases
Use MTD-compatible software to submit your VAT returns
Authorise HMRC to access your records electronically

If you do not already keep digital records, it has become necessary from 1st April 2019. You can use accounting software like QuickBooks or Sage accounting or keep manual records using excel spreadsheets.

If you are a business or individual taxpayer in the UK, it is important to familiarise yourself with Making Tax Digital (MTD) to comply with the new requirements. Moreover, you should also be prepared for the different challenges that may arise in the implementation process of MTD. So, let us highlight some points that might pose a challenge for you when you are in MTD’s implementation phase.

Common Challenges During the Implementation of Making Tax Digital (MTD)

When it comes to Making Tax Digital (MTD), the implementation phase can be a real challenge for companies. Here are some of the most common challenges faced by businesses during this critical stage:

Making Tax Digital

Lack of preparedness- Many businesses are simply not prepared for the switch to MTD. Either they have missed the deadline for registering for MTD, or they have not put adequate systems and processes in place to comply with the new requirements. This can lead to a lot of last-minute scrambling and chaos, which can be very costly and disruptive.
IT (Information Technology) issues- Another common challenge during the implementation phase is related to IT. Many companies may find their existing accounting software incompatible with MTD, or they may not have enough capacity to handle the extra data that needs to be submitted under MTD. This can lead to significant delays and frustration in the implementation process of MTD.
Increased costs- Implementing MTD can also lead to increased costs for businesses. They may need to invest in new software or hire additional staff to help with compliance. Such increased costs can be a real challenge for businesses, especially small businesses, who may not have the budget to accommodate them. However, businesses can rely on outsourced taxation and accounting services and cut down on costs to a great extent.
Training costs- Another challenge business owners encounter is ensuring that the entire staff is properly trained on the new system and understands how to use it effectively. This can be a time-consuming and expensive process, particularly for businesses with large numbers of employees. But it is essential to ensure a smooth process.
Proper testing- Finally, business owners also need to overcome the challenge of ensuring that the new system is properly tested before it goes live. This includes testing it with actual data to ensure it works as intended and checking for any potential errors or glitches. Any sort of failure to properly test the system can lead to significant problems down the line.

Conclusion

In conclusion, Making Tax Digital gives businesses of all sizes improved access to the tax system, better real-time insights into their financial performance, and more accurate data. The implementation of MTD is an important step in making taxation more efficient and streamlined for businesses. As you can now see, there are many considerations that need to be taken into account when it comes to MTD compliance– but do not worry, careful planning and preparation will pay off! Compliance with MTD regulations will help your business stay on top of its finances and save time and money in the long run. We hope that this blog has been helpful in helping you get acquainted with MTD and its various aspects. Making sure your processes are MTD compliant is essential to ensure that there are no problems while filing taxes in the future- so start preparing!