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Making Tax Digital: Understanding the Basics of MTD

Posted on 15th November 2023

As a business owner you may have heard of Making Tax Digital (MTD), indeed if you are VAT registered then you will be familiar with the requirements that it places upon you. MTD is a HM Revenue and Customs (HMRC) initiative that aims to modernise the tax system and ensure compliance while making your obligations simpler.

If you are not already familiar with the concept of MTD then now is the perfect time to get acquainted with what it is and how you can prepare for the arrival of the next stage, Making Tax Digital for Income Tax Self Assessment (ITSA). Being prepared with compliant software and the knowledge of an expert accountant can prepare you to never miss a filing and meet all of your obligations to HMRC.

Understanding Making Tax Digital (MTD)

Making Tax Digital (MTD) is a crucial component of HMRC's planning to simplify taxation in the United Kingdom. Its primary objective is to enhance the efficiency and effectiveness of the tax system. To comply with MTD rules, businesses are required to maintain digital records and file returns online through approved software.

This use of software can help businesses as it gives them access to real time financial data and allows them to upload expenses, invoices and manage cash flow simply. There are many types of software available to be used and choosing the right one is a vital step in preparing for MTD.

MTD for VAT

MTD for VAT became the mandatory process for all businesses that are VAT registered from April 2022 with it first being rolled out from 2019. Currently all businesses registered for VAT, even if registered voluntarily, must submit their quarterly VAT returns through cloud software of by using bridging software to convert their records to a compliant format.

Software such as FreeAgent, Xero and Quickbooks are some of the most popular options and many of our own clients use these, with the guidance of our expert accountants, to ensure they are submitting timely, accurate returns.

What do You Need to Know if You are Registering for VAT?

If you have a growing business, or are looking to set one up, and expect your turnover to exceed the VAT threshold of £85,000 in a twelve month period you will need to register for VAT. The registration process is simple and your accountant can help you with your registration.

Once you have registered you will need to keep track of all income you generate as well as all expenses you incur as part of your business operations. You will be able to offset the VAT paid on goods and services pertaining to your activities against VAT that you have generated from sales when you file your returns quarterly.

The best way to do this is through cloud accounting software which contains features allowing you connect your business bank account to allow for simple bank reconciliation and the ability to upload receipts and invoices straight from your phone or desktop. Understanding the right software for your specific needs is important and our accountants at Sherwin Currid can help advise you on the best software for your needs.

MTD for Income Tax Self Assessment (ITSA)

You may have seen in the news that making tax digital will also shortly apply to income tax self assessment as well as VAT. This will be applicable from April 2026 to those who earn over £50,000 from self employment or property income. This change will mean that sole traders and landlords must file quarterly returns disclosing their income to HMRC through compliant software

How Will MTD Affect ITSA?

The main implication of the roll out of MTD for ITSA is the mandatory quarterly filings. While this may be a daunting prospect for some self employed individuals there is no reason to be concerned. Your accountant will be able to guide you through the process and explain how to use your cloud software (or bridging software) to remain compliant and submit your returns on time. There will not be a change to the amount of tax due on your income simply to the way in which it is reported.

What MTD Compliant Software to Use?

Choosing compatible software is the most important step to ensure you are ready for MTD and should not be overlooked. Keeping your business records in order and up to date with the MTD requirements now will ensure that you are prepared for any changes and are compliant for VAT and eventually ITSA.

FreeAgent and Xero are two of the most popular software providers and offer comprehensive digital services. All of our accountants at Sherwin Currid are experts in these softwares as well as others and would gladly take the time to understand your needs and provide you with guidance on choosing the right software for you.

FreeAgent

FreeAgent is a powerful bookkeeping software that offers a range of features to help businesses manage their financial transactions efficiently. Its user-friendly interface, automation, reporting, and project management features make it an ideal tool for small businesses and freelancers.

It's simplicity and low subscription costs mean its a great option for those businesses who record expenses infrequently or in small volumes. Sole traders and Personal Service Companies are ideally suited to FreeAgent which is why it is the most popular choice by our clients. It is so popular that we include FreeAgent subscriptions in all of our contractor package offerings.

Xero

Xero is a comprehensive accounting software that offers a range of features to help businesses manage their finances effectively. It offers a wide range of functions such as automatic transaction import, built in invoicing system, reporting options, and integrations with third-party applications.

Its flexibility, range of pricing plans, and emphasis on security make it an ideal choice for growing small businesses that are looking to simplify their accounting and bookkeeping processes and gain greater visibility into their financial performance. Many of our clients with small businesses prefer this software for its digital record keeping system and our accountants are all trained experts in Xero to ensure you get the most out of this software.

How Can an Accountant Help With MTD?

Hiring an accountant such as Sherwin Currid can help you massively with MTD. With a good accountant you are able to benefit from a wealth of expertise around software choices, tax law knowledge, planning advice and more. Your accountant will be able to take the trouble of submitting VAT returns, and soon ITSA returns, out of your hands meaning you can spend more time focusing on your business. All of our clients at Sherwin Currid have unlimited access to a specialist accountant that will be on hand to guide you through choosing the right software and how to use it in order to get the most out.