What is Making Tax Digital?

The government’s Making Tax Digital strategy looks to there being a new, digital way of working that will include all taxpayers reporting their income and expenses via digital software, in a more timely manner.

Ultimately, HMRC are looking for this to lead to the more frequent payment of tax, in line with the increased reporting requirements, for all self-employed and small business owners. They are looking at the development of a single digital account and single taxpayer record.

Which businesses does Making Tax Digital affect now?

Making Tax Digital compliance now applies to all VAT-registered businesses.  This means they must keep VAT records digitally and send returns using Making Tax Digital compatible software.

There is room to apply to HMRC for an exemption if it is not reasonable or practical for you to use computers, software or the internet.

The requirement is that all VAT return information must be supplied digitally from your accounting software directly into HMRC’s MTD portal. Excel spreadsheets can continue to be used, but only if the accompanying MTD bridging software is fully digitised to submit VAT returns.

When will Making Tax Digital affect me or my business?

The government’s Making Tax Digital programme launched in 2019 – by 2026 there will be an expectation on most businesses and self-employed individuals to keep digital records and use software to submit their returns.

All VAT-registered businesses need to be Making Tax Digital compliant from 1 April 2022. There has been a two-year delay until April 2026 for mandatory MTD ITSA filing. The minimum income reporting level has increased to £50,000, with those earning more than £30,000 mandated to join the scheme in 2027. The situation for landlords and sole traders earning less than £30,000 will be reviewed to see if MTD ITSA can be shaped to meet the needs of smaller businesses.

Is there software that can help with Making Tax Digital?

If you are a small business and do not already have an internal system to log your accounting records, you can use off-the-shelf software such as Xero, QuickBooks, Sage Accounting or FreeAgent.

These cloud accounting software solutions are user-friendly and will enable you to keep your finances in control. They streamline the recording and reporting process by letting you take photos of invoices/receipts and upload them directly to synch with your business bank account – all via an app on your phone or tablet.

Cloud accounting solutions use bank feeds to import live data, this reduces the time needed to undertake manual data entry. They are easy to use on the go and can improve the cash flow of your business.  This can, in turn, help in making crucial business decisions as there will be a better picture of finances with real-time information.

What are the implications of not making my tax digital?

HMRC’s ambitions for a real-time compliance-based system place data firmly at the heart of its strategy and the message is clear: businesses will need to ensure their data is accurate and their compliance documented.

The government is introducing a new penalty regime for late submission of tax returns and late payment of tax.

Late-submission penalties

There will be new penalties for late submission of tax returns.

Taxpayers will not be charged an automatic financial penalty if they fail to meet a submission obligation. Instead, they will incur a penalty point for each missed submission obligation and a financial penalty will only be levied once the taxpayer reaches a penalty points threshold. The threshold varies depending on the frequency of the obligation (monthly, quarterly, annual) and the penalty has been set at £200.

The points system will be applied separately to each tax, and it will be possible to appeal against penalty points as they are incurred. The points will expire after a period of full compliance of up to 24 months.


We would recommend that as part of your forward planning for your business, you look to start keeping digital records and providing updates to HMRC electronically.

Across the Stephenson Smart offices, we have accountants who have specialist knowledge and accreditations to support our clients with their Making Tax Digital obligations.

Please get in touch if you would like to discuss how you can prepare for these changes.