Making Tax Digital: What Every UK Business Owner Needs to Know in 2025

Last week, I had three different clients ask me the same question: "Do I really need to worry about Making Tax Digital?" The short answer? Yes, you absolutely do. But don't panic – I'm here to walk you through everything you need to know.

What Actually Is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's push to modernise how businesses handle their tax affairs. Think of it as the government's way of dragging tax compliance into the digital age, and frankly, it's about time.

The system requires businesses to keep digital records and submit VAT returns using compatible software. No more scribbling figures on paper receipts or frantically searching through shoeboxes come tax time.

Who Needs to Comply with MTD?

Here's where it gets specific:

VAT-registered businesses with taxable turnover above £85,000 have been required to use MTD for VAT since April 2019. If you're below this threshold but voluntarily VAT registered, you're included too.

Income Tax Self Assessment is the next phase, originally planned for April 2024 but now delayed. When it does roll out, it'll affect sole traders with business income above £50,000 and landlords with property income above £50,000.

Corporation Tax MTD is coming for companies with turnover above £10.2 million, likely from April 2026.

The Software Side of Things

You can't just use any spreadsheet and call it digital. HMRC maintains a list of approved software packages, and trust me, using non-compliant software is like building a house without planning permission, it might work for a while, but you'll regret it later.

Popular options include:

• Xero – Great for small businesses, intuitive interface

• QuickBooks – Solid all-rounder with good reporting features

• Sage – Comprehensive but can be overkill for smaller operations

• FreeAgent – Particularly good for freelancers and contractors

The key is finding software that integrates with your bank feeds and handles your specific business needs.

Getting Your Records Digital-Ready

This is where most business owners feel overwhelmed, but it's actually straightforward once you break it down:

Start with your bank feeds. Most MTD software connects directly to your business bank account, automatically importing transactions. This alone eliminates hours of manual data entry.

Categorise as you go. Don't leave everything until year-end. Spend 10 minutes each week categorising transactions, your future self will thank you.

Keep digital copies of receipts. Use your phone to snap photos of receipts immediately. Apps like Receipt Bank (now part of Dext) can even extract the key information automatically.

Set up regular backups. Cloud-based software usually handles this automatically, but it's worth checking your backup procedures.

Common MTD Mistakes I See (And How to Avoid Them)

Mistake 1: Leaving everything until the last minute Start your MTD transition at least three months before you need to be compliant. Rushing leads to errors and stress.

Mistake 2: Choosing software based on price alone The cheapest option often costs more in the long run. Consider features, support quality, and integration capabilities.

Mistake 3: Not training staff properly If your team doesn't understand the new system, you'll end up with messy records. Invest in proper training.

Mistake 4: Forgetting about bridging software If you're using spreadsheets currently, you might need bridging software to connect Excel to HMRC's systems.

The Hidden Benefits Nobody Talks About

While compliance is the obvious driver, MTD actually offers some genuine business advantages:

Real-time financial insights mean you can spot problems early and make informed decisions quickly.

Automated processes free up time you can spend on growing your business instead of paperwork.

Better cash flow management comes from having up-to-date financial information at your fingertips.

Reduced errors happen naturally when you eliminate manual data entry and calculations.

Penalties and What They Mean

HMRC isn't messing around with MTD compliance. Late submission penalties start at £200 and increase for repeated failures. More importantly, non-compliant businesses may face investigations and additional scrutiny.

But here's what many people don't realise: the penalties for poor record-keeping under MTD can be more severe than traditional penalties. Digital records need to be complete, accurate, and preserved properly.

Making the Transition Smooth

Plan your timing carefully. Don't switch software right before a busy period or major deadline.

Run parallel systems initially. Keep your old system running alongside the new one for at least one full quarter to ensure everything works correctly.

Test your VAT return process before the deadline. Submit a test return if possible, or at minimum, prepare one without submitting to check for issues.

Build relationships with support teams. Whether it's your accountant or software support, establish these connections before you need urgent help.

Looking Ahead: Income Tax MTD

While Income Tax MTD has been delayed, it's still coming. The requirements will be similar to VAT MTD but with quarterly updates instead of annual submissions.

Smart business owners are already thinking about this transition. If you're implementing MTD for VAT now, choose software that will handle Income Tax MTD when it arrives.

The Bottom Line

Making Tax Digital isn't just about compliance – it's about modernising how you run your business. Yes, there's an initial investment in time and possibly software costs, but the long-term benefits far outweigh the setup effort.

The businesses thriving under MTD are those that embraced it early and saw it as an opportunity to improve their processes, not just a regulatory burden.

If you're still putting off your MTD transition, now's the time to act. The longer you wait, the more rushed and stressful the process becomes.

Need Help with Your MTD Transition?

Every business is different, and cookie-cutter advice only goes so far. If you're feeling overwhelmed by Making Tax Digital requirements, or you're not sure which software solution would work best for your specific situation, we're here to help.

Our team has guided hundreds of businesses through successful MTD implementations, and we can do the same for you. Get in touch for a consultation – because getting MTD right from the start is always easier than fixing problems later.

Ready to make your tax digital? Contact us today to discuss your MTD strategy and ensure you're fully compliant while maximising the benefits for your business.