If your business still relies on paper receipts, spreadsheets that are updated at year end, or a last-minute search for invoices, Making Tax Digital may require a change in routine. It is not simply a new way to submit a tax return. It is HMRC’s move towards keeping records digitally and sending information through compatible software – and getting organised early makes the transition far less stressful.

For many Manchester business owners, the real benefit is not just compliance. Better bookkeeping gives you a clearer view of cash flow, VAT, costs and profitability throughout the year, rather than only when accounts are due.

What is Making Tax Digital?

Making Tax Digital, often shortened to MTD, is an HMRC programme designed to make tax reporting more accurate and more efficient. It requires affected taxpayers to keep specified business records digitally and use compatible software to send information to HMRC.

The rules differ according to the tax involved. Making Tax Digital for VAT has already been in place for several years. Making Tax Digital for Income Tax Self Assessment, usually called MTD for ITSA, is now being introduced in stages for self-employed people and landlords.

The principle is straightforward, but the practical detail matters. You do not have to become an accountant or spend every evening looking at bookkeeping software. You do need a reliable process for recording income and expenses, retaining supporting evidence, and ensuring the figures submitted are complete.

Making Tax Digital for VAT

All VAT-registered businesses are now generally required to follow MTD for VAT, regardless of taxable turnover. This means VAT returns must be filed using compatible software, rather than through the old HMRC online VAT account.

You must keep digital records of your sales and purchases, the VAT you charge and reclaim, and the VAT accounting schemes you use where relevant. The figures that make up your VAT return should flow through a digital link. Re-keying totals from one spreadsheet into another can break that link, even if the final VAT figure is correct.

A spreadsheet can still form part of an MTD process when connected to suitable bridging software. However, it is worth considering whether this remains the most efficient arrangement as the business grows. Cloud accounting software can reduce duplicate entry, make it easier to photograph and store receipts, and give directors a more current picture of what the business owes.

Accuracy still depends on the information going in. Software cannot tell whether a personal purchase has been posted as a business cost, whether an invoice has been missed, or whether the correct VAT treatment has been used. Regular review remains essential.

Who will need Making Tax Digital for Income Tax?

From April 2026, MTD for ITSA applies to self-employed people and landlords with qualifying income above £50,000. Qualifying income is the total gross income from self-employment and property before expenses are deducted. It is not your profit, salary, savings income or dividend income.

HMRC will normally assess whether you need to join using information from your 2024/25 Self Assessment tax return. If your combined qualifying income exceeds £50,000, you should prepare for the new requirements from the start of the 2026/27 tax year.

The threshold is due to widen from April 2027 to those with qualifying income above £30,000, based on figures reported for 2025/26. Further expansion has been announced for later years, so it is sensible for smaller businesses and landlords to establish sound digital records now rather than wait until a deadline is close.

The rules do not currently bring company directors into MTD for ITSA simply because they receive a salary or dividends. Likewise, corporation tax is not yet within a mandatory Making Tax Digital regime. A limited company may still be required to use MTD for VAT, and its director may have separate personal Self Assessment obligations.

What changes under MTD for ITSA?

Instead of collecting everything for one annual tax return, affected sole traders and landlords will use compatible software to send quarterly updates of their income and expenses to HMRC. These updates are not tax bills and do not finalise your taxable profit. Their purpose is to keep HMRC informed during the year.

After the tax year ends, you will make any necessary accounting and tax adjustments, such as capital allowances, private-use adjustments or claims for reliefs. You will then submit a final declaration by 31 January following the end of the tax year. This replaces the current process of completing a Self Assessment return for the income covered by MTD.

For some people, quarterly reporting sounds like more work. It can be, particularly if records are currently brought together once a year. But businesses that reconcile their bank account, issue invoices promptly and keep receipts as they arise may find that the workload is simply spread more evenly. The year-end rush becomes much more manageable.

The records you need to keep

The right system depends on how you trade. A consultant with a small number of invoices has different needs from a retailer, contractor or landlord with several properties. In every case, records need to be complete enough to support your tax position and kept in a digital form that your software can use.

For most businesses, that means recording the date and amount of each item of income, the category and amount of each expense, and the VAT details where applicable. You should also retain source documents, such as invoices, receipts, bank statements and mileage evidence. Taking a clear photograph of a receipt when it is received is usually safer than leaving it in a wallet until month end.

Do not assume your bank feed tells the whole story. It shows money moving in and out, but it does not always explain the nature of a transaction. Loan repayments, transfers between accounts, director payments and personal spending all need appropriate treatment.

How to prepare without disrupting the business

Preparation is most effective when it is practical and gradual. The following steps give most small businesses a sound starting point:

  • Confirm whether you are already within MTD for VAT and whether your current filing method meets the digital-record requirements.
  • Review your latest Self Assessment return to understand your qualifying income and likely MTD for ITSA start date.
  • Choose accounting software that suits the size and complexity of your business, rather than paying for features you will not use.
  • Build a weekly or monthly bookkeeping routine for invoices, expenses, bank reconciliation and queries.
  • Give your accountant access early, so problems can be identified before a VAT return, quarterly update or year-end deadline.

The choice of software should be based on more than price. Consider whether it connects to your bank, handles VAT correctly, produces useful reports, supports your invoicing process and is simple enough for the people who will use it. A low-cost system that staff avoid can create more work than it saves.

If you use an external bookkeeper or accountant, agree who is responsible for each task. For example, you may upload bills and raise invoices, while they reconcile transactions, review VAT treatment and submit returns. Clear responsibilities prevent duplicated work and help ensure nothing is missed.

Common mistakes to avoid

One common misunderstanding is thinking that MTD means submitting a full tax return four times a year. Quarterly updates are different from final tax calculations, but they still need to be based on sensible, up-to-date records. Treating them as estimates will create difficult corrections later.

Another is leaving the switch to software until the first filing deadline. Moving records from a spreadsheet or paper system takes time, particularly where opening balances, unpaid invoices or historic VAT issues need attention. Starting before you are mandated gives you time to test the process and ask questions.

There are limited exemptions for people who are digitally excluded because of age, disability, location, religion or another genuine reason. An exemption is not automatic, and it should not be assumed simply because someone is uncomfortable with technology. Advice should be sought before relying on it.

Turning compliance into better financial control

Making Tax Digital can feel like an administrative requirement imposed from outside the business. Used well, it can also improve day-to-day decision-making. Regular records make it easier to follow up overdue invoices, see whether costs are rising, plan for VAT payments and discuss tax liabilities before they become urgent.

The aim is not to create more paperwork in a different format. It is to establish a process that gives you confidence in the numbers. Coombs Chartered Accountants can help clients choose an appropriate system, organise their records and understand what each MTD deadline means in practice. A little structure now can leave you with more time to focus on the business you are building.