Making Tax Digital: what small businesses need to know

Making Tax Digital (MTD) is HMRC’s programme to move tax administration online. If your business is registered for VAT, you are already required to keep digital records and submit VAT Returns using compatible software. Here is what that means in practice.

What MTD requires

Under MTD for VAT, businesses must keep their VAT records digitally — not in spreadsheets (unless they are linked to compatible software), and not on paper. VAT Returns must be submitted through software that connects to HMRC’s systems via an API. You cannot submit returns through the old HMRC portal.

The records you must keep digitally include your business name, address, and VAT registration number; the VAT accounting scheme you use; the details of every supply you make and receive; and the rate of VAT charged on each transaction.

Choosing software

HMRC publishes a list of compatible software on GOV.UK. Options range from free basic tools to full accounting packages like Xero, QuickBooks, and FreeAgent. The right choice depends on the complexity of your business and whether you want your accountant to have direct access.

Penalties

HMRC has moved to a points-based penalty system for late submissions. Each late return adds a penalty point; once you reach the threshold (four points for quarterly filers), you receive a £200 penalty for each subsequent late return. Late payment penalties are calculated as a percentage of the outstanding tax.

Getting help

If you are unsure whether your current record-keeping meets MTD requirements, speak to your accountant. The cost of getting it wrong — in penalties and lost time — is significantly higher than the cost of setting it up properly from the start.