What does Making Tax Digital (MTD) mean for small businesses in the UK? 

For many, it’s another rule to keep up with, one that changes how taxes are reported and managed. 

The goal is to make the process smoother and reduce mistakes, but we know that change isn’t always easy, especially regarding finances. 

Red Fish Accountancy has seen firsthand how confusing tax updates can be, and we’re here to make it simple. 

If you’re unsure about the right software, worried about compliance, or just don’t have the time to figure it all out, we’ve got you covered. 

Our team will handle the tax side so you can focus on what matters running your business.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is the government’s way of bringing tax into the digital age. Instead of relying on paperwork and manual records, businesses now need to keep track of their finances using digital tools.

The goal is simple: make tax reporting easier, cut down on errors, and help businesses stay on top of their finances without the stress of last-minute paperwork. 

By using MTD-compatible software, you can keep your records organised and submit tax returns more smoothly. It’s all about saving time and reducing hassle so you can focus on running your business.

Who Needs to Comply with MTD?

As of April 2022, if your business is registered for VAT, you’re required to keep digital records and submit your VAT returns using MTD-compatible software. This applies to all VAT-registered businesses, no matter your turnover.

Looking ahead, starting from April 2026, if you’re self-employed or a landlord with an annual income over £50,000 from your business or property, you’ll need to follow MTD rules for income tax. Then, from April 2027, this requirement will extend to those earning more than £30,000.

Switching to Making Tax Digital (MTD) brings several benefits for small businesses:

1. Fewer Mistakes, More Accuracy

Manual bookkeeping leaves plenty of room for human error—misplaced decimal points, forgotten transactions, or incorrect figures can cause big headaches.

MTD requires businesses to keep digital records and use software that connects directly to HMRC. This means fewer mistakes when recording income and expenses, reducing the risk of miscalculations. Since errors can lead to penalties or delayed tax returns, getting things right the first time is a major advantage.

According to HMRC, tax return mistakes cost the government billions each year. By ensuring that calculations are done digitally, MTD helps businesses submit more accurate tax returns, avoiding the stress and cost of correcting errors later.

Business Tax

2. Saves Time and Reduces Admin Work

For small business owners, time is money. Instead of spending hours manually inputting data, chasing invoices, or sorting through piles of paperwork, MTD allows you to automate many tax-related tasks.

With MTD-compliant software, much of the process is streamlined:

  • Transactions are recorded automatically
  • Expenses are categorised without needing manual input
  • VAT returns can be submitted directly to HMRC with just a few clicks

This not only speeds things up but also gives you more time to focus on running and growing your business rather than dealing with tax paperwork. 

If you’ve ever scrambled to find missing receipts or worried about getting figures wrong, digital record-keeping can make your life a lot easier.

3. Real-Time Financial Updates and Better Planning

One of the biggest challenges for small businesses is managing cash flow and planning for tax bills. 

Many business owners only look at their financial records when it’s time to submit their tax return. By then, it may be too late to make adjustments.

With MTD-compatible software, you can keep track of your income, expenses, and tax obligations in real-time. Many platforms also provide estimates of how much tax you owe throughout the year, helping you set aside the right amount of money instead of getting hit with an unexpected bill at the last minute.

Having this kind of visibility into your finances means you can make better business decisions. You’ll know whether you need to cut costs, increase pricing, or set aside extra funds for an upcoming tax payment.

4. Easier Tax Submissions and Fewer Late Fees

Tax deadlines can be stressful, especially if you’re rushing to gather all your documents at the last minute. With MTD, because everything is stored digitally and updated regularly, submitting your tax return is much simpler.

Instead of manually filling out forms, your software pulls data from your digital records and submits it to HMRC for you. 

This lowers the risk of missing deadlines and getting fined for late submissions. Plus, since your records are always up to date, you won’t have to scramble to gather everything just before the deadline.

5. Safe and Secure Record-Keeping

Losing important tax records is a nightmare, whether it’s due to misplaced paperwork, accidental deletions, or even computer failures. With MTD, records are stored securely in the cloud, meaning they won’t get lost, damaged, or accidentally deleted.

Cloud-based accounting software also protects your data with encryption and regular backups. This is much safer than keeping paper records or manually storing files on your computer. If HMRC ever requests an audit, having digital records makes it easier to provide the necessary information quickly.

6. Making Tax Digital is the Future

MTD isn’t a temporary change, it’s the way forward for tax in the UK. It applies to VAT-registered businesses, but by 2026, it will extend to self-employed individuals and landlords earning over £50,000, and later to those earning over £30,000. Eventually, all businesses will be expected to comply.

Getting ahead of the transition now means you won’t have to rush later. If your business isn’t yet required to use MTD, starting early will help you adjust at your own pace rather than being forced into compliance at the last minute.

What Happens If You Don’t Comply? 

To ensure a smooth transition, follow these steps:

  1. Check if MTD applies to you – Identify whether your business is required to comply now or in the future.
  2. Choose MTD-compatible software – Options include QuickBooks, Xero, Sage, and FreeAgent.
  3. Digitise your records – If you’re still using paper or spreadsheets, migrate to a digital system.
  4. Train your team – Ensure staff understand how to use the software.
  5. Keep up with updates – Stay informed about changes to MTD requirements.

What Happens If You Don’t Comply? 

Failure to comply with MTD rules can lead to penalties from HMRC. 

The government has introduced a points-based penalty system, meaning repeated non-compliance can result in fines. 

Avoiding these penalties is as simple as ensuring your business follows the rules and submits tax information digitally.

The government has set up a points-based system to handle this. Here’s how it works:

Points System for Late Submissions
  • Earning Points
    • Every time you miss a tax submission deadline, you get a point.
  • Thresholds
    • If you reach a certain number of points, HMRC will fine you £200. The thresholds depend on how often you need to submit:
      • Annual submissions : 2 points
      • Quarterly submissions : 4 points
      • Monthly submissions : 5 points
Tax penalty
  • Resetting Points
    • To clear your points, you need to:
      • Submit all your returns on time for a set period (24 months for annual, 12 months for quarterly, and 6 months for monthly submissions).
      • Make sure all past-due returns are filed.
Penalties for Not Using Compatible Software

If you don’t use MTD-compatible software to file your VAT returns, HMRC can fine you up to £400 for each return. This is separate from penalties for late submissions.

Daily Fines for Not Keeping Digital Records

Not keeping your records digitally can result in daily fines ranging from £5 to £15 until you comply.

Interest on Late Payments

If you pay your VAT late, HMRC will charge interest on the amount you owe. The longer you delay, the more interest you’ll have to pay.

How to Avoid Penalties

To steer clear of these fines:

  • Use Compatible Software
    Make sure you’re using MTD-approved software for your tax records and submissions.
  • Keep Digital Records
    Maintain all your financial records in a digital format.
  • Meet Deadlines
    Submit all tax returns and payments on time.

Making Tax Digital Doesn’t Have to Be Complicated

Red Fish Accountancy knows tax rules keep changing, and it’s hard to keep up when you’re already juggling everything else in your business. You’re busy running a business, and the last thing you need is more paperwork or complicated rules. Making Tax Digital (MTD) might feel like another burden, but in reality, it’s designed to make things easier, with less guesswork, fewer mistakes, and a clearer view of your finances.

Learning new software, keeping digital records, and making sure everything is up to HMRC’s standards can feel overwhelming. 

But you don’t have to figure it out alone. We’re here to help, whether that means setting up the right software, keeping your records in order, or making sure you’re fully compliant.

So if you need help setting up MTD-compatible software, keeping digital records, or just figuring out what all these changes mean for your business, we’ve got your back.

If you’re unsure about MTD or need expert support to get everything in place, let’s talk. 

We’ll handle the tax side of things so you can focus on running your business. Visit us to see how we can help.