Making Tax Digital for self-employed and small businesses

Making Tax Digital for self-employed and small businesses

Monique Holtman

Monique Holtman
4th March 2019

If you’re a small business owner or even looking for information on how to become self employed, chances are you’re hearing the phrase ‘Making Tax Digital’ more and more. What exactly is it however and why is it coming into effect?

The government is introducing Making Tax Digital in a bid to make it easier for businesses and the self-employed to get their tax right and stay on top of their affairs. It’s intended to bring the UK tax system into the 21st century by providing businesses with a modern, streamlined system to keep their tax records and provide information to HMRC.

Why go digital?

There are a number of reasons why the government wants to introduce a fully digital tax system:

  • Replacing paper-based bookkeeping with digital tax accounts enables you to check that the information HMRC holds about you is 100% correct
  • You will have a complete view of all your tax information, liabilities and entitlements in one central place
  • It will allow HMRC to look at your tax information almost immediately, thus reducing human error from data input
  • HMRC anticipates taxpayers will better understand how much tax is owed within the digital tax account
  • There’s a lower chance of unwelcome compliance checks and audits from HMRC
  • Online billing means you will be able to pay your tax straight away
  • It will be easier to contact HMRC online via web chats and secure messages

If you’re a VAT-registered business with a taxable turnover above the VAT threshold (£85,000 per annum), you will be required to start submitting your VAT returns through the Making Tax Digital service from the 1st of April 2019. There are a few exceptions to this which can be found in the Making Tax Digital for VAT timeline section on the website.  

How Making Tax Digital will affect small businesses and the self-employed

If you’re a small business or you’re self-employed, you no doubt have a lot of questions about how MTD is going to affect you and what you need to do to ensure you’re complying.

Below I’ve put together a list of questions and answers which should help to clear up everything you need to know.

Will I be affected by Making Tax Digital?

It’s important to be aware that Making Tax Digital will eventually affect everyone who files a tax return in the UK. This includes businesses, the self-employed, landlords, individuals, non-profits and anyone who receives an income from any place other than standard PAYE payroll.

MTD will not affect pensioners, those who are solely paid through payroll/PAYE or anyone who has a secondary income of less than £10,000.

How does this change how I interact with HMRC?

Anyone who has ever tried to get through to HMRC (especially around the January 31st tax return deadline), will know that this is no easy feat. One of the greatest benefits of MTD is that you will be able to interact with HMRC digitally in a way and at a time that suits you thanks to web chats and secure messaging.

Will making the transition to Making Tax Digital cost my business money?

HMRC won’t be charging businesses to move to Making Tax Digital. Updating your internal business processes and other admin might incur a cost however. HMRC has consulted on this and estimates the average cost to be approximately £280 per business. These costs are likely to arise from:

  • Time spent training on new digital tools and quarterly submission of information
  • Purchasing new apps and upgrading existing software
  • Some businesses may need to purchase new hardware or upgrade existing hardware
  • Additional accountancy/agents costs

How do I get ready for Making Tax Digital?

Step one:

The first step is to ensure your business isn’t exempt. For now, MTD will only apply to companies who are VAT-registered and have a turnover of more than £85,000 per annum.

HMRC may allow you to be exempt from MTD if it’s not practical for you to keep and submit digital records (e.g., you have very poor Internet access), religious beliefs prevent you from using computers or you have an insolvency procedure in place.

If you’re not sure if Making Tax Digital applies to you, please contact the VAT Helpline on 0300 200 3700. 

Step two: 

If you haven’t already, you will need to upgrade to functional compatible software.

This will be used to maintain compulsory digital records, calculate your tax returns and make submissions to HMRC via an Application Programme Interface (API).

It is possible to mix and match software – the complete set of digital records needed for MTD for VAT doesn’t have to be held in one single piece of software. As long as there is a link between the different pieces of software, the records can be held in a range of acceptable digital formats. If you need help deciding what to use, HMRC has released a list of software companies who have committed to providing compatible products ready for the pilot phase of Making Tax Digital.

If you’re already using accounting software, check if your manufacturer is on the list. If they’re not, get in touch with them and ask if they’re planning to launch compatible software in time for the April 2019 deadline.

Step three: 

Understand the digital records you will be obliged to keep.

As well as submitting your VAT returns online, HMRC will require you to keep certain records which will need to remain accessible for six years. This includes:


To demonstrate a link between the output tax in a business’s records and the output tax on the VAT return, your electronic account must contain a record of:

  • Output tax owed on sales
  • Output and input tax owed on acquisitions from other EU member states
  • Any tax to be paid on a supplier’s behalf under a reverse charge procedure
  • Any tax owed or tax which can be reclaimed following a correction or error adjustment
  • Any other adjustment required by the VAT rules
  • Input tax which can be claimed on business purchases
  • Any other necessary adjustment (only the total value for each type of adjustment will need to be kept digitally)


Your business’s name, registered address, VAT-registered number and a record of any accounting schemes must all be recorded digitally.

Supplies In 

Each supply your business receives must be recorded digitally including:

  • Date
  • Time
  • Value (including any VAT that cannot be reclaimed)
  • Total amount of input tax to be claimed

Supplies Out

Every supply made by your business must be recorded including:

  • Date
  • Time
  • Worth
  • Amount of VAT charged

Step four: 

Speak to your accountant. If you’re unsure about any aspect of Making Tax Digital, please speak to your accountant as they will be able to help you make the transition as easy and stress-free as possible.

What does the future hold for Making Tax Digital?

Although the first rollout of Making Tax Digital is due to happen in just a few weeks’ time, not everyone is convinced that UK businesses are ready for it.

Back in November, a House of Lords executive committee called on HMRC to push back the rollout of MTD for VAT by one year to April 2020. It was also recommended that the start date of MTD for other taxes such as income tax and corporation tax, should be postponed until at least April 2022.

The peers’ report warns that many small businesses in the UK simply aren’t ready for Making Tax Digital. This is a view which is also shared by the Chartered Institute of Taxation (CIOT) and the Association of Tax Technicians (ATT). As to whether the report will have any influence remains to be seen.

The government ignored many recommendations the same committee issued in a similar report published last year. HMRC has also expressed dismay at the committee’s findings, arguing that it has done a lot to improve awareness of MTD among the business community in the last 12 months.

While Making Tax Digital for VAT will come into force in April 2019, other businesses and tax-payers who don’t earn above the £85,000 threshold won’t be affected until April 2020.

In the meantime, the self-employed and small business owners should familiarise themselves with the forthcoming changes and take the necessary steps to digitise their VAT returns should the changes go ahead in April.

What should small businesses and the self-employed expect?

The biggest changes will be felt by those who don’t currently keep track of their invoices digitally. If you currently use a paper filing system, this will need to be updated. You’ll also have to invest in Making Tax Digital compatible software in order to submit your returns.

If you’re not familiar with how to use the software, you’ll either have to spend time learning how to do so or outsource this function to an accountant. There are a number of webinars and videos on the HMRC website which can help.

Installing new software, learning how to use it and changing the way you keep track of expenses and file your tax return is undoubtedly the last thing you want to do when you’re busy running a small business. Despite the initial disruption however, Making Tax Digital will help to improve the current tax system. Believe it or not, it could even benefit you financially in the long-run.

MTD has been designed to reduce instances of errors, missed or late filings will reduce and subsequently, so should the burden of making corrections and paying fines. Ultimately, it will make filing easier, there’s less risk of HMRC making errors and businesses will benefit from being able to keep track of all their tax information in one central location, in real-time.

As this is the first implementation of a new system, it’s expected that there will be an unofficial ‘grace period’ of about one year for non-compliance with MTD. However, businesses that are late getting up-to-speed do potentially risk fines and penalties.

If you’re still confused about Making Tax Digital, please speak to an accountant. Even if you don’t choose to use one on an ongoing basis, they will be able to get you ready for the scheme and ensure you have the correct software in place.