My MTD Survival Guide: What Is Changing (Part 1)

MTD is coming and it’s probably going to be a shock. I am a small business owner who has researched what the impacts of this change will be for all SMEs. Here’s what I found out …

MTD is, if you haven’t heard by now, Making Tax Digital, an initiative from HMRC to ensure almost live tax reporting and, eventually, tax payment. The project has been gradually implemented over the last 6 years and since April this year all businesses that charge VAT should already be joined with HMRC at the computer-chip. (Employers have been using RTI (Real Time Information) to report PAYE since 2013 but that is a whole different system.)

The next stage, over the next 3 years, is to have small businesses reporting their income tax and property income every 3 months. You read that right. Every 3 months. No more sweaty Januarys emptying glove boxes, back pockets and receipt tins. Instead, small businesses will soon be in a constant reporting cycle of 5 tax returns every year (four quarterly updates and an annual final declaration).

So, get yourself a napkin and work out your expected turnover for your current financial year i.e. your gross income, before accounting for any expenses or tax reliefs. This includes any property income (including furnished holiday lets) you may receive as a landlord. It does not include any PAYE income you receive from other employment.

Then check the timeline for adoption…

If the number you’re staring it is over £50,000, you will need to adopt everything described below starting from April next year (7 months away). If you are near the threshold and there’s a chance you might tip over £50,000 during the 2024-5 tax year, you’ll also need to get prepared for April next year.

However, even if you can’t imagine your turnover hitting £20,000 soon, the advice from the business community is to start getting ready now. Don’t underestimate how much your behaviour will need to change to make this a seamless transition. Even if you’ve been running a small business for years, waiting until you have to change may well end up being more expensive and a lot more inconvenient.

One addition to this – note that there have already been delays and there is a chance there will be further postponements to the above published timeline.

Let’s be clear …

This is not just a tax change. How much tax you pay is a completely separate question. This is a wholesale change in how you report and how often you will need to report.

Businesses can no longer afford to leave their tax reporting till the end of the year to sort everything out

If you aren’t paying VAT already, you will need to change the set up of your current software or, you’ve guessed it, buy completely new software. There are specific rules to prevent any manual re-entry after you first entered your initial accounting figures. The idea here is that accidental copying errors will be totally prevented. The concern is us small business owners don’t set things up properly in the first place.

The requirements for digital record-keeping and having software that will talk to HMRC applies equally to all businesses, despite their employee headcount or when they start actually reporting. This means the costs for this specific Income Tax and Self Employed reporting are effectively the same. However, there are also some benefits which smaller businesses are likely to get comparatively more of. More about that soon.

What does ITSA MTD reporting involve?

Keeping clearer digital records. Especially if you have mixed income streams, all income and expenses must be broken down by type of income. You may keep this information on a spreadsheet but you must use bridging software to send the data to HMRC without any manual re-entry of the figures.

Quarterly updates. Every quarter of the financial year (you can request to use your own financial year), by the 7^th of the first month of the new quarter, the previous quarter must be reported.

Verify that the digital link has worked and the figures have been sent accurately:

End of year final declaration. The final declaration will be pre-populated with the income and expenses data already submitted through the quarterly updates i.e. all sole trader and landlord data.

This end of year declaration replaces the Self Assessment return.

Note: Gross sole trading and rental income may only be a part of the total taxable income reported at the end of the financial year. It may be easy to overlook some income sources for this end of year return and so, although not included with the quarterly updates, complete records must be kept throughout the year. You are expected to keep digital records of all income and expenses. This does not mean a photograph or PDF but at the very least the amount, category, and date of each. Digital records can either be held in accounting software or on spreadsheets. Keeping paper receipts for bookkeeping may still be best practice but they are not required by MTD.

For VAT, records must include the time of supply (tax point), debit/credit notes, imports/exports, VAT-exempt items, and expenses that do not incur VAT.

For ITSA, records must detail self-employment income, property income, dividend income, savings interest, and allowable business costs, supported by valid evidence such as sales invoices, business bank statements, tenancy agreements, and dividend vouchers.

The payment deadlines for income tax haven’t changed from the current 31 January and 31 July each year.

What if I make a mistake?

Between quarterly updates, it might come to light that an accounting error has been made. You can correct this on the next quarterly update. But note that the final declaration pre-populates from your Q4 update so accuracy on the final update of the year is crucial.

If you are late with your submission, HMRC will award you penalty points. All penalty points expire after 24 months of sound compliance unless HMRC grant an exception.

So, what do I have to do?

Check if you are exempt.

Exemptions are automatically applied if you are a:

Exemptions can be claimed and must be approved by HMRC if you are digitally excluded due to:

If you start trading as a sole trader or acting as a landlord after 6 April 2026, you can submit a Self Assessment tax return first before you transition to MTD, or you can choose to register straight away.

If you’re exempt, it may be worth your while to know a bit more about it in case your exemption state changes.

If you’re not exempt, or you’re not sure, read Part 2 where I explain the costs of compliance, software choices,