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Many self-employed people and small business owners will have heard of Making Tax Digital (MTD) as it was first introduced by the Government a decade ago in the Spring Budget of 2015. But many of them, especially those that are not VAT-registered, will be unsure of what it is and how it will impact their business.
In this post we’ll explore Making Tax Digital with a focus on income tax, how it should be seen as an opportunity rather than a threat and how we can help you comply with your Making Tax Digital obligations thanks to FreeAgent accounting software which we provide free of charge to all our clients.
What is Making Tax Digital (MTD)?
Making Tax Digital is an ongoing Government scheme to transition the UK tax system to operate digitally and eradicate manual processes. Digital record-keeping, calculation and submission of tax returns has various benefits for both taxpayers and HMRC including better efficiency and accuracy. Closing the tax gap is also a key objective from the Government’s perspective as well as simplifying and streamlining the whole tax process.
Making Tax Digital mandates affected taxpayers to:
- Do digital record-keeping
- Use HMRC-approved software to calculate and file their tax returns
- Update HMRC more regularly regarding their income and expenses
This is a huge shakeup of the tax system and implementation is a significant undertaking for the Government, and as such Making Tax Digital is currently undergoing a phased rollout.
What’s Already Happened?
Making Tax Digital for VAT is already in effect. Implementation was staggered but effective from April 2022 all VAT-registered businesses must comply with Making Tax Digital regulations in respect of their VAT returns.
This means no manual input into HMRCs portal is permitted and MTD-compatible digital software or spreadsheets with digital links must be used to maintain VAT records and calculate and submit quarterly updates to HMRC as well as filing annual returns.
Just under half of UK private sector businesses are VAT-registered so many have yet to encounter Making Tax Digital. Those that are VAT-registered will already be familiar with the requirements and will likely have accounting software in place that will ensure MTD-compliance going forwards. But the transition for businesses that aren’t VAT-registered and don’t have MTD-compliant accounting software and digital practices will not be as smooth, so it pays to get ahead of the curve and be ready in advance.
Making Tax Digital for Income Tax and the MTD Rollout
The next confirmed phase in the rollout is Making Tax Digital for income Tax Self-Assessment (MTD for ITSA).
- Effective from April 2026: MTD for ITSA becomes mandatory for sole traders and landlords with a turnover exceeding £50k
- Effective from April 2027: MTD for ITSA becomes mandatory for sole traders and landlords with a turnover exceeding £30k
To comply with MTD for ITSA, you must:
- Use HMRC-approved software for your record-keeping
- File quarterly updates with HMRC (instead of an annual self-assessment tax return)
- Submit an annual End of Period Statement (EOPS) and a Final Declaration to HMRC
HMRC will then calculate your tax liability based on the submitted information, issue you a tax bill and you must pay any monies owed.
What the Future Holds
The situation with Making Tax Digital is fluid and the Government hasn’t confirmed anything definite in terms of the next phases of the rollout beyond MTD for ITSA becoming compulsory in 2026 and 2027 for some taxpayers.
The next phase will likely be to make MTD for ITSA mandatory for all income taxpayers and MTD for Corporation Tax to follow but no dates are yet confirmed.
Accounting Software and Income Tax Self-Assessment
Put simply, accounting software is a game-changer when it comes to income tax self-assessment. Let’s explore why.
Digital Record-Keeping
The vast majority of available accounting software will come with a proprietary mobile app. These apps generally have a wide range of functionality and key amongst those is the ability to do your record-keeping on-the-go.
Digital record-keeping is of course mandatory for MTD-compliance, but it’s also very beneficial. Receipts and invoices can be scanned on-the-go and accounting software can automatically categorise them.
This has various benefits, not least that you can keep on top of your record-keeping avoiding a backlog or having to find and collate mountains of paperwork in the last few days of January, and you also have a digital backup of all your records. It makes it easier to record all allowable expenses helping to minimise your tax liability.
Your Income Tax Return Automatically Calculated
Good accounting software will have a range of automation features that we’ll cover later in this post. But from a tax perspective, it will automatically calculate your income tax return (as well as VAT and Corporation Tax returns if needed) in the background while you work based on the information you input from doing your bookkeeping throughout the year.
Your self-assessment tax return, and quarterly updates and end of period statement when MTD for ITSA is mandated, can then be validated and digitally filed with HMRC saving a lot of time, improving accuracy and ensuring MTD-compliance.
Accounting Software Helps With Much More Than MTD
The transition to Making Tax Digital will be a daunting one for many self-employed people, but we’re big advocates of the benefits of technology and the positives of using accounting software far outweigh any negatives beyond just record-keeping and tax returns. Here are some other ways it can help.
It Saves You Time
At the top level, accounting software saves you a lot of time. The automation features handle a variety of laborious and repetitive admin tasks and other functionality such as time trackers enable you to accurately and efficiently manage your time.
Detailed and Insightful Reporting
Accounting software comes with a host of inbuilt reporting features that automatically generate a range of financial reports such as balance sheets, profit and loss statements and cash flow statements. It can project income and expenditure as well as your tax liability so you always have an at-a-glance view in real-time of the financial position of your business.
Bank Reconciliation
Accounting software can integrate with your business bank account which enables your transactions to be imported automatically and the accounting software will then validate them and categorise them so they can be verified and approved. This negates a significant amount of manual work and also helps to improve accuracy.
Simple Invoicing
Accounting software can be used to create professional branded invoices which can be automatically sent to your clients when contracts are completed. In addition, unpaid invoices can be tracked and chased automatically and thank you emails can be configured to send once your clients have settled up. This allows you to keep on top of your cash flow with minimal manual input needed.
Easy Payments
Accounting software will integrate with a range of third party payment providers enabling your clients to easily and securely pay you for your services. Various payment methods are supported including bank transfer and credit and debit cards and payments are automatically categorised and logged against the relevant invoice keeping things organised.
Grant Access to Your Accountant
Most accounting software provides collaborative access which means you can grant your accountant access to your accounts within the software. This has various benefits as you shouldn’t need to forward any postal correspondence to them and they can monitor your financial position and provide ongoing guidance, recommendations and support based on the accounting data.
How Gorilla Can Help With Making Tax Digital for Income Tax
The benefits of accounting software are significant and although MTD for ITSA won’t begin until April 2026, it’s a good idea to get ahead and make the transition to digital accounting now. Working with an accountant that provides you with accounting software adds an extra dimension in terms of these benefits, the extra support you’ll receive and the time you’ll save.
We are FreeAgent platinum partners and, as technology-focused accountants, we provide FreeAgent to all our clients inclusive with all our accountancy packages saving you up to £330 a year.
FreeAgent is multi-award winning, industry-standard, cloud accounting software that’s used and trusted by over 150,000 contractors, freelancers and small business owners with the powerful mobile app enabling them to manage their business finances on-the-go.
It’s HMRC approved meaning you will be fully compliant with your MTD-obligations and future-proofed with regard to any MTD changes going forwards irrespective of your business structure and the taxes you have to pay.
With Gorilla, you work with your own dedicated accountant who will expertly manage all your business and personal accounting needs while providing unlimited support and advice on all facets of your business finances including maximising your tax-efficiency whilst remaining compliant.
If you’d like to learn more about making Tax Digital, FreeAgent or how our accountancy service can help you, request a callback to speak to an accountant or get an instant quote here.
