Making Tax Digital for Sole Traders

The tax system in the UK is going through a period of significant change and modernisation that will affect sole traders as well as other self-employed people and, eventually, anyone that has to submit a tax return.

It’s fair to say that some sole traders prefer traditional paper-based accounting and record-keeping practices. This could be due to preferring the familiarity of the methods they know or a reluctance to adopt new technology from a cost perspective, or possibly they don’t feel they have enough time to transition to and learn digital accounting software.

But the Making Tax Digital (MTD) initiative will ultimately mandate the shift towards digital accounting across the tax spectrum as the Government tries to ensure that the tax system keeps up with the pace of change in the digital age.

Sole traders and other self-employed people, however, should see making tax digital as a significant opportunity rather than a threat or an inconvenience. Let’s start at the beginning…

What is Making Tax Digital?

Making Tax Digital is an ongoing Government initiative to digitise and modernise the UK tax system. The Government plans to make HMRC one of the most digitally advanced tax administrations in the world by mandating the use of digital accounting software for record keeping and to electronically file tax returns with HMRC.

There are various reasons MTD is being implemented. Key amongst those is closing the tax gap as the Government aims to recoup significant lost tax revenue by reducing errors and improving accuracy through digitisation and automation.

Improving efficiency is another main objective and electronic tax returns will significantly reduce the time it takes HMRC to process returns compared with paper-based filings, and the same can be said for taxpayers when completing their returns.

The Making Tax Digital Timeline

Fully digitising the UK tax system is a huge undertaking and Making Tax Digital is undergoing a phased rollout. Let’s look at the timeline of what’s been done and what’s to come.

Making Tax Digital was first introduced in the Spring Budget of 2015 and the Government published their strategy less than a year later. The rollout began in earnest in April 2019 with VAT the initial focus. All VAT-registered businesses with a taxable turnover of £85,000 or more had to use MTD-compatible software to submit quarterly VAT returns, and businesses that already filed quarterly VAT returns were mandated to keep records digitally.

In April 2021 digital links were introduced which mandated the use of formulas in spreadsheets, CSV and XML imports and exports and automation or APIs to communicate between software programs. From April 2022 all VAT-registered businesses had to digitally store and submit their VAT returns.

Effective from April 2026, Making Tax Digital for income tax will be introduced. Sole traders and landlords with a turnover above £50,000 must use MTD-compatible software for their self-assessment tax returns and from April 2027 the turnover threshold reduces to £30,000. Sole traders are therefore at the forefront of the MTD for income tax rollout.

What You Need to do to be MTD-Compliant

Use Making Tax Digital Compatible Software

You must use MTD-compatible accounting software, such as FreeAgent, for record keeping and to submit tax returns digitally to HMRC.

Keep Records Digitally

Bookkeeping must be done digitally so records of income, expenses, receipts, invoices and any other relevant financial documentation or information must be electronically stored using your accounting software.

Submit Digital Tax Returns to HMRC

Where mandated by Making Tax Digital legislation, you must submit your annual tax returns digitally to HMRC. If you’re VAT-registered, quarterly VAT returns must also be submitted where mandated.

How Making Tax Digital Can Benefit Sole Traders

The use of accounting software for bookkeeping and to prepare and submit tax returns presents a significant opportunity to streamline and speed up your business admin relating to your tax obligations, but the benefits of using accounting software go way beyond that.

Improved Efficiency

Maintaining records and calculating and submitting tax returns digitally is significantly quicker than paper based methods. Inbuilt automation with accounting software means your tax returns can be calculated in the background while you work and can then be submitted electronically meaning you don’t have to post anything to HMRC. You also get more time to complete your tax returns as the deadlines for digital filing are later than for paper filing.

Enhanced Accuracy

Manual calculations are needed when completing paper-based tax returns which always exposes you to the risk of human error. With MTD-compatible software, automated calculations and validation significantly increase the chances of your filings being error-free. Better accuracy also helps you to stay compliant and avoid investigations, fines or penalties from HMRC.

Real-Time Insights and Reporting

Providing quarterly updates to HMRC means you have to stay on top of your bookkeeping and tax obligations and keep your records relatively current. Accounting software will also provide you with a host of insightful reports including cash flow forecasts, profit and loss and balance sheets to give you a real-time snapshot of the financial health of your business.

Tips for Success with Making Tax Digital

It pays to find the right MTD-compliant accounting software so it’s a good idea to do your research to find software that has great reviews, fits your needs and is HMRC-approved. Key things to look out for include integration so you can be sure the software you choose is compatible with your bank or other tools that you use, for example. Comprehensive automation, intuitiveness, security and ease of use are also paramount as well as solid customer support in case you have any queries or issues.

There will of course be a cost involved whether you get the software directly or by engaging with an accountant who would supply it as part of their monthly fee, but you should view this as an investment in your business to improve efficiency and accuracy as well as ensuring compliance.

It’s also important to safeguard your records and personal information from malicious activity so be sure to enable all authentication options such as two or multi-factor authentication and use strong passwords and make regular back-ups of your data.

Making Tax Digital is easier for early adopters so it pays to switch paper records to digital sooner rather than later with MTD for ITSA coming into effect for sole traders in 2026. Start scanning and digitally storing invoices, receipts and other relevant documentation and make time each week or month to review your bookkeeping. The transition to Making Tax Digital will be much smoother for early adopters.

Engaging an accountant that’s experienced with Making Tax Digital can be a great help and this also offers a host of benefits beyond MTD-compliance.

Gorilla Accounting and FreeAgent

Making Tax Digital can seem daunting for sole traders that use paper-based accounting methods and it’s true to say that it is a big change to make the switch to digital, but it’s a big opportunity to streamline and improve the management of your tax obligations.

When you appoint Gorilla you receive full access to FreeAgent accounting software inclusive in our great value Sole Trader Accounting package.

FreeAgent is HMRC approved and fully Making Tax Digital compliant. It has won multiple industry awards and is designed for sole traders and the self-employed. You can do your bookkeeping on the go thanks to the powerful app and comprehensive automation means your tax returns are calculated in the background while you work and can be electronically submitted to HMRC at the click of a button.

With Gorilla, all your business and personal accounting needs will be expertly managed by your own dedicated accountant. They are on hand to provide you with unlimited support and advice including on using FreeAgent and ensuring that you are compliant with your MTD and tax obligations.

You are also guaranteed a same day response to your queries if you contact us before 3pm on any working day.

If you have any queries about Making Tax Digital, FreeAgent or our Sole Trader Accounting service, speak to an accountant today on 0330 024 0406 or request a callback here.