What is Making Tax Digital?

And What Do You Need to Know?

Making Tax Digital (MTD) is here

First announced in the 2015 Spring Budget, MTD is designed to transform the UK tax system for individuals and businesses. But do you know how this will affect you? 

Despite the importance of MTD, many contractors, sole traders and small business owners are still unaware of what the change means and how it will impact them.

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What is Making Tax Digital?

The legislation introduces digital record-keeping in order to make the tax system more efficient, effective and easier for both taxpayers and the government. The goal behind MTD is to help HMRC to become one of the world’s most digitally advanced tax administrations.

After April 2019, most businesses were required to file their VAT returns on a quarterly basis. Some businesses already file their VAT every three months but will now also need to record all transactions digitally on MTD-compliant tools, like our FreeAgent bookkeeping software.

If your business has a taxable turnover above the VAT threshold, currently set at £85,000, you will need to comply with Making Tax Digital. While you don’t need to opt-in if your VAT-registered business is below this threshold at the moment, HMRC encourages you to do so anyway. This is because all VAT returns must be stored and submitted digitally from April 2022 no matter your turnover.

Why is HMRC Implementing Making Tax Digital?

The government hopes to improve the UK tax experience by introducing MTD, but that’s not all; HMRC also intends to collect £4.8 billion by 2023 through this new process. With an estimated £9.4 billion in tax revenue missing due to errors or incorrect submissions, the government aims to reduce this by receiving quarterly tax reports and ensuring the storage of crucial documents and records in digital form.

Thousands of contractors, freelancers and SME owners still keep paper-based records or use Excel spreadsheets to keep track of their expenses or invoices. This, of course, can cause serious mistakes, such as lost documents and misremembered information.

Businesses can’t store information on paper or Excel anymore for the purpose of VAT submissions, so switching to an MTD-compliant alternative is crucial.

Who's Affected by Making Tax Digital?

At first, MTD applied to VAT-registered businesses with a turnover of more than £85,000, although businesses with a turnover below this figure could still join the scheme voluntarily – once inside the Making Tax Digital for VAT, a business needs to remain in MTD unless it’s no longer registered for VAT.

From April 2022, all businesses, even those that don’t meet the threshold, must register as well. This means that, if your taxable turnover is £50,000, for example, you still need to register and submit your returns through an MTD-compliant bookkeeping software.

April 2024 will also signify changes for Making Tax Digital, as sole traders and landlords will have to start complying with the rules as well. You can see more about this below.

In short, Making Tax Digital affects – or will affect – contractors, sole traders, landlords, locums and small business owners. in addition, as of now, VAT-registered businesses that must comply with Making Tax Digital for VAT include sole traders, partnerships, limited companies, non-UK businesses registered for UK VAT, and trusts and charities.

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Which Information Do You Need to Record Digitally?

With the introduction of MTD, you have to keep certain information as digital records. You must record and store each individual transaction digitally, especially as HMRC requires records to be as current as possible.

You will also have to keep certain information as digital records, including your business name, place of business, VAT registration number and rate of VAT charged. The accounting software you use must be capable of displaying the audit trail between records and VAT returns as well.

In addition, you must keep details on supplies you made and received, as well as their time and value. Your records will need to be stored digitally for six years.

It’s important to consider digital links too. This means that you must link to email records and imported XML files, for instance, and can’t simply ‘copy and paste’ data or make manual changes.

The Benefits of Making Tax Digital

As contractor accountants, we understand that Making Tax Digital feels like a big change; however, we also know there are several benefits to the introduction of this legislation.

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Concerns with Making Tax Digital

From online shopping to online banking, digitalisation and technology are now an integral part of our daily lives; the next natural step is for taxes to be digitised, as well. However, while many businesses are affected by MTD, not all understand exactly what that means.

It’s crucial that sole traders, locums and contractors remain on top of the latest news regarding MTD so that they can stay compliant – we can help you do that. As expert accountants, we’ll clarify any confusion about this legislation so that you don’t have to worry about possible penalties.

Another concern about MTD is internet speed. Rural areas can suffer from slow broadband speeds, leading to issues and difficulties for business owners. MTD relies on good connectivity, so self-employed individuals may find it hard to update HMRC quarterly if their Internet speed is slow.

It’s also expected that some businesses will find it difficult to transition from paper-based processes to digital ones.

Making Tax Digital for Income and Corporation Tax

Currently, MTD only applies to VAT, but this will change in a few years. Digitalisation will come to income tax after 6 April 2024 for self-employed businesses and for landlords with an income of over £10,000.

This means sole traders will also be affected. Just like with VAT, you can choose to start keeping records digitally and update HMRC regularly instead of filing a self-assessment return, although it’s not obligatory before 2024. This would mean replacing the self-assessment with five reports, four quarterly and one year-end submission.

The dates for these reports are:

  • Q1 – from 6 April to 5 July (deadline is 5 August)
  • Q2 – 6 July to 5 October (deadline is 5 November)
  • Q3 – 6 October to 5 January (deadline is 5 February)
  • Q4 – 6 January to 5 April (deadline is 5 May)

The end-of-year statement needs to have all required information and documentation asserting that everything is correct and complete, and must be filed by 31 January after the relevant tax year.


As for corporation tax, businesses will have the chance to start complying with MTD in a pilot initiative soon, though the mandatory use won’t begin before 2026.

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What About Non-Compliance with MTD?

If your business must comply with MTD but doesn’t, you’ll face a penalty system that applies to the first VAT return you filed after 1 April 2021. This refers to a default surcharge that lasts for 12 months, another surcharge if you fail to comply again (applied to the VAT due on your latest return), and a points-based system if you continue to fail in your compliance.

The surcharge owed is calculated as a percentage of the VAT that’s unpaid by the due date. The percentage for the first late payment during this period will be 2% of the outstanding VAT; this fee will progressively increase to 5%, 10% and 15% for further payments.

You will likely be fined if your VAT return is not error-free as well, so make sure that all details are correct – as contractor accountants, we can help you stay on top of your returns to ensure all information is on point.

Using FreeAgent as Your MTD-Compliant Software

The accounting software you choose to keep your digital records need to be compliant with Making Tax Digital. As mentioned, FreeAgent bookkeeping software, which we offer to our clients when you work with us, is a good example of that.

This cloud-based system can be accessed anywhere, from your browser to your smartphone, and will always keep your information secure. Security is key when handling financial data, and FreeAgent will keep your information safe and sound, even in the event of a computer crash or if you accidentally delete a very important file. All of your financial data is safely transferred to FreeAgent’s backup servers several times an hour.

You won’t have to worry about when to submit your digital VAT returns either, as FreeAgent has been helping contractors, locums, sole traders and small business owners do this for the last eight years. With this software, you can track your expenses and income easily and quickly without any hassle.



Get in Touch with Gorilla Accounting

Ensuring your compliance with Making Tax Digital is vital and peace of mind is priceless. Our expert Gorilla Accounting team will handle MTD for you, so you won’t have to stress about non-compliance, freeing you up to focus on what really matters: your business. We have many years of financial experience and vast knowledge of UK legislation, which we put to good use for all of our customers.

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