Making Tax Digital: what your business has to do and when

Making Tax Digital is HMRC’s programme for keeping tax records digitally and sending information to HMRC straight from software. For VAT, HMRC’s notice says it requires VAT-registered businesses to keep records digitally and file their VAT returns using software that talks to HMRC through its API.

For Income Tax, GOV.UK describes it as a new way for sole traders and landlords to do Self Assessment: you keep digital records, send quarterly updates and then submit your tax return through compatible software. This guide covers those two parts. Check GOV.UK for any other tax you pay.

Yes, it applies to every VAT-registered business, whatever its turnover. GOV.UK says all VAT-registered businesses should now be signed up, and HMRC signs up new VAT registrations automatically unless the business is exempt or has applied for an exemption.

In practice you keep the VAT records HMRC specifies in functional compatible software and send your return from it. Records that are not part of your return do not have to be kept in the software, and some documents, such as an import VAT certificate, must still be kept in their original form. If you are not VAT registered yet, see the VAT registration threshold guide, and if you later cancel, how to deregister for VAT.

You need it if you are a sole trader or landlord registered for Self Assessment, you have income from self-employment or property, and your qualifying income is above the threshold for the relevant tax year. The thresholds are being phased in, and GOV.UK sets out the dates below.

Partnerships will also need to use it in future, and HMRC says it will set out that timeline later. HMRC reviews your Self Assessment return each tax year and writes to you if you need to start, but if no letter arrives it is still your responsibility to check. You need to submit your Self Assessment return for the tax year before you start.

Qualifying income is your total income from self-employment and property before expenses, based on the tax return you submitted for the previous tax year. In other words it is turnover, not profit.

GOV.UK’s example is £25,000 of rental income plus £27,000 of self-employment income, which gives £52,000 of qualifying income. Other income does not count towards the threshold, including:

• Employment income through PAYE
• Your share of profit from a partnership as an individual partner
• Dividends, including those from your own company
• State Pension and private pensions

That last point matters for company directors. Making Tax Digital for Income Tax is aimed at sole traders and landlords, and dividends from your own company do not make you qualify. Ask your accountant how your own mix of income is treated. See our guide to a sole trader for the basics of self-employment.

For Income Tax you check you are in scope, get compatible software, sign up, keep digital records, send quarterly updates and submit your tax return. HMRC does not provide the software itself.

1. Check if and when you need to use it, including working out qualifying income and whether you are exempt.
2. Get compatible software, using HMRC’s software finder if you want to check what you already have.
3. Sign up and authorise your software, or have your agent do it.
4. Create digital records of self-employment and property income and expenses: the amount, the date and the category, using the same categories as Self Assessment.
5. Send a quarterly update every 3 months for each self-employment and property business.
6. Add any other income sources and submit your tax return through your software.

Some things stay the same: you still submit one tax return a year and pay your tax bill by 31 January following the end of the tax year. Our guide to UK tax year dates sets out the wider calendar.

Quarterly updates are due by the 7th of the month after each update period ends. If your accounting period matches the tax year you use standard update periods, shown in the table.

A quarterly update is a summary of totals, not a tax return, and it covers the start of the tax year to the end of the update period, so you can correct records without resending earlier updates. If your accounting period runs from 1 April to 31 March you can choose calendar update periods instead, with the same deadlines. You must send an update even if you had no income or expenses, and you can send it any time from the end of the update period up to the deadline.

You need software that creates digital records, sends HMRC your updates or returns and receives information back from HMRC. You can still use a spreadsheet, but it needs bridging software to link it to HMRC.

HMRC’s VAT notice explains that data moved between the programs that make up your records must travel by digital links, such as linked spreadsheet cells, file import and export or an API. Copy and paste is not a digital link. Whatever you choose, HMRC lists tested products on its software finder, and your accountant or bookkeeper may have a preferred option. Software costs vary and are not covered here, so compare them directly.

Late submissions are penalised with points, and a £200 penalty follows when you reach the threshold. The rules differ between VAT and Income Tax.

Yes, in limited cases. For VAT you are exempt if you are subject to an insolvency procedure, or you can apply if it is not reasonable or practical to use computers, software or the internet, for example because of your age, a health condition, a disability, where you live or religious objections.

You apply by calling or writing to HMRC and keep sending returns as usual until you receive a decision. Extra effort or cost of changing to software is not on its own enough. For Income Tax, GOV.UK says reasons such as being digitally excluded can qualify you for an exemption, and you must then still report income in a Self Assessment tax return.

Making Tax Digital is a compliance requirement and not something Capzy arranges. We are a credit broker, not a lender, and are paid by the lender. We do not give tax or accounting advice, so ask your accountant what applies to you.

What we can help with is the cash flow around tax. Quarterly reporting gives you earlier sight of your bill, and a cash flow forecast puts VAT and Income Tax payments in the plan. If a bill still outruns your cash, you can check your funding options with a soft search that does not affect your credit score, subject to status and lender criteria, or read about how to pay a VAT bill.