Making Tax Digital (MTD): What's Changing in 2025 for SMEs
Making Tax Digital is HMRC's initiative to digitize the UK tax system. With MTD for VAT already mandatory and Income Tax Self Assessment (ITSA) on the horizon, here's everything SMEs need to know about compliance, software requirements, and implementation timelines for 2025.
What's Covered:
What is Making Tax Digital?
MTD is HMRC's plan to make tax administration more effective, efficient, and easier for taxpayers through digitization. Key principles:
- ๐ฑ Digital record keeping - No more manual records or spreadsheets
- ๐ Quarterly updates - Regular submissions instead of annual returns
- ๐ค Software filing - Direct submission through approved software
- ๐ Real-time tax view - See your tax position throughout the year
- โ Reduced errors - Automated calculations and validations
MTD Timeline Overview:
- April 2019: MTD for VAT launched (businesses over VAT threshold)
- April 2022: MTD for VAT extended to all VAT-registered businesses
- April 2026: MTD for ITSA begins (self-employed & landlords over ยฃ50,000)
- April 2027: MTD for ITSA extends (income over ยฃ30,000)
MTD for VAT - Current Requirements
Who Must Comply Now?
ALL VAT-registered businesses must use MTD for VAT, regardless of turnover. This includes:
- Limited companies
- Sole traders
- Partnerships
- Charities
- Not-for-profit organizations
What You Must Do:
- Keep digital records in MTD-compatible software
- Submit VAT returns through software (not HMRC portal)
- Maintain digital links between software programs
- Preserve records digitally for 6 years
Digital Record Requirements:
Mandatory Records:
- Business name, address, VAT number
- VAT accounting scheme
- For each supply: Time, value, VAT rate, VAT amount
- For each purchase: Time, value, input tax amount
- EU acquisitions and dispatches
Exemptions (Limited):
- Religious organizations
- Businesses HMRC agrees can't go digital (rare)
- Temporary exemptions for insolvency
MTD for Income Tax Self Assessment (ITSA)
โ ๏ธ Delayed but Coming
Originally planned for April 2024, MTD for ITSA is now scheduled to begin in April 2026 following industry feedback.
Phased Rollout:
Phase 1 - April 2026:
- Self-employed individuals with income >ยฃ50,000
- Landlords with income >ยฃ50,000
- Partnerships with individuals meeting criteria
Phase 2 - April 2027:
- Self-employed individuals with income >ยฃ30,000
- Landlords with income >ยฃ30,000
New Requirements Under ITSA:
| Current System | MTD for ITSA |
|---|---|
| Annual tax return | Quarterly updates + End of Period Statement |
| Paper/spreadsheet records OK | Digital records mandatory |
| File via HMRC portal | File via MTD software only |
| 31 January deadline | Quarterly deadlines (1 month after quarter end) |
Quarterly Update Requirements:
- Business income - All sales and takings
- Business expenses - All allowable costs
- Property income - Rental receipts
- Property expenses - Maintenance, repairs, etc.
Who's Affected & When?
MTD for VAT (Now):
โ ALL VAT-registered businesses - No threshold
MTD for ITSA (From April 2026):
๐ Self-employed & landlords with qualifying income:
- 2026: Income over ยฃ50,000
- 2027: Income over ยฃ30,000
Not Yet Affected:
โ Employed individuals (PAYE only)
โ Limited companies (Corporation Tax not in MTD yet)
โ Income below ITSA thresholds
Calculating Your Income Threshold:
For ITSA, combine:
- Self-employment turnover (not profit)
- Property income (all rentals)
- Partnership share of turnover
- Foreign income
Excluded: Employment income, dividends, savings interest, pensions
MTD-Approved Software Solutions
Popular Options for SMEs:
Xero
- โ Full MTD compliance
- ๐ Complete accounting suite
- ๐ท From ยฃ14/month
- ๐ 600+ app integrations
- ๐ฑ Mobile app included
QuickBooks
- โ MTD ready
- ๐ Built-in reporting
- ๐ท From ยฃ10/month
- ๐งพ Invoice & expense tracking
- ๐ฆ Bank feed connections
FreeAgent
- โ MTD compliant
- ๐ฏ Designed for small business
- ๐ท From ยฃ14.50/month
- ๐ Real-time tax estimates
- ๐งฎ Auto bank reconciliation
Sage Business Cloud
- โ MTD enabled
- ๐ข Scalable solution
- ๐ท From ยฃ12/month
- ๐ฑ Mobile access
- ๐ Advanced security
Free/Low-Cost Options:
- HMRC's Free Software: Basic functionality for simple businesses
- Bridging Software: Connects spreadsheets to HMRC (from ยฃ15/year)
- Excel Plugins: For businesses wanting to keep spreadsheets
๐ก Tip: Choose software that handles both VAT and ITSA to avoid switching later.
Digital Links Requirement
What Are Digital Links?
Automated data transfer between software programs without manual intervention. Copy/paste is NOT a digital link.
โ Acceptable Digital Links:
- Formulas linking cells in spreadsheets
- Macros that automate data transfer
- API connections between software
- CSV imports/exports (automated)
- Integrated software suites
โ Not Acceptable:
- Manual copy and paste
- Retyping data
- Manual data entry
- Paper-based transfers
Example Compliant Process:
- Sales recorded in accounting software
- VAT calculated automatically
- Data flows to VAT return via formula/API
- Return submitted directly to HMRC
No manual intervention = Compliant โ
MTD Implementation Roadmap
6-Month Implementation Plan:
Months 1-2: Assessment & Planning
- โ Assess current systems and processes
- โ Identify data sources and flows
- โ Choose MTD software
- โ Budget for costs
- โ Create implementation timeline
Months 3-4: Setup & Migration
- โ Set up chosen software
- โ Migrate historical data
- โ Connect bank feeds
- โ Configure VAT settings
- โ Establish digital links
Months 5-6: Testing & Training
- โ Train staff on new system
- โ Run parallel with old system
- โ Test VAT calculations
- โ Submit test returns
- โ Document procedures
Common Implementation Challenges:
Challenge โ Solution:
- Multiple systems โ Use bridging software
- Staff resistance โ Provide thorough training
- Data quality issues โ Clean data before migration
- Cost concerns โ Start with basic package
- Technical difficulties โ Get professional help
Costs & Benefits Analysis
Implementation Costs:
| Cost Type | One-off | Ongoing (Annual) |
|---|---|---|
| Software licenses | - | ยฃ150-ยฃ600 |
| Training | ยฃ500-ยฃ2,000 | ยฃ200-ยฃ500 |
| Data migration | ยฃ500-ยฃ2,000 | - |
| Accountant support | ยฃ500-ยฃ1,500 | ยฃ500-ยฃ2,000 |
| System integration | ยฃ1,000-ยฃ5,000 | ยฃ200-ยฃ500 |
Quantifiable Benefits:
Time Savings:
- VAT return preparation: -75% time
- Error correction: -90% time
- HMRC queries: -60% reduction
- Year-end accounts: -50% time
Financial Benefits:
- Reduced accountancy fees: ยฃ500-ยฃ2,000/year
- Fewer errors/penalties: ยฃ200-ยฃ1,000/year
- Better cash flow visibility: 2-5% improvement
- Tax savings from better planning: ยฃ1,000+/year
ROI Calculation Example:
Small limited company (ยฃ200k turnover):
- Year 1 costs: ยฃ3,500 (setup + software)
- Annual costs: ยฃ1,200 (software + support)
- Annual savings: ยฃ3,000 (time + accuracy)
- Payback period: 14 months
- 5-year ROI: 215%
Need Help with MTD Compliance?
Don't wait until the last minute. Get MTD-ready with expert guidance.
Free MTD Readiness Assessment: We'll review your current systems, recommend suitable software, and create your implementation plan.
MTD Compliance Checklist
For VAT-Registered Businesses (Now):
- โ Sign up for MTD-compatible software
- โ Keep digital records of all VAT transactions
- โ Ensure digital links between systems
- โ Submit VAT returns through software
- โ Maintain digital records for 6 years
Preparing for ITSA (By 2026):
- โ Assess if you'll meet income thresholds
- โ Start keeping digital records now
- โ Choose software that handles both VAT and ITSA
- โ Practice quarterly reporting voluntarily
- โ Clean up your bookkeeping processes
Remember: MTD is not just about compliance - it's an opportunity to modernize your business finances and gain real-time insights that can improve decision-making and profitability.