Entrepreneur with red bag walking down a hallway on the phone

How to prepare your business for Making Tax Digital

June 8, 2022
Since April 2022, all VAT-registered small businesses have been required to store VAT records and submit VAT returns digitally in order to comply with the government initiative Making Tax Digital. Formerly only affecting businesses earning above the VAT threshold, this move marks the next step in the government’s ambition to digitalise tax data storage and submission, with the complete rollout of Making Tax Digital for VAT being just the beginning.

While Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) isn’t due to come into effect until 2024, qualifying business owners will need to make sure they’re ready for when the time rolls around. Without the right equipment to hand, business owners risk having their tax returns rejected by HMRC, leading to submission delays and late payment penalties.That being said, we’ll be going through step-by-step how to prepare your business for Making Tax Digital.

What is Making Tax Digital?

Making Tax Digital, or MTD, is a government initiative introduced by HM Revenue and Customs (HMRC) to digitalise tax data and tax submissions, completely replacing paper records and manual tax returns for all self-employed business owners in the long run.Under this scheme, qualifying businesses will need to start digital record keeping, and submit tax returns using either MTD-compliant accounting software or bridging software that converts data stored in spreadsheets into an MTD-compatible submission.With MTD in place, HMRC predicts business owners will make fewer errors in their tax submissions, increasing the likelihood HMRC will receive the they’re tax owed on time while minimising the risk of incurring a late payment penalty.

How to prepare your business for Making Tax Digital

Whether you’re expecting to register for VAT soon or are looking to get ahead on MTD for Income Tax, being prepared for MTD can make the transition period from paper to digital much easier.Luckily you can get your business ready for MTD in 3 easy steps: by checking when you need to sign up, finding the right MTD-compatible software for you, and finally registering your business for MTD with HMRC.

Check when you need to register

Since April 2019, all VAT-registered business owners earning above the £85,000 VAT threshold have been required to store digital records and file their VAT returns via MTD. This expanded to encompass all VAT-registered business owners in April 2022, including those who had registered voluntarily but were earning below the VAT-threshold.

With this in mind, self-employed business owners and sole traders looking to register for VAT will need to make sure they’re fully prepared to implement MTD into their businesses. As a result, whether you’re approaching the threshold or are planning to register for VAT voluntarily, you’ll need to implement MTD immediately.
However, if you’re already VAT-registered but haven’t yet signed up to MTD for VAT, make sure you don’t register until the all your non-MTD VAT returns have been filed at the end of your VAT period. Registering for MTD in the middle of a VAT period means you won’t be able to finish processing your VAT return through your Government Gateway online account and, as a result, you may be fined.

You can work out when you need to sign up to MTD for VAT using the table below:
Your last VAT accounting period before signing up to Making Tax DigitalSubmit your VAT return betweenDo not sign up to Making Tax Digital fromSign up to Making Tax Digital fromYour first Making Tax Digital accounting period
1 Jan to 31 March 20221 April to 7 May 202228 April to 7 May 20228 May 20221 April to 30 Jun 2022
1 Feb to 30 April 20221 May to 7 June 202231 May to 7 June 20228 June 20221 May to 31 July 2022
1 March to 31 May 20221 June to 7 July 202229 June to 7 July 20228 July 20221 June to 31 August 2022
1 March to 31 March (monthly submissions)1 April to 7 May 202228 April to 7 May 20228 May 20221 April to 30 April 2022
A period of 12 months starting on or after 1 April 2021 and before 1 April 2022 (annual submissions starting on the first day of a calendar month)2 months after the last day of your accounting periodThe7 working days before your Making Tax Digital VAT return needs to be submittedThe day after your VAT return due date until 7 working days before your next VAT Return due date (almost a full year)A period of 12 months starting on or after 1 April 2022
Source: gov.uk

MTD for Income Tax and for Corporation Tax aren’t due to be introduced until 2024 and 2026 respectively, but having the software in place can make it easier to adjust when the legislation comes into effect. It’s also worth noting that while the registration threshold hasn’t been defined for MTD for Corporation Tax, MTD for ITSA will be applicable to any self-employed worker earning above £10,000 in a tax year.We’ve summarised the full timeline for the Making Tax Digital scheme’s rollout in the table below:
DateMTD Legislation
April 2019VAT-registered businesses earning above the VAT threshold (£85,000) must store records digitally and submit VAT returns through MTD.
April 2022All VAT-registered businesses, irrespective of turnover, must submit returns through MTD (including voluntarily VAT-registered businesses earning below £85,000).
April 2024Self-employed workers and landlords earning above £10,000 in a tax year must submit their Income Tax Self Assessment through MTD.
April 2026MTD for Corporation Tax planned to come into effect.

Find the right MTD-compatible software for you

After establishing when you need to register your business for MTD, the next step is to find the right HMRC-approved MTD-compatible software for your business you can use to complete your tax returns. You can find the full list of HMRC-approved Making Tax Digital software over at GOV.UK.

If you use spreadsheets to store your digital data, you’ll need to find an MTD-compliant bridging software that can convert your data into an MTD-compatible submission. Alternatively, you can use an accounting software that records and securely stores your tax data before sending it off to HMRC — such as Ember.

With Ember, you can automatically generate, review and submit your VAT returns to HMRC directly from the app, with Pro and Unlimited users able to access readily available VAT support from our in-house team of qualified accountants.

Register for Making Tax Digital with HM Revenue and Customs (HMRC)

After settling on an MTD-compatible accounting software, you’ll need to register your business for MTD as soon as you’re eligible to do so.

Making Tax Digital for Income Tax

As mentioned above, if you’re registering for MTD for VAT make sure you register after filing your final non-MTD VAT return in order to allow any current VAT returns on your online VAT account to finish processing.To register for MTD for VAT, you’ll need your:
    Business email address Government Gateway ID and password VAT registration number Latest VAT return National Insurance number if you’re a sole trader Company registration number and Unique Taxpayer Reference (UTR) if you’re a limited company UTR and the postcode where you’re registered for Self Assessment if you’re a general partnership UTR, the postcode where you’re registered for Self Assessment and your company’s registration number if you’re a limited partnership
With the above information to hand, you can then head over to GOV.UK to register your business for MTD for VAT.

To avoid paying twice, make sure you don’t sign up less than 7 days before or less than 5 days after your VAT return is due.
After you’ve signed up you’ll receive a confirmation email from [email protected] within 3 days. Avoid submitting a return until you have confirmation from HMRC that your registration has been acknowledged, and if you still haven’t heard after 3 days you can get in touch with HMRC here.

Making Tax Digital for Income Tax

While MTD for ITSA won’t be mandatory for Self Assessment taxpayers until 2024, you can voluntarily join the MTD for ITSA pilot if you are:
    A UK residentRegistered for Self Assessment with tax returns and payments that are up to dateA sole trader with income from one business, or a landlord who rents out UK property
If you need to report income from other sources or an income tax charge, you won’t be eligible for the MTD for ITSA pilot.Alongside meeting the above criteria, you’ll also need the following information close to hand:
    Business nameBusiness start date or the date you started collecting income from rentEmail addressNational Insurance numberAccounting periodAccounting type (e.g. cash or standard accounting)Government Gateway user ID and password