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Making Tax Digital: What Small Businesses Need in Place Now

16 March 2026 · 11 min read

Making Tax Digital: What Small Businesses Need in Place Now

For many small business owners, Making Tax Digital (MTD) still feels like something that is coming later. But for some businesses, it is already here, and for many sole traders and landlords, the next phase starts from 6 April 2026. The businesses that prepare early will find the transition far easier than those that leave it until the last minute.

The key point is this: Making Tax Digital is not just about filing tax online. It is about keeping the right records digitally, using compatible software, and having a reliable process for staying compliant throughout the year.

If you run a small business, are self-employed, or earn income from property, now is the time to get your systems in order.

What is Making Tax Digital?

Making Tax Digital is HMRC’s programme to move the UK tax system onto a more digital footing. In practical terms, it means certain taxpayers must keep digital records and use software that works with HMRC to send information electronically. For VAT, this is already the norm for VAT-registered businesses. For Income Tax, the rollout is beginning in phases for sole traders and landlords.

The aim is to reduce errors, improve record-keeping, and make tax reporting more up to date. Whether or not every business owner finds it simpler in practice, the direction of travel is clear: manual, last-minute, paper-heavy tax admin is being phased out.

Who needs to act now?

This depends on the type of tax involved.

1. VAT-registered businesses

If your business is VAT-registered, you should already be following Making Tax Digital for VAT rules unless you are exempt. HMRC says all VAT-registered businesses should now be signed up, and VAT returns must be kept and submitted using compatible software.

2. Sole traders and landlords

For Making Tax Digital for Income Tax, the next deadlines are important:

  • If your qualifying income from self-employment and property is over £50,000 in the 2024 to 2025 tax year, you must use MTD for Income Tax from 6 April 2026.

  • If your qualifying income is over £30,000 in the 2025 to 2026 tax year, you must use it from 6 April 2027.

  • The government has also set out plans to bring in those with qualifying income over £20,000 from April 2028.

This means many self-employed people and landlords should already be preparing, even if they are not yet legally required to switch.

What small businesses need in place now

The businesses that cope best with Making Tax Digital are not necessarily the biggest. They are the ones with the right basics in place.

1. Digital record-keeping

The first requirement is straightforward: your records need to be digital.

For VAT, HMRC requires digital records to be kept in functional compatible software. For Income Tax, MTD users will also need to create, store and correct digital records of self-employment and property income and expenses using compatible software.

That means relying on scattered paper receipts, handwritten notebooks, or a rushed annual spreadsheet is becoming increasingly risky. Even where spreadsheets are used, they usually need to form part of a compliant digital process rather than being detached from the submission system. For VAT in particular, HMRC’s rules also cover digital links between parts of the record-keeping journey.

What to put in place now:

  • A single system for recording sales and income

  • A consistent method for capturing expenses and receipts

  • Digital storage for invoices and supporting documents

  • A process for keeping records up to date throughout the month, not just at year end

2. Compatible accounting software

MTD is not just about any software. It needs to be software that works with HMRC’s systems.

HMRC provides lists of software compatible with Making Tax Digital for VAT and Making Tax Digital for Income Tax.

For a small business, the right software should do more than tick a compliance box. It should also make life easier by helping with:

  • bookkeeping

  • invoicing

  • VAT returns

  • expense tracking

  • quarterly updates where needed

  • visibility over profit and tax position

Choosing the right platform now matters because changing software under pressure later often leads to errors, duplicated work, and missed deadlines.

3. Clear internal processes

One of the biggest problems small businesses face is not a lack of software. It is a lack of process.

You can have a good accounting package and still be disorganised if:

  • receipts are not uploaded on time

  • bank transactions are not reviewed regularly

  • income is not categorised properly

  • someone only looks at the books once a quarter or once a year

MTD works better when the underlying habits are sound. Small businesses should have a simple monthly routine for:

  • reconciling bank accounts

  • checking sales and purchase entries

  • reviewing VAT treatment

  • identifying missing paperwork

  • asking their accountant questions early

This is especially important for sole traders and landlords who will need to send quarterly updates under MTD for Income Tax. HMRC says updates must be sent every 3 months for each self-employment and property income source.

4. Better visibility over deadlines

A surprising number of businesses are not non-compliant because they are careless. They are non-compliant because deadlines creep up on them.

Under MTD for Income Tax, the shift to quarterly reporting means businesses need to think in a more regular rhythm. On top of that, there are penalty changes linked to the new regime. HMRC has published updated guidance confirming that a new late submission and late payment penalty system applies from the tax year in which a person joins MTD for Income Tax.

This makes deadline management more important than ever.

What to put in place now:

  • a compliance calendar

  • software reminders

  • regular bookkeeping dates in the diary

  • a named person responsible for records, even in a very small business

  • regular check-ins with your accountant

5. A relationship with an accountant who understands MTD

Many small businesses assume Making Tax Digital is mainly an admin issue. In reality, it is a systems issue.

A good accountant can help you:

  • identify whether MTD applies to you now or soon

  • choose suitable software

  • set up digital processes properly

  • avoid common classification errors

  • stay ahead of deadlines and penalties

  • use the move to digital records as an opportunity to improve visibility over cash flow and tax liabilities

For many businesses, the goal should not simply be “becoming compliant.” It should be building a finance system that is cleaner, more reliable, and less stressful.

What about exemptions?

Not every business or taxpayer will have to follow MTD rules.

For VAT, HMRC says you can apply for an exemption if it is not reasonable or practical for you to use computers, software or the internet because of factors such as age, disability, location, or religious grounds.

For Income Tax, HMRC also provides exemptions, including some cases of digital exclusion, and notes that some exemptions are automatic depending on circumstances. HMRC’s current guidance also says those with qualifying income of £20,000 or less are automatically exempt from MTD for Income Tax unless circumstances change.

That said, most small businesses should not assume exemption will apply. It is far safer to check your position properly and prepare early.

Common mistakes small businesses should avoid

As Making Tax Digital becomes more widespread, a few avoidable mistakes keep showing up.

Waiting until the last minute

Businesses often leave software setup and process changes too late. That leads to rushed implementation and confusion.

Assuming spreadsheets alone are enough

Some businesses still believe any spreadsheet will do. In practice, compliance depends on how records are kept, linked, and submitted.

Mixing personal and business spending

This makes digital record-keeping harder and increases the chance of errors.

Treating bookkeeping as an annual task

MTD pushes businesses toward regular, ongoing record-keeping. Leaving everything to year end becomes less workable.

Not checking whether Income Tax changes will affect you soon

A sole trader or landlord may think MTD is a future issue when, based on qualifying income, it may apply from April 2026 or April 2027.

Why acting now is the smart move

There is a practical benefit to getting ready before you are forced to.

Early preparation gives you time to:

  • test software properly

  • train staff or adjust your own habits

  • clean up messy records

  • build a routine for digital submissions

  • spot tax issues earlier in the year

  • avoid panic close to the start date

HMRC also allows some eligible businesses to sign up voluntarily for MTD for Income Tax before it becomes mandatory, which can help them get used to the system in advance.

Done properly, this is not just about compliance. It can help small businesses run with better financial discipline.

Final thoughts

Making Tax Digital is no longer something small businesses can afford to ignore. For VAT-registered businesses, it is already part of the landscape. For many sole traders and landlords, the next stage starts from 6 April 2026, with further expansion after that.

The businesses in the best position will be those that put the essentials in place now:

  • digital records

  • compatible software

  • reliable bookkeeping processes

  • deadline management

  • the right professional support

At FinanceProf, we help small businesses move beyond reactive bookkeeping and get properly set up for what HMRC requires now and next. If you want clarity on whether Making Tax Digital affects you, what software to use, or how to put the right systems in place, getting advice early can save a lot of time, stress and cost later.