With the first quarterly submissions due in early August, we interviewed Ellie Manners-Fenton, Client Finance Support Manager at SMH Group, on what should businesses be doing now, and what common mistakes are you seeing?
Making Tax Digital has been discussed for several years, but many businesses are only now beginning to feel its impact. Could you briefly explain what MTD is and who it currently affects?
Making Tax Digital moves tax reporting into software and away from once-a-year filing. The old routine of keeping a spreadsheet or a folder of invoices, sitting down at the year end and typing the figures into a tax return is no longer compliant. Records have to be kept digitally as you go and the numbers have to reach HMRC from that software rather than being manually re-keyed.
It went live for sole traders and landlords on 6 April this year for anyone whose gross self-employment and property income was over £50,000 on their 2024/25 return. They now file four quarterly updates and a Final Declaration instead of one Self Assessment. The threshold drops to £30,000 in April 2027 and £20,000 in April 2028.
From your conversations with clients, what are the biggest misconceptions or misunderstandings about Making Tax Digital?
Three come up regularly.
The first is the threshold. It is based on income, not profit. HMRC looks at gross turnover and gross rents before a single expense comes off, so a business turning over £60,000 and making £25,000 is in scope. It also combines the two, so someone with £30,000 of self-employment and £25,000 of rent is caught even though neither is near £50,000 on its own.
The second is the fear that it means four tax returns a year. It doesn’t. A quarterly update is a summary of income and expenses by category, with no reliefs or adjustments. Those still happen once, at the Final Declaration.
The third is assuming HMRC will switch you over automatically. You have to sign up yourself, or have your agent do it. A letter saying you are in scope is not the same as being enrolled.
What practical steps should businesses be taking now to prepare for MTD? Are there any common mistakes that can easily be avoided?
The first step is make sure you have a working Government Gateway account, then sign up for MTD and get suitable software in place. Those are three separate jobs and people tend to assume they are one.
A separate bank account for your trade or rental income also makes life easier. It isn’t a requirement, but when business and personal transactions run through the same account, these have to be identified and separated every quarter.
The mistake I would most want people to avoid is letting the software choice be made for them. Banks now bundle free MTD tools with business accounts and for a straightforward sole trader that can be fine. But if it doesn’t suit your situation, a landlord with several properties, say, the work doesn’t disappear. It resurfaces at the Final Declaration, with less time to do it.
What are the benefits of embracing digital record keeping and cloud accounting beyond simply complying with HMRC’s requirements?
The main benefit is knowing where you stand during the year rather than months after it has ended.
If your records are up to date, you can see your figures and roughly what your tax bill will be. That is useful information to have while you can still act on it. It might mean putting prices up, chasing a debt, or working out whether you can afford to take someone on.
Under annual accounts you get that picture once a year, by which point the decisions have already been made.
Have you seen businesses delay their preparations? If so, what risks do they face by leaving it too late?
Yes, and it is understandable. This was announced years ago and put back more than once, so a lot of people assumed it would be delayed again.
The risk this year is not really penalties. HMRC is running a soft landing for 2026/27, so there are no penalty points for late quarterly updates. That relief is narrower than people think though. It doesn’t cover the Final Declaration, and it doesn’t cover late payment, where interest runs from the due date.
The bigger problem is the records themselves. If you haven’t been keeping them digitally since April, twelve months of transactions can’t be put together in a fortnight.
How can accountants help make the transition to Making Tax Digital less daunting for business owners?
Mostly by doing the work rather than explaining it. Most business owners don’t want a briefing on the legislation. They want to know whether it applies to them, what they have to do differently, and what it will cost.
In practice that means checking someone’s qualifying income for them instead of asking them to work it out, recommending software that suits their situation instead of handing over a list, and doing the sign up and authorisations at this end.
It also means being straight about the cost. There is more admin here, particularly in the first year, and saying otherwise doesn’t help anyone.
Looking ahead, do you see Making Tax Digital changing the relationship between accountants and their clients? Will it allow accountants to provide more proactive advice rather than focusing on year-end compliance?
There is a real opportunity in it. Four points of contact through the year instead of one annual touchpoint builds a much stronger relationship with the client, and it opens the door to more support where they need it rather than a set of accounts arriving nine months after the event.
Of course there is a cost. Fees are going up and that is not an easy conversation to have, but being upfront about it is the only way it works.
Finally, if you could offer one piece of advice to Yorkshire businesses preparing for Making Tax Digital, what would it be?
Get the software in place now, before you have to. Work out when you are likely to be caught and then start moving your records across while there is no deadline attached. A few months of getting used to it makes all the difference.
Speak to your accountant before you choose. Which software suits you depends on whether you have property income, how many sources you have, and how you work, and it is much easier to get that right at the outset than to change later.
Image credit: Ellie Manners-Fenton, SMH Group
