The Key Things to Know About Tax Going Digital

by | Mar 27, 2025 | Local News | 0 comments

The Key Things to Know About Tax Going Digital

The shift towards digital tax systems is transforming the way individuals and businesses manage their finances. In the UK, Making Tax Digital (MTD) is at the forefront of this change, requiring businesses and individuals to keep digital records and submit tax returns using compatible software. While this modernisation aims to make tax reporting more efficient, it also presents challenges that experienced accountants Bangor and business owners need to prepare for.

Here’s what you need to know from an accountant’s perspective about tax going digital.

1. What Is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a government initiative aimed at simplifying and improving tax administration by requiring businesses and individuals to keep digital records and submit returns electronically.

The primary goals of MTD are:

  • Reducing errors in tax reporting
  • Making tax submissions more efficient
  • Providing real-time tax information for better financial planning

MTD has already been introduced for VAT-registered businesses, and further phases will expand it to Income Tax Self Assessment (ITSA) and Corporation Tax in the coming years.

2. Who Needs to Comply with MTD?

MTD for VAT

  • Since April 2019, all VAT-registered businesses with a taxable turnover above £85,000 must use MTD-compatible software to submit their VAT returns
  • Since April 2022, this requirement expanded to all VAT-registered businesses, regardless of turnover

MTD for Income Tax Self Assessment (ITSA)

  • From April 2026, self-employed individuals and landlords earning more than £50,000 per year must comply with MTD
  • From April 2027, those earning £30,000–£50,000 will also be required to follow MTD rules

MTD for Corporation Tax

  • HMRC has announced that MTD for Corporation Tax will not be introduced before April 2026, but details are still being finalised.

If you’re an accountant, advising your clients on their MTD obligations is crucial, as failing to comply could result in penalties.

3. What Are the Benefits of MTD?

While some businesses see MTD as an administrative burden, it also offers significant advantages, including:

Reduced Errors and Improved Accuracy

  • Digital tax filing reduces common mistakes from manual record-keeping
  • HMRC estimates that tax errors cost billions each year—MTD helps prevent these mistakes

Real-Time Tax Visibility

  • Instead of waiting until the end of the tax year, businesses can track their tax liabilities in real time
  • This helps in better financial planning and avoiding unexpected tax bills

Increased Efficiency and Time-Saving

  • Digital record-keeping automates many tasks that were previously done manually
  • Cloud-based software allows businesses to link bank transactions directly to their tax records

4. Choosing the Right MTD-Compatible Software

To comply with MTD, businesses and accountants must use MTD-compatible software that integrates with HMRC’s digital system. Popular options include:

  • Xero – Ideal for small businesses, integrates with HMRC for seamless VAT and tax reporting
  • QuickBooks – Offers automated bookkeeping, invoicing, and tax submission tools.
  • Sage – Provides scalable accounting solutions for businesses of all sizes
  • FreeAgent – Best for freelancers and small business owners with simple tax needs 

Encouraging clients to transition to cloud-based software early can help avoid last-minute compliance issues.

5. How to Prepare for MTD as an Accountant

As an accountant, guiding your clients through MTD is crucial. Here’s how you can prepare:

Educate Clients on Their Responsibilities

Not all businesses are aware of their MTD obligations. Offer training sessions, guides, or one-on-one consultations to help them understand the changes.

Transition Clients to Digital Software Early

Many businesses still rely on spreadsheets or manual bookkeeping. Helping them migrate to MTD-compatible accounting software before deadlines approach can ensure a smoother transition.

Automate Processes for Efficiency

Using tools that allow bank feed integration, automated invoicing, and real-time tax calculations can make compliance much easier.

Stay Updated on MTD Changes

HMRC regularly updates its MTD guidance. Keeping track of policy changes, deadlines, and exemptions will help provide accurate advice to clients.

Offer MTD Compliance as a Service

Businesses may struggle with digital tax compliance, so offering MTD advisory services can help accountants expand their client base.

6. What Are the Challenges of MTD?

While MTD brings many benefits, there are challenges accountants and businesses must navigate:

Resistance to Digital Adoption

Some businesses, particularly small ones, are reluctant to switch from traditional methods to digital record-keeping.

Increased Costs for Software and Training

Some MTD-compliant software requires a subscription fee, which can be a barrier for small businesses. Clients may also need training to use new accounting software effectively.

Compliance Complexity for Some Businesses

Businesses with multiple income streams, complex VAT arrangements, or international transactions may face additional compliance hurdles.

Providing tailored guidance can help businesses overcome these challenges.

7. What Happens If You Don’t Comply?

Failure to comply with MTD can result in penalties from HMRC. The penalties will depend on the type and frequency of non-compliance. HMRC is introducing a new points-based penalty system, where:

  • Late submissions will result in penalty points
  • Repeated non-compliance will lead to fines
  • Businesses exceeding a certain number of points may face higher penalties

Avoiding penalties requires ensuring all records are kept digitally and tax returns are filed on time using MTD-compatible software.

Accountants Play a Key Role in MTD Transition

As tax moves into the digital era, accountants play a crucial role in helping businesses and individuals adapt to MTD requirements. While the transition presents challenges, early adoption of digital tools and proactive planning can make compliance much easier.

Key Takeaways:

  • MTD is already mandatory for VAT, and Income Tax Self Assessment will follow in April 2026
  • Using MTD-compatible accounting software is essential for compliance
  • Accountants must educate and guide clients through the transition
  • Failure to comply can lead to penalties, so businesses should act now

For businesses and accountants alike, embracing digital tax is not just about compliance, but about future-proofing financial management and improving efficiency.