Making Tax Digital for SMEs means keeping certain tax records digitally and submitting information to HMRC through compatible software. For small and medium-sized businesses, this can affect bookkeeping, VAT reporting and the way financial information is managed throughout the year.
The transition does not need to be complicated. This guide explains how SMEs can prepare, choose suitable software, keep accurate records and avoid common mistakes.
What Does Making Tax Digital Require?
Making Tax Digital is HMRC’s system for moving tax administration towards digital record keeping and software-based reporting.
Depending on your circumstances, you may need to:
- Keep specified financial records digitally
- Use software that works with HMRC
- Maintain accurate income and expense records
- Submit VAT returns or Income Tax updates digitally
- Review and correct information before final submission
All VAT-registered businesses are generally required to keep digital VAT records and submit VAT returns through compatible software. Making Tax Digital for Income Tax applies separately to eligible sole traders and landlords.
Step 1: Check Which Rules Apply To You
Do not buy software or change your bookkeeping process until you know which Making Tax Digital requirements apply.
Your obligations may depend on:
- Whether you are VAT registered
- Whether you are a sole trader or landlord
- Your qualifying self-employment and property income
- Whether an exemption applies
- The type of tax information you need to submit
Limited companies are not currently included in Making Tax Digital for Income Tax. However, a limited company that is VAT registered must still comply with Making Tax Digital for VAT.
HMRC provides an online checker for sole traders and landlords who are unsure when they need to start using Making Tax Digital for Income Tax.
Step 2: Choose Compatible Accounting Software
Choose software that supports the relevant Making Tax Digital service and works with HMRC. Before deciding, check:
- Which taxes it supports
- Whether HMRC lists it as compatible
- Whether it connects to your business bank account
- How easily you can upload invoices and receipts
- Whether your accountant can access the records
- Whether it suits the size and complexity of your business
The most expensive software is not automatically the best choice.A smaller business with straightforward records may need a simpler system than a growing SME managing VAT, payroll, multiple bank accounts and higher transaction volumes.
HMRC maintains an official list of software that is compatible with Making Tax Digital for VAT.
Step 3: Set Up Your Digital Records Properly
Software will only be useful when the information entered into it is accurate.
Your initial setup may need to include:
- Business bank accounts
- Opening balances
- Customer and supplier details
- Income and expense categories
- VAT settings
- Outstanding invoices and bills
- Business loans and assets
Keeping business and personal spending separate can make the process much easier. A dedicated business account reduces the number of personal transactions that need to be removed or explained.
Bank feeds can also save time, but imported transactions still need to be checked and categorised correctly.
Step 4: Keep Your Bookkeeping Up To Date
Making Tax Digital works best when bookkeeping becomes a regular routine rather than a task left until the deadline.
A simple weekly or monthly process could include:
- Uploading invoices and receipts
- Reviewing imported bank transactions
- Matching payments to invoices
- Categorising income and expenses
- Checking for duplicate entries
- Reconciling each bank account
For growing SMEs, maintaining accurate digital records throughout the year also provides better visibility of cash flow, profitability and business performance.
Step 5: Review The Figures Before Submission
Compatible software can make reporting faster, but it cannot guarantee that the underlying information is correct.
Before submitting anything to HMRC, check for:
- Missing sales or expenses
- Duplicate transactions
- Personal costs recorded as business expenses
- Incorrect VAT rates
- Transfers recorded as income
- Unreconciled bank balances
- Missing CIS deduction statements
- Receipts that have not been matched to transactions
Before submitting information to HMRC, review your records carefully to make sure they’re complete and accurate.
Common Making Tax Digital Mistakes
Assuming The Software Does Everything
Software processes the information it receives. It may not recognise that a transaction is personal, duplicated or placed in the wrong category.
Leaving Bookkeeping Until The Deadline
Quarterly reporting does not mean records should only be updated every three months. Regular bookkeeping reduces pressure and makes errors easier to spot.
Using Incompatible Software
Not every bookkeeping package can submit information to every Making Tax Digital service. Check compatibility before committing to a system.
Failing To Reconcile Bank Accounts
A difference between the bookkeeping records and the bank balance may indicate missing, duplicated or incorrectly recorded transactions.
Keeping Receipts Without Recording Them
Saving a digital receipt is useful, but the related transaction must still be entered correctly within the accounting records.
A Simple Making Tax Digital Checklist
Before your first submission:
- Confirm which rules apply
- Check your required start date
- Select compatible software
- Set up the correct accounts and categories
- Create a process for storing receipts
- Decide who will maintain the bookkeeping
- Update records regularly
- Reconcile bank accounts
- Review figures before submission
- Ask for advice where anything is unclear
A consistent routine will usually make digital reporting far more manageable than trying to reconstruct records shortly before a deadline.
When Should You Ask An Accountant For Help?
As an SME grows, accounting requirements often become more complex. Professional support can be particularly valuable if you have:
- Several income sources
- VAT and Income Tax obligations
- CIS deductions
- Incomplete historic records
- Multiple bank accounts
- Uncertainty about allowable expenses
- Limited time to maintain regular bookkeeping
An accountant can help you check which requirements apply, select suitable software, correct existing records or manage ongoing bookkeeping and submissions.
CG Accounting Services Ltd supports SMEs, sole traders and landlords with straightforward accounting advice backed by 10+ years of experience.
Frequently Asked Questions
Does Every Small Business Need To Use Making Tax Digital?
No. The requirements depend on factors including VAT registration, business structure, income sources and qualifying income.
Can I Use A Spreadsheet?
A spreadsheet may form part of a compliant system, but it may need to connect with compatible software using the required digital links. Check that the complete setup meets HMRC’s requirements.
Do Quarterly Updates Replace The Tax Return?
No. Quarterly Income Tax updates are summaries rather than tax returns. The annual figures must still be checked, adjusted where necessary and finalised.
Can An Accountant Submit Updates For Me?
Yes. An authorised accountant can manage relevant Making Tax Digital submissions using compatible software, provided they receive complete and accurate records.
What Accounting Software Can I Use For Making Tax Digital?
HMRC requires businesses to use compatible software for Making Tax Digital. The right solution depends on your business size, reporting requirements and bookkeeping needs. Before choosing a package, check that it supports the relevant Making Tax Digital service and can submit information directly to HMRC.
Prepare Your Business For Digital Reporting
Making Tax Digital becomes easier when accurate record keeping is part of your normal business routine.
Start by checking which rules apply, choosing suitable software and keeping your records up to date. Acting early makes compliance much easier.
For practical support with digital records, bookkeeping or Making Tax Digital submissions, contact CG Accounting Services to discuss what your business needs.