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Making Tax Digital: Common Misconceptions - Fleximize

Making Tax Digital: Common Misconceptions

To help separate fact from fiction, Tony Mills, tax expert and Director of Online Tax Rebates, dispels some of the most common myths about the Making Tax Digital programme

By Tony Mills

The UK government’s Making Tax Digital (MTD) initiative is changing how businesses manage their taxes. The goal? To simplify tax filing, reduce errors, and help businesses stay on top of their finances. But as with any major change, there’s confusion and anxiety about what MTD really means.

This article will clear up the biggest misconceptions, answer your burning questions, and provide practical tips to help you get started.

So what is Making Tax Digital?

Making Tax Digital (MTD) is a new government initiative to modernise the UK’s tax system. It requires businesses to keep digital records and file their tax returns using HMRC-compliant software.

Since April 2019, all VAT-registered businesses with a taxable turnover of more than £85,000 must use MTD-approved software to submit their VAT returns. Over time, MTD will expand to include income tax and corporation tax, though these changes won’t happen until at least 2026.

For businesses still relying on paper records or spreadsheets, it’s time to adapt. Moving to a digital system can seem overwhelming, but it’s a step that will ultimately save time, reduce mistakes, and offer better financial oversight.

Common myths about Making Tax Digital

1. You don’t need to worry if you already file your tax returns online

Not quite. While many businesses already file tax returns online, MTD compliance requires using specific software. HMRC’s online VAT return portal is no longer an option for businesses with turnover above £85,000.

If you use popular software like Xero, Sage, or QuickBooks, you’re likely ready. But if you’ve been using HMRC’s Gateway portal or basic spreadsheets, you’ll need to upgrade to MTD-compatible tools. The onus is on your business to research and find suitable software, as HMRC itself will not provide this service.

2. If your turnover is under £85,000, you don’t need to act

True for now, but it’s only temporary. If your turnover is below the VAT threshold, you’re not yet required to follow MTD rules unless you voluntarily register for VAT. However, this could change in the future.

Switching to digital record-keeping now will give you a head start and make future compliance easier. Plus, even if your turnover fluctuates above and below the threshold, you’ll still need to comply with MTD for any period when it exceeds £85,000.

3. You can leave it till nearer the deadline

Waiting until the last minute is risky. Transitioning to MTD-compliant software takes time, and you’ll want to test everything before the deadline. This includes:

4. It’s your accountant’s responsibility to upgrade

While accountants can help file VAT returns using their MTD-compliant software, businesses are responsible for their own digital records. This means you’ll need to:

HMRC Making Tax Digital isn’t just about filing tax returns; it’s about maintaining all your financial data digitally. Don’t rely entirely on your accountant without upgrading your own systems.

5. It’s unlikely there will be financial penalties for non-compliance

While there’s been a grace period for record-keeping errors, HMRC is introducing a points-based system for late or incorrect filings. Businesses that consistently fail to comply could face penalties starting at £500 and up to £3,000 for repeat offences.

Taking action now will help you avoid fines and stay on HMRC’s good side.

6. Digital accounting is technology for technology’s sake

Some small businesses believe that traditional bookkeeping is enough. However, cloud-based accounting tools can provide significant benefits:

Embracing digital tools isn’t just about compliance - it’s a way to streamline operations and future-proof your business.

How to prepare for MTD

  1. Check your software. Ensure your accounting tools are MTD-compliant. Popular options include Xero, Sage, and QuickBooks.
  2. Train your team. Make sure everyone involved in bookkeeping knows how to use the new software.
  3. Plan ahead. Start the transition early to resolve any issues before the deadline.
  4. Consult your accountant. If you’re unsure about MTD requirements, seek advice from a tax professional.

About the Author

Tony Mills is the director of Tax Refund, one of the UK’s leading online tax consultancy services, claiming on behalf of hundreds of thousands of taxpayers for entitlements such as uniform maintenance, professional membership and subscription fees.

Your common questions answered

Yes, Making Tax Digital (MTD) is already underway. It’s part of the UK government’s long-term plan to modernise the tax system. Since April 2019, MTD has been mandatory for VAT-registered businesses with a taxable turnover above £85,000. This was expanded to include all VAT-registered businesses in April 2022.

Future phases of MTD will extend to income tax and corporation tax, although these changes are now delayed until 2026 at the earliest. The government remains committed to fully implementing MTD, so businesses of all sizes should prepare to comply in the coming years.

By transitioning to MTD-compliant tools now, you’ll avoid last-minute stress and ensure your business is ready for the digital tax era.

Yes, for VAT-registered businesses with turnover above £85,000. Smaller businesses will need to comply in the future.

For now, sole traders with turnover below £85,000 are exempt. But if you exceed this threshold, you’ll need to comply. Moving to digital records early can help you stay prepared.

Yes, but only if you use bridging software to connect your spreadsheet to HMRC’s system. This ensures your VAT returns are filed digitally in line with MTD requirements.

You’ll receive confirmation from HMRC once you’ve signed up for MTD. If you’re unsure, contact HMRC or check your business tax account.

Yes, if your turnover exceeds £85,000. Smaller businesses will need to follow suit in the coming years.

Opting out is only allowed in rare cases, such as for people with certain disabilities or due to religious beliefs.

Not yet, unless their turnover exceeds the VAT threshold. However, it’s wise for sole traders to start preparing now.

However, for sole traders and other self-employed individuals, MTD for Income Tax Self-Assessment (ITSA) will start from April 2026 for those earning over £50,000 annually.

It’s a good idea for sole traders to prepare early by switching to MTD-compliant software. Doing so now will make the transition smoother and help them stay ahead of future deadlines. Making Tax Digital self-employed rules will eventually affect all businesses, so adopting digital tools early can save time and reduce stress.

Yes, under MTD, all VAT returns for eligible businesses must be submitted using digital software.

Here are the key Making Tax Digital HMRC deadlines you need to know:

  • April 2019: MTD became mandatory for VAT-registered businesses with a taxable turnover above £85,000. These businesses must use MTD-compliant software to submit their VAT returns.
  • April 2022: MTD was extended to include all VAT-registered businesses, regardless of turnover.
  • April 2026: MTD for Income Tax Self-Assessment (ITSA) will apply to self-employed individuals and landlords with an annual income over £50,000.
  • April 2027: MTD for ITSA will expand to those with an annual income over £30,000.

Deadlines for corporation tax are yet to be confirmed but are expected after 2027. To avoid penalties, businesses should ensure they meet the relevant deadlines and start using compliant software as early as possible.

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