Making Tax Digital: What Small and Medium Businesses Need to Know

Making Tax Digital (MTD) has been on the horizon for a while, but many businesses remain unclear about its implications and scope. Small and medium-sized businesses may already comply with MTD for VAT, but this doesn’t cover all future aspects of MTD. With upcoming changes, it’s important to clarify what MTD entails and what you need to consider before the rules expand.

What Is Making Tax Digital?

MTD is a government initiative to modernise tax administration through digital record-keeping and electronic submissions, aiming for greater efficiency and ease for taxpayers.

Key principles include:

  • Digital records
  • Compatible software
  • Electronic submission to HMRC

MTD is rolling out in phases, starting with VAT and expanding to Income Tax.

 

MTD for VAT: Why It May Already Apply (or Be Business as Usual)

If your VAT-taxable turnover is over £90,000, you must comply with MTD for VAT. You must keep VAT records digitally and submit returns using MTD-compatible software. Manual processes are no longer allowed. Most SMEs already use cloud software like Xero and are compliant. For VAT, MTD may not be a new change for your business.

However, that does not mean MTD stops there.

 

MTD for Income Tax: What’s Changing?

From April 2026 (subject to legislative timetable), Making Tax Digital for

Income Tax Self-Assessment (MTD for ITSA) will begin to apply to:

  • Self-employed individuals with qualifying income over £50,000
  • Landlords with qualifying property income over £50,000

The threshold will reduce to £30,000 from April 2027.

 

If You’re a Company Director

If you’re a limited company director receiving a salary and dividends, MTD for Income Tax does not apply directly. Limited companies already file digitally for Corporation Tax.

However, you may be affected personally if you are also:

  • Have additional self-employed income
  • Receive significant untaxed income
  • Own rental properties personally

An individual’s personal income determines whether MTD for Income Tax Self-Assessment (ITSA) applies.

 

If You’re a Landlord (Personally Owned Properties)

Many SME directors may be affected here.

If you personally own rental properties, separate from your limited company, and your gross rental income exceeds the threshold, you may need to comply with MTD for Income Tax.

Under the new rules, you would be required to:

  • Keep digital property income and expense records
  • Submit quarterly updates to HMRC
  • Submit an End of Period Statement
  • File a final declaration each tax year

This replaces the traditional annual Self-Assessment submission model with more frequent digital reporting. If your income is below the threshold, the rules don’t apply yet, but thresholds are falling.

 

What Should SMEs Be Considering Now?

Even if MTD for Income Tax does not apply to you immediately, there are several sensible steps to consider:

  • Assess whether any personal or rental income may exceed future thresholds.
  • If you still track property or self-employed income manually, consider switching to digital systems now.
  • Keep personal and company finances clearly separated as reporting requirements grow.
  • Prepare for more admin as quarterly reporting increases; ensure your systems are robust.
  • Early adaptation is usually smoother than last-minute changes.

 

Does This Affect Limited Companies Directly?

Currently, MTD does not apply to Corporation Tax, but HMRC plans to expand digital requirements. Many SMEs already use digital tools for Corporation Tax. Fully digital systems offer benefits such as real-time insights, fewer errors, and easier year-end prep.

 

The Bigger Picture: Digital Is Becoming Standard

MTD is part of a wider shift towards digital reporting, automation, and transparency. For SMEs, the focus is less on compliance and more on whether systems support growth. Businesses using spreadsheets and disjointed systems often struggle as compliance expands. Integrated digital systems enable smoother reports and better insight.

If you own property personally or have multiple income streams, review your position now before thresholds change. If you would like clarity on whether Making Tax Digital affects you, personally or professionally, we are happy to talk through your circumstances.

Published on: