Changes in tax – A guide for small businesses

Small business owners in the UK may be concerned and confused by the recent changes in tax. This article spells out that changes, how they can affect the small business owner and what small business owners can do to navigate the changes.

The single biggest change in tax for businesses in Making Tax Digital (MTD). We’ll explain the important bits here. As a small business owner, you may already be registered for VAT or perhaps you are at a point where it’s time to decide whether to voluntarily register, in which case it would be good to know about MTD before-hand.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a UK government initiative led by HM Revenue & Customs (HMRC) to modernise the tax system. Its aim is to make tax administration more efficient, reduce errors, and ensure that businesses keep accurate, up-to-date digital records and submit information to HMRC electronically.

Instead of completing annual tax returns manually, businesses will use approved accounting software to maintain records and send updates to HMRC throughout the year.

Why Has MTD Been Introduced?

MTD has been introduced to:

• Reduce mistakes caused by manual record-keeping

• Make tax reporting easier and more transparent

• Help businesses understand their tax position in real time

• Improve efficiency and compliance across the tax system

HMRC estimates that billions of pounds are lost each year due to avoidable errors in tax returns — MTD is designed to tackle this.

Who Does MTD Apply To?

MTD is being rolled out in stages and affects different types of taxpayers at different times.

VAT-Registered Businesses

• Since April 2019: VAT-registered businesses with taxable turnover above the VAT threshold (£85,000) must follow MTD for VAT.

• Since April 2022: All VAT-registered businesses, regardless of turnover, must follow MTD for VAT.

• As of April 2024, the threshold for compulsory VAT registration is £90,000 of taxable turnover.

• The deregistration threshold will be £88,000

Income Tax Self Assessment (MTD for ITSA)

From April 2026:

• Sole traders and landlords with annual business or property income over £50,000 must use MTD for Income Tax.

From April 2027:

• Those with income over £30,000 will also be required to join.

Corporation Tax

MTD for Corporation Tax is planned but not yet mandatory.

What Does MTD Require Businesses To Do?

Under MTD, businesses must:

1. Keep digital records

   • Sales, expenses, VAT transactions, and income must be stored digitally.

2. Use MTD-compatible software

   • Spreadsheets alone are not sufficient unless linked to HMRC through bridging software.

3. Submit updates to HMRC electronically

   • VAT returns must be submitted via compatible software.

   • Income tax updates will be submitted quarterly.

4. Maintain digital links

   • Data must flow between systems digitally — no copying and pasting between programs.

What Is MTD for Income Tax (ITSA)?

MTD for Income Tax Self Assessment changes how sole traders and landlords report income. Instead of one annual tax return, businesses will:

• Submit quarterly updates of income and expenses

• Provide an end-of-period statement (EOPS) to finalise business figures

• Submit a final declaration replacing the traditional tax return

This does not mean tax is paid quarterly — only information is submitted more frequently.

Benefits of MTD for Small Businesses

Although it involves change, MTD offers several advantages:

• Better visibility of tax liabilities during the year

• Reduced risk of penalties due to fewer errors

• Improved financial record-keeping

• Less stress at year-end

• Easier collaboration with accountants and bookkeepers

Penalties and Compliance

HMRC has introduced a new points-based penalty system for late submissions under MTD.

• Each late submission earns a penalty point

• Once a threshold is reached, a financial penalty is issued

• Good compliance resets the points

Interest is also charged on late payments.

What Software Can Be Used?

MTD-compatible software includes:

• Xero

• QuickBooks

• Sage

• FreeAgent

• Other HMRC-approved providers

Businesses using spreadsheets can continue if they use bridging software to connect with HMRC.

What Should Small Businesses Do Now?

To prepare for MTD:

• Review whether and when MTD applies to your business

• Move to digital bookkeeping if not already

• Choose HMRC-approved software

• Speak to your accountant or adviser

• Ensure staff are trained

Early preparation reduces disruption and avoids penalties.

Key Dates Summary

Common Myths About MTD

“I’ll have to pay tax quarterly.”

❌ No — you only submit information quarterly; payments remain annual (unless already on

payments on account).

“I can’t use spreadsheets anymore.”

❌ You can, but you must use bridging software to submit to HMRC.

“MTD is only for large businesses.”

❌ It applies to most small businesses and landlords.

How Numero Bridge Can Help

At Numero Bridge, we support small businesses through every stage of Making Tax Digital, including:

• Assessing your MTD readiness

• Recommending and setting up suitable software

• Migrating records to digital systems

• Submitting VAT and income tax returns on your behalf

• Providing ongoing bookkeeping and compliance support

If you’d like reassurance that your bookkeeping and VAT treatment are set up correctly, Numero Bridge provides friendly, practical support to SME businesses. You can learn more at www.numerobridge.com, email info@numerobridge.com, or call 07761 036 682 for an informal chat. If you quote PEBBLE and sign up as a client, you will get 50% discount on your first month’s fees.