Making tax digital

Jon Martingale at FreeAgent explains how digital tax will build resilience and drive growth for UK SMEs

 

Making Tax Digital (MTD) is the UK government’s ambitious initiative to digitalise tax reporting. Set to become the most significant change to UK tax reporting in a generation, under MTD, affected businesses and landlords will be required to keep digital records and submit quarterly updates to HMRC using approved software. The rollout is happening in phases: from April 2026, it will apply to sole traders and landlords with income over £50,000; from April 2027, the threshold drops to £30,000, bringing over 1.8 million taxpayers into scope.

 

However, ahead of this, a recent survey from FreeAgent has revealed a striking level of uncertainty among UK small businesses regarding the upcoming changes to tax reporting. Nearly a third of SMEs expressed concern that MTD could add pressure to managing their tax affairs but far from being just another compliance hurdle, MTD has the potential to transform the way small businesses operate, simplifying tax, strengthening resilience, and unlocking new avenues for growth.

 

 

The need for simplicity and support 

The anxiety among SMEs is not without reason. The transition to digital tax reporting represents a significant change, especially for those still reliant on manual processes or paper records. Given the scale and significance of this reform there is a clear need for digestible, accessible guidance and robust support systems to help businesses navigate the transition.

 

Alongside the government, accountants and software providers play a crucial role, not just as compliance experts, but as trusted partners in guiding businesses through this change. Collaboration between government, industry, and the accounting profession is essential to ensure SMEs have the tools, training, and confidence they need.

 

These groups can bring together essential expertise: the government sets the regulatory framework and provides official guidance; software providers create user-friendly, compliant digital tools; and accountants offer tailored advice, training, and ongoing support to help SMEs navigate the transition. By combining these strengths, they ensure that small businesses have the resources and confidence to adopt digital tax processes successfully.

 

 

Turning worries into resilience

Apprehension around change is completely normal but by embracing digital tax processes, SMEs can turn initial worries into lasting advantages that support stability and growth.

 

Improved accuracy and compliance: Digital record-keeping reduces the risk of errors and late filings, helping businesses avoid costly penalties. Quarterly submissions encourage regular financial review, making it easier to spot discrepancies or issues before they escalate.

 

Operational efficiency: MTD-compatible software automates routine tasks such as data entry and calculations. The shift away from paper-based processes not only minimises errors but also frees up valuable time that can be reinvested in core business activities and growth initiatives.

 

Real-time financial oversight: One of the most significant advantages of MTD is the empowerment it provides through real-time financial insight. With up-to-date, accurate financial data always available, business owners can plan more effectively, allocate resources with greater precision, and make faster, more informed strategic decisions.

 

This immediate access to financial information enables SMEs to identify trends, respond to market changes, and seize new opportunities as they arise, capabilities that are increasingly vital in today’s fast-moving business environment. 

 

 

MTD as a growth catalyst

The benefits of Making Tax Digital (MTD) reach far beyond simply meeting compliance requirements. For small and medium-sized businesses, embracing digital tax tools often serves as the starting point for a broader digital transformation. Once businesses adopt MTD-compatible software, many find it natural to digitise other essential processes, such as invoicing, payroll, and inventory management. This integration of systems streamlines daily operations, reduces duplication of effort, and lays the groundwork for scalable, efficient growth. 

 

The adoption of digital tools through MTD can also deliver a lasting competitive advantage. Businesses that embrace digitalisation are typically more agile and adaptable, better positioned to innovate, and able to respond quickly to new challenges or opportunities. Early adopters frequently report improved confidence in their financial management, a reduced administrative burden, and increased capacity for value-adding activities.

 

As more businesses move to cloud-based systems, those who do not risk falling behind competitors who are leveraging technology to drive performance and resilience.

 

 

Overcoming transition challenges

Change always brings challenges. The learning curve, upfront investment in software, and need for training can seem daunting. But with the right support, clear guidance, accessible training, and responsive customer service, these hurdles are manageable.

 

The key for business leaders is to start early, seek advice, and approach MTD as an opportunity to modernise and future-proof the business.

 

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Jon Martingale is Head of Product Management at FreeAgent 

 

Main image courtesy of iStockPhoto.com and ozgurkeser