Making Tax Digital changes the way sole traders (and landlords!) report their income and expenses to HMRC.
Instead of the previous Self Assessment process, MTD uses digital software and quarterly updates to keep HMRC informed throughout the year, leading up to a final tax return. Here’s how the whole system works from start to finish.
Getting set up with MTD-compatible software
The first step is signing up for MTD-compatible software. This is any software that can digitally record your income and expenses and submit information directly to HMRC when required, or bridging software that connects your existing digital records to HMRC. Full software does it all, while bridging software can work with digital systems you’re already using.
Once you’ve chosen your software, you’ll need to sign up for Making Tax Digital and link it to your HMRC account. From that point on, all your income and expenses need to be recorded digitally through your software. No more shoebox receipts or scribbled notes on bank statements!
Recording your income and expenses
Throughout the tax year, you’ll need to use your MTD software to keep detailed digital records of every transaction. This includes all your self-employed income and any expenses you can claim as allowable business costs.
The key difference from the old Self Assessment system is how often you report income and expenses. Instead of submitting totals once a year, MTD asks you to send quarterly updates to HMRC (more on this in a sec). It’s the same underlying income and expenses, just reported more frequently (and via digital software). This might sound like more work, but it can help keep things neat and tidy throughout the year.
Plus with the right software (like Hnry!), income and expenses can be captured automatically!
Sending quarterly updates to HMRC
Like we just mentioned, here’s where Making Tax Digital really differs from the old system.
Instead of submitting one big tax return at the end of the year, you’ll send quarterly updates to HMRC showing what you’ve earned and spent over the previous three months.
The tax year splits into four quarters, and each update is due one month and two days after the quarter ends. So your first update covering 6 April to 5 July would be due on 7 August, your second covering 6 July to 5 October would be due on 7 November, and so on.
These quarterly updates aren’t full tax returns – they’re quick summaries of your income and expenses over the last three months, all submitted directly through your MTD software. No need to log into the HMRC portal at all!
Submitting your annual tax return
Even with quarterly updates in place, you’ll still need to submit a final tax return at the end of each tax year. The deadline remains 31 January following the end of the tax year, just like with Self Assessments.
The good news is that your tax return will contain all the same information you’ve already submitted in your quarterly updates. Your MTD software should make this process fairly straightforward since all your records are already in the system. You’ll just need to review everything, make any final adjustments, and submit through your MTD-compatible software. Tada!
The benefits of the MTD system
Breaking everything down into quarterly chunks means you’re staying on top of your tax admin as you go, rather than facing one massive admin session in January. In theory, it should lead to more accurate records overall, since you’re recording transactions closer to when they actually happen.
Plus, with everything digitised through proper software, there’s less room for errors or missing information. HMRC receives regular updates throughout the year, which means fewer surprises for everyone involved.
Hnry is MTD compatible
Making Tax Digital means using compatible software to record all your income and expenses digitally, sending quarterly summaries to HMRC throughout the year, and submitting your final tax return through the same software by 31 January.
It’s a significant change from how Self Assessment currently works, but the aim is to make tax admin more manageable overall. And if you’re using software like Hnry, we’ll handle all the quarterly updates and tax returns automatically as part of our 1% +VAT fee.
You just focus on your work, and we’ll make sure HMRC gets everything they need, when they need it!
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