2025 Making Tax Digital Guide for St Albans SMEs

Making Tax Digital, commonly known as MTD, is HMRC’s system for requiring businesses and individuals to maintain specified tax records digitally and submit information using compatible software.

For VAT-registered businesses, Making Tax Digital is already the standard way of managing VAT. All VAT-registered businesses must generally keep digital VAT records and submit their returns through compatible software unless HMRC has granted an exemption.

From 6 April 2026, Making Tax Digital also began applying to some sole traders and landlords for Income Tax. This creates additional digital record-keeping and quarterly reporting responsibilities for affected individuals.

For SMEs in St Albans, Harpenden and across Hertfordshire, the practical challenge is not simply choosing software. The software must be configured correctly, transactions must be recorded consistently and information must move between connected systems through appropriate digital links.

Carter Bookkeeping Services supports local businesses with digital bookkeeping, software setup, VAT return management and bookkeeping reviews. This guide explains the current MTD rules and the steps businesses should take to remain compliant.

What Is Making Tax Digital?

Making Tax Digital is HMRC’s programme for moving tax record-keeping and reporting into compatible digital systems.

There are currently two main areas affecting small businesses:

• Making Tax Digital for VAT: Applies generally to VAT-registered businesses.
• Making Tax Digital for Income Tax: Applies to qualifying sole traders and landlords according to their gross qualifying income.

Although the systems share the Making Tax Digital name, their reporting requirements are different. Being registered for VAT does not automatically mean that MTD for Income Tax applies, and operating through a limited company does not currently bring company income within MTD for Income Tax.

Making Tax Digital for VAT

Making Tax Digital for VAT has applied to all VAT-registered businesses since April 2022, unless an exemption has been granted.

This includes businesses that registered voluntarily while their turnover was below the compulsory VAT registration threshold.

Businesses within MTD for VAT must generally:

• Maintain specified VAT records digitally.
• Use software compatible with Making Tax Digital for VAT.
• Preserve appropriate digital links where several systems are used.
• Submit VAT returns directly to HMRC through compatible software.
• Retain the underlying invoices and supporting records.

HMRC automatically enrols newly VAT-registered businesses into MTD for VAT unless they are exempt or have applied for an exemption.

What Must Be Recorded Digitally?

The digital records required for VAT can include:

• The business name, principal place of business and VAT registration number.
• Details of VAT accounting schemes used by the business.
• The time and value of supplies made.
• The VAT rate charged on supplies.
• The time and value of purchases received.
• The amount of input VAT the business intends to reclaim.
• Adjustments required for the VAT return.
• The information contained within the VAT account.

The requirement to maintain digital records does not mean every supporting document must originally be created electronically. Paper invoices can be scanned or entered into the digital system, provided the required VAT information is maintained correctly.

Can Businesses Still Use Spreadsheets?

Yes. Making Tax Digital does not ban spreadsheets.

A spreadsheet can form part of an MTD-compliant system if it is connected to HMRC through compatible bridging software. Where information passes between several software products, the required data should move through digital links rather than being copied and re-entered manually.

However, spreadsheets can become difficult to control as a business grows. Cloud accounting software often provides more reliable bank feeds, invoice processing, VAT coding and reporting.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax began on 6 April 2026 for qualifying sole traders and landlords.

The starting date depends on gross qualifying income reported for the relevant earlier tax year:

Qualifying Income	Relevant Tax Year	MTD Start Date
More than £50,000	2024/25	6 April 2026
More than £30,000	2025/26	6 April 2027
More than £20,000	2026/27	6 April 2028

Qualifying income is broadly the total gross income from self-employment and property before business expenses are deducted.

Where an individual has several sole trader businesses or receives both self-employment and property income, the relevant gross amounts are normally combined when assessing the threshold.

Limited-company turnover does not count as the director’s qualifying income for MTD for Income Tax. An individual partner’s share of partnership profit is also treated separately from qualifying sole trader and property income.

What Must Affected Sole Traders and Landlords Do?

Individuals within MTD for Income Tax must generally:

• Use compatible software.
• Create and maintain digital records of relevant income and expenditure.
• Send quarterly summaries to HMRC.
• Review and correct their records after the end of the tax year.
• Add other income and information required for Self Assessment.
• Submit their annual tax return through compatible software.

The quarterly updates are summaries of the income and expenditure recorded in the software. They are not four separate tax returns and do not normally result in four separate tax bills.

The annual tax calculation and payment timetable remains relevant, including the 31 January Self Assessment deadline and payments on account where applicable.

Quarterly MTD for Income Tax Deadlines

The normal quarterly update deadlines are:

Quarterly Update	Deadline
First update	7 August
Second update	7 November
Third update	7 February
Fourth update	7 May

The first quarterly update for businesses that entered the system on 6 April 2026 was due by 7 August 2026.

Keeping bookkeeping records current throughout each quarter makes these submissions much easier to prepare. Waiting until the deadline to process three months of transactions increases the risk of missing income, duplicating expenses or using incorrect categories.

Choosing MTD-Compatible Software

HMRC does not provide its own general bookkeeping package. Businesses and individuals must choose commercial software that supports the relevant Making Tax Digital service.

Common accounting platforms include:

• Xero.
• QuickBooks Online.
• FreeAgent.
• Sage.
• Compatible bridging software for businesses retaining spreadsheet-based records.

The right choice depends on more than whether the provider describes the software as MTD compatible.

Consider whether the software supports:

• The relevant MTD service, whether VAT, Income Tax or both.
• Bank feeds and transaction reconciliation.
• Customer invoicing.
• Receipt capture.
• VAT schemes used by the business.
• eCommerce and payment-platform integrations.
• Construction Industry Scheme records.
• Payroll integration.
• Property income where relevant.
• The annual Self Assessment submission required under MTD for Income Tax.

Carter Bookkeeping Services can help businesses select and configure suitable software through our bookkeeping setup and review services.

How to Prepare Your Business for MTD

1. Confirm Which MTD Rules Apply

Start by establishing whether the business is:

• VAT registered and therefore generally within MTD for VAT.
• Operated by a sole trader or landlord who meets an MTD for Income Tax threshold.
• A limited company with VAT obligations but no current MTD for Income Tax obligation.
• Potentially eligible for an exemption because using digital systems is not reasonably practicable.

Do not assume that HMRC correspondence is the only way of determining whether the rules apply. Taxpayers remain responsible for checking their own position.

2. Review Existing Software

Confirm that the current software supports the specific MTD submissions the business or individual needs to make.

Software used successfully for VAT may not automatically support MTD for Income Tax, quarterly updates or the annual Self Assessment return.

3. Configure the Bookkeeping System Correctly

A software subscription does not create accurate bookkeeping by itself. The system needs appropriate settings and financial categories.

Review:

• The chart of accounts.
• Opening balances.
• VAT registration details.
• The VAT scheme and return periods.
• Invoice templates and VAT wording.
• Bank-feed connections.
• Automated transaction rules.
• Integrations with sales and payment platforms.
• Income and expense categories required for MTD for Income Tax.

4. Digitise the Record-Keeping Process

Create a consistent process for collecting invoices, receipts and other supporting documents.

This might include:

• Emailing supplier invoices to a dedicated address.
• Using mobile receipt-capture software.
• Connecting business bank accounts to the accounting platform.
• Importing sales data from eCommerce systems.
• Storing contracts, statements and VAT evidence securely.
• Reviewing transactions before automated rules are approved.

Paper records can still be retained where appropriate, but the information required for MTD must be maintained digitally.

5. Reconcile the Accounts Regularly

Digital records are not necessarily accurate records. Bank feeds can import duplicate transactions, automated rules can use the wrong VAT code and integrations can fail.

Regular reconciliation should include:

• Bank accounts.
• Credit cards.
• Payment processors.
• Customer balances.
• Supplier balances.
• VAT control accounts.
• Payroll control accounts.

A monthly review is appropriate for many SMEs, while businesses with larger transaction volumes may need weekly bookkeeping.

6. Train Everyone Involved

Employees who issue invoices, purchase goods or upload documents need to understand the agreed process.

Training should cover:

• How sales invoices are created.
• Where supplier invoices are sent.
• How expense receipts are captured.
• Who reviews VAT codes.
• How errors are reported.
• Who authorises the final VAT or MTD submission.

VAT Disbursements and Recharged Expenses

A disbursement has a specific meaning for VAT. It is not simply any expense that a business passes on to a customer.

A payment may be treated as a disbursement only where the business pays a supplier on behalf of its customer and the relevant conditions are satisfied. These conditions include the customer being responsible for purchasing, receiving and benefiting from the goods or services.

Where the business buys goods or services itself and then recharges the cost, the amount is normally part of the business’s own supply and follows the VAT treatment applicable to that supply.

Potential examples requiring careful review include:

• Solicitors paying court fees on behalf of clients.
• Professional firms recharging travel costs.
• Courier and delivery charges passed to customers.
• Search fees and registration charges.
• Third-party services included within a larger client project.

These transactions should not be coded automatically as disbursements. The contractual arrangement and the identity of the person receiving the underlying supply must be considered.

The VAT Domestic Reverse Charge for Construction

The VAT domestic reverse charge can apply to certain standard-rated and reduced-rated building and construction services.

It generally applies where:

• The supplier and customer are registered for VAT in the UK.
• The supply falls within the specified construction services.
• The payment must be reported through the Construction Industry Scheme.
• The customer is making an onward supply of construction services.
• The customer is not an end user or intermediary supplier treated as an end user.

When the reverse charge applies, the supplier does not collect the VAT from the customer. The customer accounts for the output VAT on its own return and may normally recover the corresponding input VAT, subject to the usual VAT recovery rules.

A reverse-charge invoice must clearly state that the reverse charge applies. The software must also post the transaction to the appropriate VAT return boxes.

The domestic reverse charge does not apply to every transaction within the construction industry. End-user supplies, employment businesses supplying workers and certain excluded services may be treated differently.

VAT Return Timing and Deadlines

Most businesses submit VAT returns quarterly, although monthly and annual arrangements are available in some circumstances.

For a normal quarterly or monthly VAT return, the submission and payment deadline is generally one calendar month and seven days after the end of the accounting period.

Businesses should not wait until the deadline to complete their records. A practical VAT process includes:

• Recording transactions throughout the period.
• Reconciling bank and payment accounts.
• Reviewing missing and duplicated invoices.
• Checking unusual VAT treatments.
• Reconciling the VAT control account.
• Reviewing the return before submission.
• Allowing sufficient time for payment to reach HMRC.

How Long Must MTD and VAT Records Be Kept?

VAT records generally need to be kept for at least six years.

This can include:

• Sales and purchase invoices.
• Credit notes.
• Import and export records.
• VAT account information.
• Scheme calculations.
• Bank statements.
• Evidence supporting input VAT claims.
• Digital records maintained within the accounting software.

Different retention periods can apply to other taxes and specialist VAT schemes. Records should therefore not be destroyed solely because a VAT return has been submitted.

MTD Readiness Checklist for SMEs

Step	Action	Why It Matters
1	Confirm which MTD obligations apply.	VAT and Income Tax have different eligibility and reporting rules.
2	Select compatible software.	The software must support the submissions and income sources you need to report.
3	Configure the chart of accounts and tax settings.	Incorrect setup can cause repeated VAT and reporting errors.
4	Connect bank accounts and sales platforms.	Digital integrations reduce manual processing but still require review.
5	Create a digital document process.	Invoices and receipts need to be captured consistently.
6	Check digital links.	Required information should move between connected systems without manual re-entry.
7	Reconcile the accounts regularly.	Imported data and automated coding can contain errors.
8	Review VAT disbursements and reverse charges.	These treatments depend on strict conditions and should not be assumed.
9	Schedule submission and payment deadlines.	Late filing and payment can result in points, interest and penalties.
10	Retain records securely.	VAT records generally need to be available for at least six years.

Common MTD Mistakes

• Assuming MTD started in 2025: MTD for VAT has applied to all VAT-registered businesses since April 2022.
• Believing spreadsheets are prohibited: Spreadsheets can remain part of an MTD system when suitable bridging software and digital links are used.
• Treating digital as automatically accurate: Automated rules and bank feeds can still create errors.
• Using software that supports VAT but not Income Tax: Each MTD service has different functionality.
• Recording only bank deposits: This may omit invoices, fees, refunds and money received through other channels.
• Manually retyping totals between systems: This can break the required digital links.
• Leaving records until the quarterly deadline: MTD works best when bookkeeping is maintained throughout the period.
• Treating every recharged expense as a VAT disbursement: A genuine disbursement must satisfy specific conditions.
• Applying the construction reverse charge to every CIS transaction: The customer, supply and end-user position must all be checked.
• Assuming quarterly Income Tax updates replace the annual return: An annual tax return is still required through compatible software.

Why SMEs in St Albans Choose Carter Bookkeeping Services

Carter Bookkeeping Services supports sole traders, landlords and small businesses across St Albans, Harpenden, Hertfordshire and London.

Our services can include:

• MTD-compatible bookkeeping services.
• Accounting software selection and setup.
• Bank-feed and integration reviews.
• VAT return preparation and submission.
• Making Tax Digital for Income Tax preparation.
• Review of digital records and processes.
• VAT disbursement and recharge reviews.
• Construction reverse-charge bookkeeping.
• Monthly and quarterly reconciliation.
• Bookkeeping health checks and record clean-ups.

Our client testimonials provide further information about the experiences of businesses that have used our services.

Frequently Asked Questions

Does MTD for VAT Apply Only to Businesses Above £90,000?

No. MTD for VAT generally applies to all VAT-registered businesses, including businesses that registered voluntarily while below the compulsory registration threshold.

Does MTD Mean I Cannot Use a Spreadsheet?

No. A spreadsheet can be used if it forms part of a compliant digital system and suitable bridging software submits the VAT return to HMRC.

Required data must also move through appropriate digital links where several systems are used.

Does HMRC See My Accounts in Real Time?

No. MTD does not normally provide HMRC with continuous access to your complete accounting records.

You submit specified information through your software at the required intervals. HMRC can still request supporting records during a compliance check.

Does MTD for Income Tax Apply to Limited Companies?

No. MTD for Income Tax currently applies to qualifying individuals with self-employment or property income. Limited companies have separate Corporation Tax and reporting obligations.

Is Voluntary VAT Registration Worthwhile?

It can be beneficial where a business incurs substantial recoverable VAT or mainly sells to VAT-registered customers.

However, voluntary registration also creates VAT pricing, administration, digital record-keeping and return obligations. The decision should be based on the business’s actual customers, costs and future plans.

What Happens If an MTD VAT Return Is Late?

A late VAT return normally results in a penalty point. Once the relevant points threshold is reached, HMRC can issue a £200 penalty, followed by further penalties for additional late returns while the business remains at the threshold.

Separate interest and penalties can apply where VAT is paid late.

Can a Bookkeeper Submit MTD Returns?

Yes. A properly authorised bookkeeper or tax agent can maintain records and submit relevant MTD updates and returns on the client’s behalf.

The business owner or taxpayer remains legally responsible for ensuring the information is complete and accurate.

How Long Should VAT Records Be Kept?

VAT records generally need to be retained for at least six years. Longer periods can apply to certain specialist schemes and other tax records.

Prepare Your Business for Making Tax Digital

Making Tax Digital is not simply a different way to press the submit button. It requires accurate digital records, compatible software and consistent bookkeeping processes throughout the reporting period.

Businesses that configure their systems properly and reconcile their records regularly are better placed to meet deadlines, identify errors and understand their financial position.

Carter Bookkeeping Services can review your existing setup, identify MTD risks and recommend a practical process for your business.

Contact us today to arrange a free initial discussion about your bookkeeping and Making Tax Digital requirements.

• Phone: 07903 364040
• Email: wendy@carterbookkeepingservices.co.uk