by Steffen Kemmerzehl, MAAT, AATQB – see The Accounting Hub
Many UK sole traders and small business owners are already hearing about Making Tax Digital (MTD), but still aren’t fully clear on what it actually changes in practice.
A self-employed tradesperson using spreadsheets to track income. A freelancer uploading invoices to basic accounting software. A landlord keeping rental records across different files and folders.
These are all very common setups across the UK, but they often create problems when HMRC’s digital reporting requirements become stricter.
MTD is HMRC’s move toward a fully digital tax system. In simple terms, it requires businesses to keep digital records and submit updates using compatible software rather than relying purely on an annual manual Self Assessment return.
It does not change what tax you owe.
It changes how and how often information is recorded and submitted.
What MTD Actually Means in Practice
Under Making Tax Digital, most affected businesses will need to:
- Keep digital records of income and expenses
- Use MTD-compatible software (such as Xero, QuickBooks, or similar)
- Submit updates to HMRC through the software
- Maintain more consistent bookkeeping throughout the year
Instead of one annual “snapshot” of your accounts, HMRC is moving toward more frequent digital reporting.
Common Real-World Issues with MTD (What We Are Already Seeing)
Even before full rollout, many businesses are already experiencing practical issues when trying to adapt.
Some of the most commonly reported problems include:
1. “I use software, so I assumed I was compliant”
Many businesses already use accounting tools, but still make manual adjustments outside the system.
This breaks the digital record chain HMRC expects.
2. Spreadsheet users struggling with MTD bridging
Spreadsheets are still widely used, but require bridging software to remain compliant.
Many users are unaware this extra step is required.
3. Inconsistent bookkeeping throughout the year
A common issue is businesses updating records only before tax deadlines.
MTD is designed to reduce this, meaning gaps in monthly records can become a compliance risk.
4. Mixed personal and business transactions
This continues to be one of the biggest problems for sole traders.
Personal spending appearing in business records can distort digital submissions and create HMRC queries.
5. Software setup errors
Incorrect VAT settings, bank feeds not reconciled, or duplicate entries are common.
Under MTD, these errors are repeated into every submission unless corrected early.
6. “Digital” but not “accurate” records
HMRC’s focus is not just on using software, but on the accuracy and traceability of the data.
Poor bookkeeping habits still create risk, even in fully digital systems.
Why MTD Matters More Than People Think
MTD is not just an admin change. It is a structural shift in how HMRC interacts with small businesses.
Instead of reviewing records once a year, HMRC will increasingly rely on:
- Real-time or quarterly updates
- Consistency of digital records
- Software-based audit trails
This means errors are likely to be identified earlier, not later.
For many businesses, this is less about tax changes and more about improving financial discipline throughout the year.
A Simple Example
Two self-employed traders:
Trader One
- Uses spreadsheets once a year
- Keeps receipts loosely in folders
- Updates records just before tax deadline
This creates higher risk under MTD due to missing digital continuity.
Trader Two
- Uses accounting software year-round
- Logs income and expenses weekly or monthly
- Reconciles bank transactions regularly
This approach aligns much more closely with MTD requirements.
Keeping Things Simple
At Friendly Assist Accountancy, we help sole traders, landlords, and small businesses prepare for Making Tax Digital in a practical and straightforward way.
This includes:
- Reviewing current bookkeeping systems
- Checking software readiness
- Fixing inconsistent records
- Helping clients move from spreadsheets to structured digital systems
- Explaining HMRC requirements without jargon
Most businesses do not need a complete overhaul. In many cases, a few structured changes are enough to become MTD-ready.
The key is understanding your current setup before HMRC requirements fully apply.
Useful Resources for Making Tax Digital
HMRC Making Tax Digital Overview
https://www.gov.uk/government/collections/making-tax-digital
Get in touch for a friendly chat about how we can support you.
Friendly Assist Accountancy
Clear advice. Friendly support. Practical help when you need it.