What’s coming next and what businesses need to know. Here BABTAC Collective finance expert -The Beauty Accountant, Ria-Jaine Lincoln - breaks down exactly what you need to know so you can keep your finances shipshape.
Making Tax Digital (MTD) is moving into its next phase, extending beyond VAT into Income Tax for self-employed individuals and landlords. While the direction of travel has been clear for some time, many business owners are still unsure what will actually change and some still need to make the changes needed to comply.
The biggest MTD shift is that tax will change from a once-a-year process to an ongoing, digital reporting system, built on real-time records. This follows best practice that is applied to all our monthly bookkeeping package holders that are already MTD ready and compliant. In that sense MTD could be a benefit to business owners as they have a real time view of the numbers and tax estimates.
The 24.25 tax return will determine if you are required to comply with MTD in April 2026. If your income exceeds £50,000 you are required to comply for no less than three years (even if your income drops below the threshold). You can only exit MTD if income stays below the threshold for three consecutive years. This is the three year rule.
MTD for Income Tax: the next step
MTD for Income Tax will require affected individuals to:
- keep digital records of income and expenses
- use compatible software
- submit quarterly updates to HMRC
- complete an end-of-period finalisation
This moves compliance away from once a year reporting and towards continuous record-keeping.
What counts as a digital record
Digital records must show:
- income received
- business expenses
- dates and values of transactions
- VAT information where relevant
Bank feeds alone are not enough. Supporting documents such as invoices and receipts must exist to evidence the entries. Booking systems will help to capture sales information and luckily, many hair and beauty business owners already use online booking systems. The challenge will be ensuring that the systems are set up correctly.
The emphasis is on what we used to call the ‘paper trail’ which is now being replaced with the ‘Digital Footprint or link’. HMRC expects a clear path from transaction to submission.
Digital links explained
Digital links are the connections between systems or software where data flows without manual retyping.
Examples include:
- bookkeeping software linking to VAT submissions
- integrated apps feeding into accounting platforms
- Bank accounts sharing information on interest earned
Copying and pasting figures manually between systems will increasingly fall outside acceptable practice as MTD develops.
Penalties and compliance expectations
MTD introduces a more behavioural approach to compliance.
Key features include:
- a points-based system for late submissions
- separate penalties for late payment
- increased reliance on consistent record-keeping
The system is designed to reward businesses that stay organised and penalise repeated delays or poor processes rather than one-off mistakes.
Quarterly reporting: what actually gets submitted
Quarterly submissions are not full tax returns. They are summary updates based on the digital records already held within bookkeeping software.
They provide HMRC with:
- income totals
- expense totals
- ongoing visibility of business performance
A final end-of-year declaration still confirms the overall tax position.
What this means for business owners
The shift to MTD is less about new technology and more about behaviour.
Businesses that:
- keep records up to date
- use digital tools effectively
- treat bookkeeping as routine rather than reactive
will find the transition manageable. Those relying on year-end catch-up processes will feel the impact more significantly.
Ultimately MTD embeds tax into day-to-day business for consistent digital record-keeping, regular reporting and fewer surprises at year end.
For information on free MTD compliant software solutions email hello@thebeautyaccountant.co.uk.
For more information and advice from HMRC click the relevant link below:
Webinars and Videos
HMRC videos and webinars for Making Tax Digital for Income Tax - GOV.UK
Eligibility Checker
Find out if and when you need to use Making Tax Digital for Income Tax - GOV.UK
Software page, explains what the software products need to do, the different types of recognised MTD compatible software, and what to consider when choosing the software with the features that is right for you.
Choose the right software for Making Tax Digital for Income Tax - GOV.UK
Software finder tool, an interactive tool allowing you to filter by criteria that is important to you and identify suitable compatible products for your circumstances
Find software that works with Making Tax Digital for Income Tax - GOV.UK