MTD differences for limited vs unlimited companies

Making Tax Digital (MTD), a key part of HM Revenue & Customs’ (HMRC) strategy to modernise tax administration, simplifies the tax process for business owners.

The initiative has been in the pipeline for a while, and many businesses are either compliant or progressing towards compliance.

Nonetheless, MTD presents challenges and questions for several of our clients who are yet to adapt to these changes.

Who is affected by MTD for Income Tax Self-Assessment (ITSA)?

So far, limited companies have only encountered MTD in the realm of VAT.

However, sole traders and partnerships will soon need to gear up for changes in Income Tax regulations, in addition to their existing VAT reporting obligations.

Starting April 2026, self-employed individuals and landlords with annual business or property income above £50,000 must adhere to MTD for ITSA.

This requirement will extend from April 2027 to those earning above £30,000 and will eventually include partnerships.

Unlike unincorporated businesses (sole traders and partnerships), limited companies are exempt from MTD for ITSA.

However, individual directors, depending on their situation, may need to file Self-Assessments.

MTD for limited companies

Limited companies will eventually come under the MTD for Corporation Tax legislation.

This will mandate digital record-keeping and digital tax submissions for Corporation Tax, contrasting the annual reporting via a Corporation Tax return (CT600) and differing from the Income Tax Self-Assessment system.

The Government has yet to confirm the implementation date for MTD for Corporation Tax, but it is certainly something to be aware of if you work for (or own) a limited company.

MTD for unincorporated companies

On the other hand, unincorporated SMEs, including sole traders and partnerships, do not create separate legal entities and therefore pay Income Tax on their profits.

(In the eyes of HMRC, there is no separation between the individual and the business when it comes to their tax reporting requirements).

These businesses are, therefore, directly impacted by MTD for ITSA.

If you are a sole trader, you’ll need to assess your business income thresholds to determine your entry point into the MTD for ITSA scheme, especially as it will be reduced to only £30,000 in 2027.

MTD for VAT registered businesses

MTD for VAT has been a reality for VAT-registered businesses, limited and unlimited since April 2019.

Businesses with a taxable turnover exceeding the VAT threshold, currently £85,000, whether incorporated or unincorporated, have been required to maintain digital VAT records and submit VAT returns using compatible software.

What counts as MTD-compatible software?

MTD-compatible software must have certain functions, including the following, taken from the Government website:

  • Maintaining business records as set out in the regulations.
  • Preparing and sending quarterly updates and end-of-period statements using the information maintained in those records.
  • Finalising your business income and submitting your declaration after the end of the tax year
  • Communicating with HMRC digitally through our application programming interface (API) platform

We recommend using the shift to new software as an opportunity to invest in cloud-based accounting software and are happy to discuss this with you further.

For more information about MTD, how it affects your business, and choosing the right software for you, please get in touch.

Posted in blog, Business, Business Advice, HMRC, Making Tax Digital, SME's, Tax, VAT.