When should small businesses start preparing for Making Tax Digital?

Understanding what Making Tax Digital actually means for small businesses

Making Tax Digital (often shortened to MTD) is the UK government’s long-term programme to move tax reporting and record-keeping into a more consistent, digital-first approach. For small businesses, the headline is simple: over time, more taxpayers will be expected to keep certain records digitally, use compatible software, and send updates to HMRC in a prescribed way rather than relying on manual spreadsheets, ad-hoc processes, or once-a-year paperwork.

That sounds straightforward, but it raises an immediate planning question: when should a small business start preparing? The honest answer is “earlier than you think” — not because everyone must switch tomorrow, but because the hard part isn’t pressing a button; it’s getting your records, processes, and people ready so that compliance becomes routine rather than a stressful last-minute scramble.

Preparation is rarely about technology alone. It’s about how you capture sales and expenses, how you store evidence like invoices and receipts, how you reconcile your bank accounts, how you handle VAT and payroll if relevant, and how you close your books. If these are already tidy and consistent, moving to digital submissions is usually painless. If they’re messy, the change can feel disruptive.

Why “start preparing early” isn’t just generic advice

Small businesses often interpret compliance initiatives as a future problem: “We’ll deal with it when it’s mandatory for us.” The risk with that approach is that MTD requirements tend to interact with everyday operational realities: busy seasons, staff turnover, cashflow pressures, and the limits of your current bookkeeping process. Waiting until the last minute can mean implementing new software while also trying to fix historical data, train someone, change invoice routines, and still run the business.

Starting early gives you options. You can test software without pressure. You can choose a process that suits how you work rather than picking whatever seems quickest. You can clean up your chart of accounts, fix recurring miscodings, and establish a consistent approach to expenses and receipts. Most importantly, you can spread the effort across a few weeks or months instead of cramming it into a stressful deadline window.

Early preparation also reduces risk. Many compliance problems aren’t caused by people trying to do the wrong thing; they come from confusion, rushed decisions, incomplete data, and unclear responsibilities. If you decide now who is responsible for what, how often reconciliations happen, and how you’ll store records, you’re less likely to discover issues when it matters most.

The best time to start depends on your “tax complexity” rather than your size

Two businesses of identical size can have very different preparation needs. A sole trader with a single bank account and a handful of invoices per month may only need a simple setup and light training. A small limited company with multiple revenue streams, several staff, VAT, inventory, foreign currency transactions, or multiple payment platforms may need a more structured implementation plan.

Instead of using turnover or headcount as your guide, look at tax complexity and process maturity:

1) How many transactions do you process each month? 2) How many different places does your money come in (bank transfers, cash, card terminals, online marketplaces, payment processors)? 3) How many people touch your records (you, a bookkeeper, a spouse, a staff member, an external accountant)? 4) How often are your books updated (weekly, monthly, quarterly, annually)? 5) How confident are you that your records match your bank and reflect reality?

If your business has multiple moving parts, the best time to prepare is as soon as you can — ideally well before any mandatory date that applies to you — so you can build a reliable routine.

Practical milestones: a preparation timeline you can actually use

Even without focusing on exact legal dates, you can use a simple timeline that works for most small businesses. Think in milestones rather than months.

Milestone 1: You can produce clean, up-to-date records without drama

This is the foundation. Before you worry about software compatibility or digital submissions, make sure you can answer basic questions quickly and accurately: What did we sell this month? What did we spend? Are invoices paid? Are bills overdue? Does the bank balance in your accounts match your actual bank balance? If it takes days of detective work to answer these, preparation should begin immediately.

To reach this milestone, focus on regular reconciliation. Reconciling means matching the transactions in your accounting records to your bank statement and payment platforms so nothing is missing and nothing is duplicated. A weekly or fortnightly cadence is ideal for many small businesses; monthly is still workable; quarterly is where problems tend to grow unnoticed.

Milestone 2: Your data capture is consistent and repeatable

MTD is easier when your routine is consistent. For example: sales invoices are raised in one place (or flow reliably from your point-of-sale or ecommerce platform); expenses are captured with digital copies; mileage is tracked; and personal spending is kept separate from business spending. Consistency reduces corrections and makes digital reporting far less intimidating.

Common quick wins include: using a dedicated business bank account; limiting the number of “miscellaneous” categories you use; standardising how you record common expenses (travel, subscriptions, materials); and ensuring every invoice has a clear reference and date. If you have a bookkeeper or accountant, ask them to define a simple “rules list” for how to treat your most common transactions.

Milestone 3: You have chosen a software approach that fits your business

At this stage you should evaluate how you want to comply. Many businesses move from spreadsheets or manual bookkeeping into a cloud accounting package. Others use bridging tools that connect spreadsheets to the required submission process. The right choice depends on how you work, how many transactions you have, how much time you want to spend on bookkeeping, and whether you want features like invoicing, bank feeds, stock, project tracking, or payroll integrations.

The key is not choosing the “most popular” option, but the option that matches your workflow. If you create invoices in one system and reconcile in another, you want software that handles those connections smoothly. If you sell through online marketplaces, you may need integrations that summarise sales, fees, and payouts correctly. If you have VAT, you’ll want a setup that makes VAT returns straightforward.

Milestone 4: Your team knows what to do and when to do it

Even if you’re a microbusiness, “team” might include you plus a bookkeeper plus an accountant. The most common failure point in compliance transitions is unclear responsibility: who captures receipts, who codes transactions, who reconciles bank accounts, who reviews, and who submits. Write this down in plain language. Decide what happens weekly, monthly, and quarterly. Decide what evidence is required for expenses and where it is stored.

If someone else does your bookkeeping, ensure you understand the process at least at a high level so that if they are unavailable, you can keep things moving. Conversely, if you do your own bookkeeping but rely on an accountant for year-end, agree how often they will review your records during the year and how you’ll handle corrections.

Milestone 5: You have completed a “dry run” period

A dry run means operating your new routine for a period of time before any critical deadline. For instance, you might run your bookkeeping entirely through the chosen software for a quarter, reconcile regularly, and produce the relevant reports. You want to discover issues like duplicated bank feed entries, incorrectly mapped VAT rates, or missing invoice numbers when there is time to fix them.

The dry run period also helps you estimate how long month-end tasks take and whether you need additional support. Many businesses find that once the routine is established, the workload drops. The initial setup is often the heaviest part.

If you are still on spreadsheets, here’s when you should start

Plenty of small businesses use spreadsheets effectively, especially when transactions are low and the owner is disciplined. The challenge is that spreadsheets can be fragile: formulas break, files get duplicated, audit trails can be unclear, and keeping consistent digital links can be difficult without strict controls.

If you use spreadsheets today, you should begin preparing as soon as you can if any of these are true: your transaction volume is growing; you have VAT; you have multiple bank accounts or payment platforms; you are regularly behind on bookkeeping; you often chase missing receipts; or you dread year-end because “everything needs sorting.” Those signals suggest that a more structured system will pay off, not just for compliance but for cashflow visibility and decision-making.

A practical approach is to start by cleaning up your spreadsheet process first: standardise categories, ensure every transaction has a date and reference, keep a consistent method for VAT if relevant, and reconcile to the bank statement regularly. Once that’s stable, you can decide whether to move to a cloud system or use a bridging solution. Starting early gives you time to choose wisely.

If you already use accounting software, preparation may be mostly process

If you’re already using mainstream accounting software, your preparation is often less about switching systems and more about tightening your routine. The questions become: Are bank feeds enabled and reconciled regularly? Are VAT codes applied correctly? Are invoices raised in the system rather than outside it? Are you attaching digital copies of receipts consistently? Are you keeping personal transactions out of the business account?

In this scenario, “start preparing” can mean running a health check: reviewing your chart of accounts, checking how you treat common expenses, ensuring opening balances are correct, and making sure the people involved know what’s expected. You can often avoid headaches by doing a review well before any mandated reporting date.

VAT-registered businesses: preparing is about avoiding accidental errors

VAT adds a layer of complexity because small mistakes can compound. Wrong VAT rates, inconsistent treatment of deposits, and mis-recorded fees from marketplaces can distort your liability. If your VAT return is currently created by manually adding figures from different sources, you should start preparing early because digital reporting relies on clean inputs.

To prepare, focus on: ensuring all sales channels are captured; making sure fees and refunds are recorded correctly; confirming how to treat mixed supplies (standard-rated, reduced-rated, exempt, or zero-rated where relevant); and establishing a clear method for recording purchases and expenses with valid VAT invoices.

Many VAT problems come from incomplete data rather than complicated rules. The more you automate data capture and reconciliation, the fewer surprises appear at quarter-end.

Sole traders and landlords: the key is building a routine, not just buying software

For sole traders and landlords, the biggest benefit of preparing early is building a predictable routine. The temptation is to see MTD as a software decision: pick an app and you’re done. In practice, the routine matters more: when you record income, when you record expenses, and how you store evidence.

A simple monthly checklist often solves most issues: import bank transactions, match income to invoices or rent statements, categorise expenses, attach receipts where needed, reconcile balances, and review for anything unusual. If you do this monthly, any required submissions become a straightforward extension of the work you already do.

Starting early helps you discover which expenses you regularly miss, whether you’re mixing personal and business spending, and whether you’re tracking mileage or home office costs appropriately. These aren’t just compliance details; they affect how much tax you pay and how confidently you can forecast.

Limited companies: don’t let “we have an accountant” delay preparation

Many small limited companies assume their accountant will handle whatever changes come along. Accountants are essential, but they can’t fix what they don’t have. If your records are late, incomplete, or inconsistent, your accountant’s role becomes crisis management rather than advisory support.

For limited companies, early preparation is about ensuring bookkeeping is timely and accurate. That might mean implementing a system for expense claims and receipts, ensuring directors’ loan account items are recorded properly, and reconciling bank and card accounts regularly. If you pay yourself via payroll and dividends, you also want clarity on how those transactions appear in your records.

Starting early allows you to agree with your accountant on an efficient division of labour: what you will do each month, what they will review, and when they will step in. This reduces fees caused by clean-up work and improves the quality of advice you can receive during the year.

Signs you should start preparing right now

Even if no deadline is immediately on your horizon, certain signs indicate you should begin preparation immediately because your current process will struggle under digital reporting expectations:

You frequently fall behind and only update your books just before tax deadlines. You have no consistent reconciliation routine. You have multiple sales channels and can’t easily explain differences between gross sales and bank deposits. You have piles of receipts and missing invoices. You rely on cash estimates rather than accurate figures. You don’t know which customers owe you money without checking multiple places. You dread dealing with HMRC correspondence because you aren’t confident in your records.

These problems don’t resolve themselves. The earlier you improve the routine, the more calm and control you gain — and the less likely you are to face rushed decisions later.

How far in advance should you prepare, in practical terms?

Rather than anchoring to a specific date, think in preparation lead time. Most small businesses benefit from starting at least one full accounting cycle before they must comply in a new way. If you have quarterly processes (such as VAT), then starting at least one quarter early gives you time to do a full run-through. If you operate monthly, starting a few months early gives you time to stabilise.

If your records are currently messy, give yourself longer. Cleaning up historical data can take time, especially if you need to reconcile multiple accounts or correct VAT coding. If you plan to switch software, allow time for setup, data import, and training. If you want to involve an accountant or bookkeeper, factor in their availability, because busy periods can limit how quickly they can support an implementation.

A useful rule of thumb is to separate “setup time” from “habit time.” Setup time includes choosing software, configuring accounts, connecting bank feeds, and importing contacts. Habit time includes training yourself or staff to capture receipts promptly, reconcile regularly, and close the month properly. Many businesses underestimate habit time. Start early enough that the routine becomes second nature.

Choosing between cloud accounting, bridging tools, and hybrids

Preparation often includes choosing a technology path. While every business is different, you can evaluate options through a few lenses: effort, cost, risk, and future flexibility.

Cloud accounting software tends to reduce effort over time because bank feeds, invoicing, receipt capture, and reporting can be integrated. It may cost more than spreadsheets, but it can save time and reduce errors. Bridging tools can be cost-effective if your spreadsheet process is disciplined and you want minimal change, but they can preserve manual work and may be less forgiving if your data structure is inconsistent. Hybrid approaches exist too, such as using software for invoicing and bank reconciliation while maintaining certain internal analyses in spreadsheets.

When you start preparing early, you can trial these approaches without pressure. You can test how easy it is to reconcile, how reports look, and whether the workflow fits your business. You can also check whether your accountant supports your chosen approach and whether they can access your records efficiently.

Data hygiene: the part everyone ignores until it hurts

Digital reporting amplifies whatever is already happening in your records. If your categories are inconsistent, your submissions will be inconsistent. If you regularly miscode expenses, that will continue. If you mix personal and business transactions, you will still have to untangle them, only now you may be doing it more frequently.

Start preparing by improving data hygiene. Create a sensible chart of accounts (or review the one you have). Decide how to treat owner drawings, reimbursements, and personal items. Ensure that your customer and supplier records are tidy. Establish rules for common expenses. If you have recurring subscriptions, set them up consistently. If you accept payments through multiple processors, decide how you will record fees and payouts. If you do this early, you avoid repeating errors across multiple reporting periods.

Training and behaviour change: the hidden cost of waiting

Most small businesses underestimate the human side. A new system can fail because people continue to work the old way. Staff might keep emailing photos of receipts instead of using the capture feature. Someone might record invoices in a separate spreadsheet “just in case.” Directors might keep using the business card for personal items, creating more reconciliation work. None of this is malicious; it’s habit.

When should you start preparing? As soon as you can influence habits without stress. Introduce one new behaviour at a time. For example: first, require that every expense has a receipt stored digitally. Then, introduce a weekly reconciliation habit. Then, standardise how invoices are issued. Gradual change is more sustainable than a sudden overhaul.

If you use a bookkeeper, ensure they train you on what you need to provide and when. If you do it yourself, consider a short training session from an accountant or software adviser so you set up correctly from the start.

What to do if your business has irregular income or seasonal peaks

Seasonality changes the answer to “when should we start preparing” because you want to avoid implementing major process changes during your busiest periods. If your peak season is November and December, trying to switch systems in late October is a recipe for stress. Start right after your peak season, when you have more headspace.

If your income is irregular, you still benefit from routine. Even if you have quiet months, keep up the habit of reconciling and recording expenses. That keeps your books accurate and avoids a huge backlog when business picks up again. Digital reporting works best when it is continuous, not episodic.

Working with an accountant or bookkeeper: agree the plan early

If you have professional support, start preparing by having a focused conversation: what system should you use, who does what, and what “good” looks like each month. Many accountants prefer certain software because it integrates with their workflow, but the best choice is one that you will actually use properly. A good adviser will help you balance both needs.

Ask them to define: the minimum information they need each month; how you should store documents; whether you should use bank feeds; how often they will review your records; and what end-of-year clean-up tasks you can reduce by doing things right during the year. The earlier you set expectations, the less friction you’ll have later.

A simple preparation checklist you can start this week

You don’t need to do everything at once. Start with a small, high-impact checklist:

1) Separate business and personal finances: dedicated bank account and card where possible. 2) Choose a consistent method for capturing receipts (app, email forwarding, or a structured folder system). 3) Reconcile your bank account at least monthly (weekly if transactions are high). 4) Standardise your expense categories and VAT treatment if applicable. 5) Ensure invoices and income records are complete and match deposits. 6) Create a month-end routine: reconcile, review, and file documents. 7) Agree responsibilities with anyone involved (bookkeeper, accountant, staff).

Once these are in place, the rest becomes much easier. Software decisions and digital submissions sit on top of this foundation.

Common mistakes when preparing for Making Tax Digital

One mistake is treating preparation as purely technical. Buying software without changing your routine often results in frustration and unused subscriptions. Another is migrating messy data without cleaning it. If your existing records are inaccurate, importing them into a new system just moves the problem, often making it harder to fix.

A third mistake is ignoring integrations. If you sell on platforms, use payment processors, or have a point-of-sale system, you need a plan for how those numbers will flow into your records. Without a plan, you may end up manually copying figures, increasing the chance of errors.

Finally, many businesses fail to schedule time for learning. Even intuitive software takes a little getting used to. Allocate small blocks of time in the first month to explore features, understand reports, and refine your categories. Starting early gives you that breathing room.

So, when should small businesses start preparing?

Small businesses should start preparing for Making Tax Digital as soon as they can do so calmly and methodically — ideally well before any mandatory compliance point that applies to them. If your records are already tidy and you use accounting software effectively, preparation may simply mean checking your setup, tightening routines, and completing a dry run period. If you rely on spreadsheets, have inconsistent bookkeeping, or manage multiple sales channels, the best time to start is now because improvements to your process will pay off immediately, even before any formal requirement forces change.

The most reliable guide is not a date on a calendar, but whether your current record-keeping can produce accurate figures without stress. If it can’t, preparing early gives you control. If it can, preparing early still gives you the chance to optimise, test, and avoid last-minute decisions.

Making Tax Digital is ultimately about turning bookkeeping into a routine rather than a seasonal scramble. The earlier you begin building that routine, the smoother compliance becomes — and the more useful your numbers will be for running your business day to day.