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If you've heard the phrase "Making Tax Digital" and aren't entirely sure what it means or whether it affects you, you're not alone. It's one of the most commonly asked questions we get from business owners — and one of the most important to understand.

Here's everything you need to know, in plain English.

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What is Making Tax Digital?

Making Tax Digital (MTD) is HMRC's initiative to move the UK tax system online. The goal is to make tax administration more efficient, more accurate, and easier for businesses to get right by requiring them to keep digital records and submit tax information to HMRC through compatible software.

In short: spreadsheets and paper records are out. HMRC-compatible accounting software is in.

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Who does Making Tax Digital apply to?

MTD for VAT

If you're VAT registered, you are already required to comply with MTD for VAT. This means:

• You must keep digital VAT records
• You must submit your VAT returns using HMRC-compatible software — not through HMRC's own portal
• This has applied to all VAT-registered businesses since November 2022

MTD for Income Tax Self Assessment (MTD for ITSA)

This is the next phase of Making Tax Digital, and it affects self-employed individuals and landlords. Here's the current timetable:

• April 2026 — applies to self-employed people and landlords with combined income over £50,000
• April 2027 — applies to those with income over £30,000
• Potentially 2028 and beyond — those with income over £20,000 (subject to government confirmation)

Under MTD for ITSA, affected individuals will need to submit quarterly updates to HMRC through compatible software, plus a final end-of-year declaration — five submissions per year instead of one.

MTD for Corporation Tax

MTD for Corporation Tax is still in the planning stages and is not expected until at least 2026. Limited companies should monitor developments but do not need to take action yet.

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What software do I need?

You'll need accounting software recognised by HMRC as MTD-compatible. The most widely used options include:

• Xero — our recommended choice for most small businesses
• QuickBooks
• FreeAgent
• Sage

At NexPhase, we use and recommend Xero combined with Link My Books, which automatically pulls your sales and fee data directly from your selling platforms into your accounts — making quarterly reporting straightforward and reducing the risk of errors significantly.

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What happens if I don't comply?

HMRC issues penalties for non-compliance with MTD rules on a points-based system — you accumulate points for each missed submission, and once you hit a threshold, a financial penalty is applied. If you're working with an accountant who manages your submissions, compliance is handled for you.

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Do I need to do anything right now?

If you're VAT registered — you should already be compliant with MTD for VAT. If you're still submitting returns manually through HMRC's portal, you need to address this immediately.

If you're self-employed or a landlord with income over £50,000 — you have until April 2026 to get set up, but the earlier you switch to compatible software, the smoother the transition will be.

If you're a limited company — you don't need to do anything about MTD for Corporation Tax yet, but keeping digital records is good practice regardless.

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How NexPhase can help

We make MTD compliance straightforward for our clients. From setting up compatible software to managing your quarterly submissions, we handle the technical side so you can focus on running your business. All NexPhase packages from our Launch tier upwards include Xero setup and support, and our Scale tier and above includes full VAT registration and MTD-compliant submission management.

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One of the most common questions we get asked — particularly from growing businesses — is whether they should be operating as a sole trader or a limited company. It's an important decision and the right answer genuinely depends on your individual circumstances. This article breaks down the key differences, the tax implications, and how to decide which structure is right for you right now.

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What is a sole trader?

A sole trader is the simplest business structure. You and your business are legally the same entity — you register with HMRC for self assessment, declare your profits, and pay income tax and National Insurance on your earnings.

Pros of being a sole trader

• Simple to set up — just register with HMRC
• Less administration — one annual self assessment return
• Lower accountancy costs
• No requirement to file accounts at Companies House
• Complete privacy — your financial information isn't publicly available

Cons of being a sole trader

• Unlimited personal liability — if your business has debts, you're personally responsible
• Can be less tax efficient at higher profit levels
• May appear less professional to larger clients or lenders
• Fewer options for tax planning

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What is a limited company?

A limited company is a separate legal entity from you as an individual. Your company pays corporation tax on its profits, and you as a director typically pay yourself through a combination of salary and dividends. Your personal liability is limited to the value of your shares.

Pros of a limited company

• Limited liability — your personal assets are protected
• More tax efficient at higher profit levels
• Greater credibility with clients, suppliers and lenders
• More flexibility in how and when you pay yourself
• Easier to bring in shareholders or investors

Cons of a limited company

• More administration — annual accounts, confirmation statements, corporation tax returns
• Higher accountancy costs
• Your financial information is publicly available at Companies House
• Less flexibility — you can't just take money out of the business whenever you want

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The tax comparison

The most tax-efficient approach for a limited company director is typically to pay yourself a salary at the personal allowance threshold (£12,570) and take the remainder of your income as dividends. Here's a simplified comparison for someone with £50,000 in profit in 2025/26:

Structure	Total tax & NIC	Take home
Sole trader	~£9,734	~£40,266
Limited company	~£9,657	~£40,343

At £50,000 the difference is modest. However, as profits grow, the gap widens in favour of a limited company. At £80,000 profit, the saving can be several thousand pounds per year.

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When should you consider incorporating?

Consider staying as a sole trader if:

• Your profits are consistently below £30,000–£35,000
• You're just starting out and want to keep things simple
• Your business carries low financial risk

Consider incorporating if:

• Your profits consistently exceed £30,000–£35,000
• You want to protect your personal assets from business risk
• You're working with larger clients who prefer or require a limited company
• You're looking to bring on employees or investors

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The costs you need to factor in

A limited company comes with additional ongoing costs that need to be weighed against the tax saving:

• Accountancy fees — limited company accounts are more complex and typically cost more
• Companies House filing fees — annual confirmation statements (£34 online)
• Corporation tax filing — your company must file a CT600 return each year
• Payroll — if paying yourself a salary, you'll need to run a payroll scheme

If the tax saving is £500 but the additional accountancy costs are £800, incorporating doesn't make financial sense yet.

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Can you switch from sole trader to limited company later?

Absolutely — and many businesses do exactly that. You can start as a sole trader and incorporate later when the timing is right. We handle this entire process for clients, ensuring the transition is smooth and fully compliant.

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If you're selling online — whether through Amazon, Shopify, eBay, Etsy, Vinted or TikTok Shop — there's a good chance you need to complete a self assessment tax return. But many E-commerce sellers either don't realise this, aren't sure how it works, or leave it until the last minute and end up with penalties.

This guide covers everything you need to know, from whether you need to register to what you can claim as expenses.

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Do I need to complete a self assessment?

You need to register for self assessment with HMRC if any of the following apply to you:

• You're self-employed or a sole trader and your income exceeds £1,000 in a tax year (the trading allowance)
• You're a director of a limited company and receive a salary or dividends
• Your total income from all sources exceeds £100,000
• You received income from selling goods online that amounts to more than £1,000

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What counts as income for E-commerce sellers?

Your taxable income is not your total sales figure — it's your profit after deducting allowable business expenses. For example, if you sold £30,000 worth of products but spent £22,000 on stock, platform fees and shipping, your taxable profit would be around £8,000 — not £30,000.

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What about selling personal items?

Selling personal items — clearing out your wardrobe on Vinted or selling old furniture on eBay is generally not taxable. HMRC doesn't consider this a business activity.

Running a trading business — regularly buying goods with the intention of reselling them for profit is trading and the income is taxable. HMRC uses the "badges of trade" to determine whether an activity constitutes trading.

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Key dates for self assessment

Date	Deadline
5 April	End of the tax year
5 October	Register for self assessment (new registrations)
31 January	File your online return & pay your tax bill
31 July	Second payment on account (if applicable)

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What expenses can E-commerce sellers claim?

• Cost of goods sold — stock purchased for resale
• Platform fees — Amazon, eBay, Etsy, Shopify, TikTok Shop fees
• Shipping and packaging — postage, materials, label printing
• Storage and fulfilment — Amazon FBA fees, warehouse costs
• Software and subscriptions — Xero, Link My Books, inventory tools
• Marketing and advertising — Amazon PPC, sponsored listings, social ads
• Home office costs — proportion of utilities and broadband
• Professional fees — accountancy fees, legal advice
• Bank and payment processing fees — PayPal and Stripe fees

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What you cannot claim

• Personal clothing (unless a uniform or protective clothing)
• Personal meals and entertainment
• Fines and penalties
• The cost of commuting from home to a fixed place of work

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Payments on account

If your tax bill exceeds £1,000, HMRC requires advance payments towards the following year's bill — 50% due 31 January and 50% due 31 July. In your first year of filing, you could owe one and a half times your expected tax bill in January. It's important to budget for this.

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What happens if I miss the deadline?

• 1 day late: £100 fixed penalty
• 3 months late: Additional £10 per day (up to 90 days)
• 6 months late: 5% of the tax due or £300 (whichever is greater)
• 12 months late: A further 5% of the tax due or £300

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