Making Tax Digital for Income Ta

What is MTD?

MTD, stand for Making Tax Digital. What HMRC mean is that they want you to keep your bookkeeping records on a computer – a spreadsheet or software package will do but not pen and paper.

But along with this comes the obligation to send year to date totals from your computer direct to HMRC computer – every 3 months.

Essentially whether you use a spreadsheet or software package you must enter every invoice and bill, the computer software must then calculate the year-to-date totals and send them direct to HMRC computer with out you editing anything in transit.  You can download a file and upload it into another software package e.g. bridging software but not type in anything new.

Anyone who is VAT registered will be familiar with the process as they have had to do it since April 2017.

Warning – you may have to make more than one return each quarter e.g.: –

• If you are VAT registered and a sole trader, you may now have to make a return for income tax as well as one for VAT as there are no combined returns, and they may be different quarters.
• If you have two or more self employments then you will need to make two or more returns each quarter, one for each trade.
• If you have UK property income and self-employed income then you will need to make a return every quarter for each, one for the UK property income and one for the self employment.
• If you have UK property income and overseas property income then you will need to make two returns each quarter, one for the UK property income and one for the overseas property income, identifying each country separately.
• If you have a property jointly with others, then each owner may have to include their share of the income in their quarterly submission as there are no joint submissions.
• If you have several UK properties with different joint owners, then you can only make one quarterly UK property submission, but it will have to include your share of income for every one of your UK properties.

HMRC will not be providing any software so you will have to find or buy commercial software to do the job for you.

Who needs to do MTD?

MTD has been the standard for any VAT registered business since April 2017

HMRC are now phasing it in for landlords and sole traders with qualifying income of over £20,000.  There are certain exceptions who will not need to do it yet – as HMRC are finding it too difficult to write the software e.g.

• Partnerships and partnership income
• Anyone using Farmers averaging.
• Foster carers
• Ministers of religion
• Trustees

Qualifying income is the total turnover or gross income reported on your personal tax return as sole trader income, UK property income, or overseas property income.  This is the combined total for you.  If you share a property, then it includes your share of income from that property unless there is a formal property partnership in place.

When do I need to do this?

As mentioned, HMRC are phasing in the new rules.

• If the total qualifying income reported on your 2025 personal tax return exceeded £50,000 then you will have to abide by MTD from April 2026
• If the total qualifying income reported on your 2026 personal tax return exceeds £30,000 then you will have to abide by MTD from April 2027
• If the total qualifying income reported on your 2027 personal tax return exceeds £20,000 then you will have to abide by MTD from April 2028

You will have to register with HMRC, set up your software, do your record keeping and make your first quarterly submission, by 7^th August.

The default way of record keeping is cash accounting so you can take the figures from you business bank account – but you can elect to do accrual accounting or make adjustments at the year end.

The default quarters are tax quarters ended 5^th July etc, but you can elect to use calendar quarters ended 30^th June etc.

HMRC are promoting early registration for MTD and have a pilot scheme running.

It can be a very good idea to start keeping digital records in advance of registration, so you are familiar with how your software works.

What Happens at the year end?

Currently all sole traders and landlords report their income on a self assessment personal tax return, along with all their other income, and claims – due 31^st January.

There will still be this annual return, with a few minor changes: –

• it will be called an MTD annual return.
• HMRC plans to prepopulate it with the figures reported quarterly under MTD.
• HMRC plans to prepopulate it with other figures it may obtain e.g. bank interest.

 

What about Tax Due?

Initially there will be no change to the way tax is currently calculated and collected.

HMRC plans to give quarterly tax estimates but with other income missing then these may be very inaccurate for some.

HMRC plans to start to collect self employed taxes via tax codes if someone is both self-employed and employed or a pensioner.

Pessimists think HMRC are planning to collect self employed taxes quarterly per the MTD returns, but there are no current plans for this.

Why is HMRC making us do this?

HMRC believe that with MTD: –

• they can obtain more timely information on how the economy is doing,
• and hence be more agile in their responses.
• they will be able to make more accurate estimates of tax revenue,
• and hence be able to budget better.
• there will be fewer errors.
• there will be fewer opportunities to make mistakes.
• there will be more accurate and timely returns.
• it will save time on inspections.
• they will get more tax,

So what do I need to do now?

You need to review your qualifying income to see when MTD may apply to you.

You need to review your systems to see if they are compliant and can submit figures to HMRC.

If not, then you need to plan to change to a system that is compliant by the due date or find out if your system will be compliant by then.

Pen and paper is NOT compliant.

Spreadsheets may be compliant, but you are likely to required bridging software to make submissions.

HMRC will NOT be providing free software.

It can be a good idea to make these changes in advance so that you are familiar with the system well before submissions are required.

It is a good idea to liaise with your accountant or whoever prepares year end returns and whoever does the bookkeeping, so you can decide who is going to make the quarterly submissions.

Make sure you have your own government gateway account and have authorised your accountants so you can keep an eye on what HMRC are doing.

When you know all of the above then it will be time to register for MTD with HMRC.

Penalties

With the introduction of compulsory MTD, a new penalty regime is being introduced.

There will be penalties for late returns, based on a points-based system.

• Each late return earns a penalty point.
• If points total is over the penalty threshold, then you get a fixed penalty.
• Points may be cleared after a period of compliance – based on type of return.

There will also be penalties for late payment.  The later the payment the higher the percentage penalty.

There will also be interest charged on late payment and credited on refunds.

HMRC have agreed to be lenient with penalties in the first year i.e. 2026/7.

If you have triggered penalties, then your penalty point status will be available to view on your government gateway.

Registering for MTD for Income Tax

Registration for MTD for income tax is now open.

• You can register for the pilot scheme this year 2025/6 – and submit catchup quarterly returns for your sole trader or rental business – this is voluntary.
• Or you can register now to start submitting quarterly returns next tax year.

However: –

• HMRC MTD systems can not currently accommodate some types of income, and some taxpayers, so it is not open to all.
• HMRC are still writing the software to accept year end tax returns under MTD.
• HMRC free tax return software will continue for those not subject to MTD but will not accommodate MTD i.e. commercial software will be required to prepare and submit tax returns that include an MTD element.

If you would like assistance with MTD or just wish to discuss how it will affect, you then do contact us.