Since its inception in 2015, plans for Making Tax Digital for Income Tax (MTD IT or MTD for ITSA) have been delayed, reassessed and revised. The government promises that these reforms will improve productivity, make things easier for small businesses, and cut the time spent on tax administration.
Though the prospect of moving to a digital system has loomed, some have begun to doubt whether this new scheme with ever materialise after multiple changes to thresholds and eligibility. However, the new Labour government has confirmed in its first budget that MTD plans will be going ahead.
It is worth being aware of the upcoming changes to ensure you are prepared…
Who will be affected?
From 6 April 2026, every person with trading and/or property income over £50,000 per annum will be required to keep digital records of income and expenses, report information quarterly to HMRC and make a final declaration at the end of the year, equivalent to the current Self-Assessment tax return…
From 6 April 2027, those with income (from trading/property) over £30,000 per annum will also need to fulfil these requirements.
Beyond this (date to be announced) MTD IT will be mandated for landlords and self-employed individuals with combined trading and property income over £20,000.
If your income (from trading/property) is below these thresholds, you may continue using the traditional Self-Assessment system.
The assumption is that the businesses initially affected will be unincorporated, have income under the VAT threshold (so fall outside other MTD requirements), and have no employees.
Note: These thresholds concern income, not profit. If you have more than one source of income from training or property, these must be combined to determine whether you surpass the threshold.
Currently, no deadlines have been set for partnerships or companies, who will fall into the MTD IT regime at some point. Individual members of a partnership are not currently within the scope of MTD IT in respect of their partnership income, despite being treated as self-employed for most tax purposes.
There will be simpler reporting requirements for rental income available, including reporting of income individually for jointly held property, but this is yet to be finalised.
You may be exempt if you do not use computers for religious reasons, or are unable to comply because of age, disability, or location.
HMRC plans to write directly to taxpayers during the Spring/Summer who, on the basis of their 2023/24 Self-Assessment returns, are likely to be eligible for MTD IT from April 2026.
The requirements
Those affected will need to…
- Record each individual transaction (income and expenditure), including the amount, category and date digitally. Summaries will not be sufficient, apart from daily sales totals for retail businesses.
- Submit quarterly reports through ‘MTD compatible software’ that records all income and expenditure. Tax and accounting adjustments do not apply to these reports, unlike a full tax return.
- Submit a final declaration after the end of the year to provide detail of all other income, including investments and savings interest, as well as your final business profit/loss, after any tax and accounting adjustments. From this, HMRC can calculate your Income Tax due.
Note: When keeping your digital records and making your quarterly submissions, each income source must be recorded and reported separately. For example, a sole trader who also has a UK property business would need to submit eight quarterly updates a year.
The deadlines for quarterly updates will be 7 August, 7 November, 7 February and 7 May following the end of the relevant quarter.
The first quarterly updates, for the quarter 6 April to 5 July 2026 (or up to 30 June 2026 if working on a calendar quarter), will be due on 7 August 2026. The first final declaration for the tax year 2026/27, will be due by 31 January 2028.
Whilst digital records are required, this doesn’t mean that businesses must scan and store invoices and receipts digitally. You can continue to keep documents in paper form if you prefer, but each individual transaction (not summaries) must be recorded and stored digitally. HMRC is encouraging people to keep records in as near to real time as possible.
Software
There are certain paid applications, such as QuickBooks Online and Xero, that offer compatible bookkeeping and quarterly submission functions.
The government has undertaken to ensure free MTD IT software will be made available to businesses with the most straightforward affairs.
If you intend to continue recording income and expenditure yourself on spreadsheets, then you will need to find and use ‘bridging software’ to transfer the information to HMRC. Check the software will be fit for your needs. Read government guidance on choosing software here…
In some cases, it will be possible to use the same MTD IT software that is used for the quarterly updates to also submit the final declaration at year-end. For others, it will be necessary to use separate tax software, or the new online submission service that is being built by HMRC. We will continue to offer submission through our own agent software for your end-of-year reporting.
How to prepare
Here are a few considerations and potential actions you could take to prepare for the arrival of MTD IT:
- If you have multiple sources of (relevant) income, are you keeping records for each?
- Review how you are currently keeping your records. Will this comply with the new digital record keeping requirements?
- If you work with an accountant, it might be worth discussing both digital record keeping and the quarterly submissions with them. Whilst you are not required to make tax and accounting adjustments as part of these processes, it could improve the information you have available on your trading activity.
- By default, the quarters will follow the tax year, not the accounting period of the business. To reduce complexity, you may choose to use calendar quarters and align your year-end with the tax year (if you have not done so already). For information on ‘basis period reform,’ please read our article.
- HMRC will not automatically register taxpayers to MTD IT. Taxpayers whose income meets the relevant threshold will need to sign up to use MTD IT in much the same way as taxpayers register for Self-Assessment now. If this applies to you, don’t forget!
- Although MTD IT is not yet mandatory, you may wish to sign up to the beta testing phase to get prepared early for future requirements.
Need some guidance?
How you will comply with MTD IT requires some thought, as there is no ‘one-size-fits-all’ approach. Knowing what’s needed and exploring the software options is a good place to start.
If you have any questions with regard to MTD IT, please get in touch with us and a member of our team will do their best to assist you.
