Tax

Making Tax Digital (MTD) was first mentioned by the UK Government back in 2015, nearly ten years ago!

The main goal of MTD is to create a more efficient and accurate way of calculating and paying tax.  This is to be done by introducing a compulsory requirement for taxpayers to maintain and keep digital records and to submit quarterly updates to HM Revenue & Customs (HMRC) using MTD compatible software.

A long running project; the first phase of MTD saw the introduction of MTD for VAT back in April 2019.

The second phase, MTD for Income Tax (MTD for IT), is due to go live in April 2026, with a second rollout in April 2027.  This will be the biggest change to the way Income Tax returns are filed since the introduction of Self Assessment in 1996.

Please see below for details of how the scheme will work, who will be affected, what we are doing to prepare for the changes and what we can do to help you comply with MTD for IT.

Who will be affected from April 2026?

• Sole traders with a business turnover above £50,000
• Landlords with rental income above £50,000
• A sole trader who also receives rental income, the turnover from which when added together exceeds £50,000

In all of the above tests it is the gross income that is considered, i.e. before the deduction of any expenses.

Also, if you have rental property that is owned jointly, it is only your share of the rental income that is taken into consideration when deciding whether you need to comply with MTD for IT.

How will this affect you?

If you meet the above criteria you, or  we as your Accountant, will need to:

• Use software that is compatible with MTD for IT
• Keep digital records of your business and/or rental income and expenses
• Send to HMRC quarterly updates of your business and/or rental income and expenses
• Submit an end of tax year annual submission

Who will be affected from April 2027?

Still only sole traders and landlords, but from April 2027 the income threshold decreases from £50,000 down to £30,000.

This reduction in the threshold will bring many more taxpayers into MTD for IT.

The Government have also announced that the above £30,000 threshold for sole traders and landlords will, at some point in the future, decrease further down to £20,000.

They have also confirmed that Limited Companies and partnerships will also fall under MTD in due course.

What does digital record keeping look like?

If you have to comply with MTD for IT, you will be legally required to keep digital records.

There will be two options available:

• Use software specifically designed for MTD for IT.
• Use spreadsheets to track your income and expenses, although these spreadsheets will then need to be linked through bridging software to MTD compatible software to allow the submission of the quarterly updates.

If you have more than one sole trade business, you must keep separate digital records for each business.  If you have more than one UK rental property these can be treated as a single UK property business for record keeping purposes.  If you have rental income from outside of the UK, a separate record will need to be kept showing the income and expenses for each country.

What is the process for the quarterly updates?

At the end of each quarter, you will be required to make a digital submission of your income and expenses for the past three months for each qualifying income stream.

The standard quarterly update periods will fall in line with the tax year; so they will end on 5 July, 5 October, 5 January and 5 April.

It is however possible to make an election to opt for calendar quarters if your sole trade business prepares accounts to 31 March.  Making an election means that your quarters would end on 30 June, 30 September, 31 December and 31 March.

Regardless of when your quarter ends, your quarterly submission must be filed by the 7^th of the following month as follows:

• Quarter 1 must be filed by 7 August
• Quarter 2 must be filed by 7 November
• Quarter 3 must be filed by 7 February
• Quarter 4 must be filed by 7 May

If you are already complying with MTD for VAT, and you also meet the MTD for IT criteria, then you will need to submit separate quarterly reports under MTD for IT as well as the usual MTD for VAT filings.

How will you know if you have to comply with MTD for Income Tax from April 2026?

It is your income for the 2024/25 tax year, i.e. 6 April 2024 to 5 April 2025, that will dictate whether or not you have to comply with MTD for IT from April 2026 onwards.

Whilst some people may already know if they have breached the £50,000 income threshold in the current 2024/25 tax year, and so will have to comply with MTD for IT from April 2026 onwards, others may not know until their 2024/25 accounts and tax return are prepared.

There will therefore be a benefit in your 2024/25 accounts and tax return being prepared as soon as possible after the tax year end so that, if you have to comply with MTD for IT, you have as much time as possible to get things in place before April 2026.

Can you get an exemption from MTD for Income Tax?

Yes, you can apply for an exemption if you think that you are digitally excluded.

This would be the case if:

• It is not practical for you to use software to keep digital records or submit them.  This may be due to age, disability or location.
• You are a practising member of a religious society whose beliefs are incompatible with using electronic communications or keeping electronic records.

What are we doing to prepare for MTD for Income Tax

MTD for IT will be a huge change to the way that we as a firm, and taxpayers, deal with their affairs going forward.

We are aware that the above may cause worry or concern for many, but please be assured that we are working hard behind the scenes to make sure that this change is as easy and as streamlined as it can be for you.

Even though April 2026 is over a year away, we know how fast time passes, and are now working on the following as part of our MTD for IT plan:

• We will shortly be contacting directly all clients whose circumstances in the 2023/24 tax year mean that it is likely they will have to comply with MTD for IT from April 2026 onwards.
• We will also confirm to clients as soon as their 2024/25 accounts and tax return are prepared, whether or not they will have to comply with MTD for IT from April 2026 onwards.
• We have signed up to HMRC’s MTD for IT testing phase and will be testing the new system for a year before it goes live.  This will give us valuable experience early on.
• We have a dedicated software team who, as part of the testing phase, will be looking at all software options available to make sure that we use and recommend the best software for your circumstances.
• If you decide that you would like to keep your own digital records, and or submit your own quarterly updates, we will advise on and assist with setting up your software and can provide training on this for you if required.
• We will keep your digital records and submit your quarterly updates if you do not want to do this yourself.

MTD for IT will be a hot topic for us for the foreseeable future.  Keep an eye out for future news, but if you have any queries in the meantime please do not hesitate to get in touch.  A member of our MTD team will be happy to help you.