Latest MTD Update: Preparing for the Digital Tax System Transformation

Nearly ten years ago in March 2015, the then-Chancellor George Osborne announced a government initiative setting out a vision for the ‘end of the tax return’ and a ‘transformed tax system’ under the title of ‘Making Tax Digital’ (MTD). The MTD start date for small businesses was first planned as April 2018, then the focus switched to MTD for VAT which commenced on time for most VAT-registered businesses, for VAT periods starting on or after 1 April 2019.

Since then, there have been various delays not helped by Covid and many thought the ‘initiative’ would not happen. However, whilst HMRC is yet to officially confirm that Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will go ahead as from 6 April 2026, a new piece of guidance has been released titled ‘Work out your qualifying income for Making Tax Digital for Income Tax’ intended to assist those who may be required to submit under MTD. MTD for corporation tax is to be implemented at a date still to be announced.

Reminder – what is MTD?

The two critical requirements for MTD are to:

• Keep transaction records via a ‘digital link’; and
• Use compatible software to submit returns to HMRC.

HMRC is looking for ‘transparency’ between the business’s underlying accounting records and tax returns; this, HMRC believes, will reduce the risk of tax error and make compliance and enforcement more efficient.

Digital record keeping will form the basis of submissions, with transactions recorded digitally and the details submitted using specific MTD-compatible software. The software will electronically link bookkeeping records into HMRC’s MTD computers.

Taxpayers will be required to submit ‘updates’ every quarter (or more frequently if the taxpayer wishes). The ‘time window’ for submission will be from 10 days before the quarter end to one month and seven days after so as to align with the current VAT return submission deadline.

Such quarterly updates will be on a cumulative basis, allowing errors to be corrected as part of the following update and removing the need to resubmit previous quarters.

A year-end filing (termed ‘final declaration’) will also be required to confirm the previous quarterly submissions’ data and include claims such as the restriction of mortgage interest (if such information has not already been included in the ‘updates’), capital allowances, claims and other taxable income (e.g. investment and employment income). The submission deadline for this filing will be 31 January after the year’s end.

Who will be mandated?

As of 6 April 2026, MTD ITSA will apply to all self-employed individuals, partnerships, and landlords (including trusts that receive income from property) whose combined gross income from those sources exceeds £50,000. Those taxpayers with income between £30,000 and £50,000 will come under the scheme a year later, on 6 April 2027. Taxpayers whose income is less than £30,000 are exempt for now (although this is under review).

Note: It is important to note that these thresholds are gross trading/property income and not net or taxable profit. Where a taxpayer has more than one trade or has trading and property income, the total figure must be considered.

The next stage

HMRC advises that it is ‘gearing up’ for the 6 April 2026 start date and intends to write to all taxpayers who it thinks will likely be mandated into the scheme. HMRC will look at the 2024/25 submission and issue advisory letters as to which taxpayers they think should come under the scheme as of 6 April 2026. HMRC also intends to start an advertising campaign to inform taxpayers of the new system, including webinars.

Practical point

Taxpayers who believe they will be mandated into the scheme should consider opening a separate business bank account if they are not already using one for their accounts. Some business bank accounts come with free recording software built in.

Partner note:

HMRC Guidance: ‘Work out your qualifying income for Making Tax Digital for Income Tax’

Note: the comments confirming the ‘time window’ amendment to align with the current VAT return submission deadline and the use of the ‘cumulative basis’ for changes to prior submissions were confirmed by HMRC MTD ITSA Programme Director Craig Ogilvie in a webinar on 9 October 2024.

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