HMRC's Making Tax Digital: A Major Self-Assessment Overhaul for Traders and Landlords
Spring, as Leo Tolstoy noted in Anna Karenina, is a season for plans and projects. For hundreds of thousands of self-employed individuals and property owners across the UK, this sentiment is now tinged with apprehension as HM Revenue and Customs rolls out the most significant transformation of the self-assessment tax system in decades.
What is Making Tax Digital?
Making Tax Digital, or MTD, is a new framework for recording and reporting tax information to HMRC. It fundamentally changes how tax returns are submitted by introducing a requirement for quarterly digital updates. Claire Thackaberry, a technical officer at the Low Incomes Tax Reform Group, explains that it affects self-employed people and those with property income above specific thresholds.
From April 2024, the threshold is set at £50,000. This will drop to £30,000 on 6 April 2027, based on income earned in the 2025-26 tax year. By 6 April 2028, it will further reduce to £20,000 for income from the 2026-27 tax year. Individuals earning over these thresholds must use commercial software to submit an annual tax return and quarterly digital records detailing income and expenses from property and self-employment.
Who is Affected and How to Check
To determine if you are impacted, review your 2024-25 tax return. If you were registered for self-assessment and your combined turnover from property and self-employment exceeded £50,000, you are legally required to transition to MTD, unless exempt. Note that the threshold applies to turnover, not profits, and includes only property and self-employment income. Other sources, such as employment income, are excluded.
Exemptions exist for certain groups, including those without a national insurance number, disabled individuals receiving the blind person's allowance until at least April 2029, and recipients of qualifying care relief until at least April 2027. Limited companies are also exempt, as MTD applies solely to individuals.
Compliance and Software Options
Compliance involves using MTD-compliant software to send quarterly updates, due just over a month after each quarter ends. For instance, records for 6 April to 5 July 2026 must be submitted by 7 August 2026. Late submissions will incur penalties, though HMRC is waiving these for the first year. Software options range from free versions to premium tools like Xero, Sage, or QuickBooks, costing approximately £5 to £8 per month, which can be claimed as a business expense.
There are two main software types: bridging software, which links to spreadsheets for manual entry, and integrated software that automatically imports transactions from linked bank accounts. The latter categorises transactions as sales, expenses, or drawings, streamlining the process. Manual adjustments are possible for cash transactions or those from unlinked accounts.
Challenges and Preparation Tips
Andy Levett of HW Fisher acknowledges that the addition of quarterly updates will be a shock, but he believes it may eventually reduce paperwork and year-end workloads. To prepare, consider opening a separate current account for business transactions to minimise categorisation efforts. Mettle, a digital banking brand, offers a free business account with complimentary FreeAgent software, which is MTD-compliant.
HMRC is contacting affected taxpayers in February and March, but compliance is mandatory regardless of receiving a letter. Exemptions can be applied for based on factors like age, disability, or religious beliefs, but applications are assessed case-by-case.
Penalties and Future Outlook
Penalties include points for late submissions, with a £200 fine accruing after four points. However, no penalties apply for inaccurate quarterly updates if the final tax return is correct. Levett anticipates a learning curve in the first year, with HMRC likely expecting initial non-compliance. He advises against panic, emphasising that this shift aims to modernise tax reporting for efficiency.
As MTD expands to nearly 3 million individuals by 2028, staying informed and proactive is crucial for navigating this digital tax revolution.
