For some years the government, or rather HMRC, has been trying to become more efficient through greater levels of digitisation of its processes. Offices have shut, telephone lines have gone unanswered, and paper forms have been removed – all with the goal of ‘forcing’ taxpayers online.
Some may bemoan what has happened in that they have an inherent preference for the known, detest technology, and like paper. But given the direction of travel they have little option but to comply.
HMRC removed the submission of paper VAT returns in 2012, a move that was followed in 2022 with the compulsory introduction of Making Tax Digital for VAT (MTD VAT). Now the tax authority is preparing to introduce Making Tax Digital for Income Tax (MTD ITSA), from April 2026.
Making Tax Digital
In overview, MTD is a plan to end traditional tax returns and to introduce a ‘transformed tax system’. First announced in 2015, it was originally intended to be in place by 2020 after a phased introduction.
From HMRC’s perspective, the central plank of MTD is to make tax administration more effective, more efficient and simpler for taxpayers. It also seeks to give HMRC more up-to-date information and lower the likelihood of errors while also, importantly, closing the tax gap – the difference in tax revenue that HMRC reckons is due compared to what is actually paid.
But for taxpayers, there is – at this point at least – more administrative work and cost but better record keeping.
Squarely aimed at the self-employed and landlords with gross income of £50,000 per year or more – it’s going to have quite an impact. Consider the self-employed mechanic turning over £80,000 who is under the VAT registration threshold. They currently escape MTD VAT unless they’ve chosen to be registered but will be caught by the new regime for income tax.
From April 2027, that threshold will drop to £30,000, and those with turnover of between £20,000 and £30,000 will be brought within MTD ITSA by the end of this parliament.
For the moment though, if an individual’s gross income from self-employment and/or rental income is more than £50,000 on their 2024/25 tax return they will have to follow MTD rules from 6 April 2026. Those with both sources of income, for instance a self-employed mechanic who also lets out a holiday home, need to assess their combined income (before expenses) from both sources to work out when MTD will affect them.
MTD ITSA is intended to apply to partnerships and companies at some point in the future, but there are currently no firm dates as to when either might have to comply.
The regime in practice
The main principles of MTD are digital record keeping and quarterly reporting of data to HMRC. In practical terms, this means that once business records are created in software, all transfers of data must be made digitally, including those between taxpayer and accountant, submitting quarterly updates, making any corrections, and for MTD ITSA, filing the year-end declaration.
Under MTD ITSA digital records will have to note the amount, category and date of income and expenses relating to an individual’s businesses and/or rental property; records can be kept either in purpose-built software, or on spreadsheets (extra software will be needed to upload the data to HMRC), but all transfers of data have to be done digitally –manually retyping data from one piece of software into another won’t be allowed.
It’s going to mean upheaval for the self-employed who will need to change their accounting processes.
As with MTD VAT, the move is quite radical and will mean significant change for many since they’ll have to be timelier and more detailed in their record keeping, acquire new software to cope, or pay an accountant to complete the task.
MTD ITSA compliance is going to require more time and involve more expense. And those that are used to handing their accountant a bag full of receipts at year-end are going to find the new world order harder, and more expensive, to comply with.
Summary
If taxpayers choose not to comply then they’ll find themselves on the wrong side of a new tax penalty regime, which is similar to the rules applying to VAT. Those that leave migration to MTD ITSA to the last minute are going to pay dearly for advice – all while the trade is trying to cope with rising prices, the change from ICE to EV, and drivers being careful with their cash.
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