Excellent experience start to finish – always very responsive to any queries and the turnaround on the property I was buying was very quick, even in the busy time leading up to stamp duty deadline. Jenny was always very helpful and went above and beyond to close on a short timescale.
What is Making Tax Digital?
The Government’s Making Tax Digital (MTD) system, which presently applies to VAT, requires those individuals (so not corporate entities) affected by the system to:
- keep digital records
- submit quarterly updates and
- submit a year-end summary.
The system allows for bespoke software to keep these records, or for the information via spreadsheets.
Taxpayers must ensure that any software they use is compatible with HMRC’s system.
Making Tax Digital – what is changing?
It was announced it last November’s Budget that MTD is to be extended to income tax for certain taxpayers on 6 April 2026.
The new system will apply to sole traders and landlords who have a qualifying income of £50,000 or more for the 2024/2025 tax year.
“Qualifying income” includes:
“gross income from self-employment and property before any tax allowances or expenses are deducted”.
Digital Records
Digital records will need to include the amount, type and date of income, along with any expenses relating to the business in question (i.e. sole trade or property business).
Landlords who use agents to manage their portfolios will want to ensure that their agents are aware of the changes and provide the digital records in a format which meet with HMRC’s requirements.
Quarterly Reports
Using the information from these digital records, the affected taxpayers will then submit a quarterly update, due on 7th of the relevant month.
HMRC have said that these should not be seen as a quarterly tax return; rather, it will be the cumulative record of income and expenses during that quarter.
Trade and property businesses are treated as separate; therefore, a sole trader who also has a property business in their individual name will need to file separate updates for each business (8 all together).
Any errors in a quarterly update may be amended in the following update.
Digital Tax Return
The taxpayer must file a “digital tax return” at the end of the tax year; the sum of the 4 quarters will assist in producing this, but it will need to be modified to include the other relevant sources of income, such as any PAYE income, along with declarations of any capital gains. The return itself will not be entirely dissimilar to a present self-assessment return.
The filing deadline under the new system remains unchanged.
What do affected taxpayers need to do, and what happens if they don’t?
Providing that your 2025 return is filed before the deadline of 31st January 2026, HMRC should contact you to confirm if you will be required to use the new system.
If you do not want to wait and would like to check now if you will be required to do so, you can click on the link to the Gov.Uk website Find out if and when you need to use Making Tax Digital for Income Tax – GOV.UK
How to sign up for the MTD system?
As for how to sign up to the new system, it will likely follow a similar process as the MTD enrolment for VAT. That is, you will need the user ID and password for Self Assessment if you have them. There may be a request for additional identity documents, also.
There is currently a voluntary system for those who wish to take part in the testing phase of the new scheme. There are no penalties for late quarterly submissions for those who participate in the testing phase, allowing users to familiarise themselves with the system without risk.
Failure to comply
Those who are subject to the expanded MTD scheme will be required to use the MTD system after 6th April 2026, and there will be penalties for failure to meet the deadlines for both submissions and payments.
The HMRC policy paper states that failure to submit an annual return on time will incur a “penalty point”. Once 2 penalty points are earned, there will be a financial penalty of £200 for late submission.
This does not apply to quarterly updates; it appears that 1 penalty point will be awarded for each late submission. Once 4 are earned, the penalty will apply.
Regarding late payments, financial penalties for these will be levied under the revised general system for penalties. That is, there will be no penalty if the tax is paid within 15 days of the due date; however –
- after day 15 there will be a 3% penalty on the amount outstanding,
- rising to 6% by day 30.
- After day 30, there is an additional penalty charged at 10% per year for every day that the tax is not paid.
This is a punitive system but can be mitigated via a “Time to Pay” agreement being reached.
Further changes are coming
The minimum income required to be caught by the expanded MTD scheme will decrease in successive years. For example, it will decrease to £30,000 in April 2027 for the 2025/2026 tax year.
HMRC intend to expand to the MTD scheme so that it applies to partnerships, but no date has been set for that.
