13/03/2026
Apologies for a long post, but we've had a lot of clients asking about Making Tax Digital for Income Tax. If you were one of them, read on, if not, scroll on unless you're suffering from sleep deprivation...
How It Started
During a Budget about 10 years ago, the Chancellor announced that personal Tax Returns were “to be scrapped”. No detail of a proposed replacement service was announced, and the general tone was to cut bureaucracy. There was initial panic in some accounting quarters, but it was thought generally that the announcement lacked substance, and was more ‘hot air’ (budgets are good at producing this…).
How It Developed
HMRC have always had a bee in their bonnet about individuals paying self assessment tax not paying in ‘real time’ ie as they earn the money. This is pretty impossible to do, as self assessment income doesn’t necessarily come in ‘smoothly’ like often employment income does, and costs tend to follow a similar clunky pattern, which is all best reviewed over a 12 month period. Self assessment income is taxed slightly in arrears, after a calculation of the net profit is made, and after allowing for an in-year instalment payment.
I can only imagine that for the initial soundbite “to be scrapped”, turning into “MTD for Income Tax”, which from 6th April will require quarterly real-time returns, plus an end of year Tax Return, equalling FIVE Tax returns per year, involved a dozen civil servants and a crate of beer locked in a room together...
Where We Are
From 6th April, 2026, MTD for Income Tax is being introduced, and is compulsory for qualifying individuals. I say individuals, because it doesn’t apply to Limited companies or Partnerships. MTD for Income Tax is a quarterly return for all individuals with self employed TURNOVER and/or RENTAL INCOME which totals over £50,000 (£30,000 from 2027 and £20,000 from 2028). To be clear, if your Turnover is £45,000 and you have Rental Income of £6,000 this year, you are IN !
The quarterly return requires Turnover for the quarter, plus Total Costs, giving a profitability figure for the quarter. This is a separate form to your VAT Return if you are VAT Registered, and does not replace the annual Tax Return, which for the individuals in this scheme will be called the Final Declaration. HMRC advise that the new form is necessary to help improve and digitalise book-keeping, and help you prepare for your tax bill by alerting you to your growing tax bill through the earlier calculation of profit. What isn’t mentioned or factored in is the expense and time cost of individuals producing the extra information, or the clear possibility that once the system is operational we are a button-press away from the introduction of quarterly real-time tax payments (which would bring a huge one-off windfall to the treasury). If this is the way we are moving it would be nice if there was some honesty about it.
HMRC will operate a penalty point system after the first year, if a return is late a penalty point will be issued, after 4 penalty points there will be a £200 fine. This is one area where HMRC have traditionally been quite efficient.
HMRC haven’t advised us which of our clients is required to file MTD quarterly returns in 2026/2027, and we will have to request a separate authority to file for each, our existing authority isn’t sufficient. It does appear to me that it is part of an HMRC policy of easing accountants out and dealing directly with clients. The cynic in me thinks that someone has run an algorithm which suggests that this would garner more tax for HMRC…
One example of where we are, let’s suppose that you are a tradesman who is VAT registered and claims Universal Credit, earning £15k per annum, and your VAT Return dates don’t line up with your MTD dates You will have 12 x UC forms, 4 x VAT return forms, 4 x MTD forms, plus a Final Declaration, 21 forms to report your income in the year !!! There’s no time left to earn a living. The old mantra used to be ‘Tax Doesn’t Need to be Taxing’…
What Needs to Be Done
We have about 100 or so clients who will be affected by the changes this year, 250 next year, and 350 the year after, and anyone affected SHOULD have received a couple of letters from HMRC advising of their participation. The return to be filed is going to be a basic Turnover/Total Costs report, which can be overwritten when the end of year Tax Return goes in to HMRC. Any client who is VAT registered and we file your VAT presently, we could file the extra Quarterly Return for if you require us to. Our initial thought is that affected clients who aren’t VAT registered file their own Quarterly Returns, and we file the end of year Final Declaration (Tax Return) as usual. Our logic being twofold, we have always disliked charging clients for ‘bolt on’ work, plus doing an extra 400 or so returns a year (100 x 4), with all it entails to do it properly, would be too much for us.
HMRC have a list of software they recommend (some of it is free), and we are happy to let them guide your choice of software. The choice would be between fullblown book-keeping software ie Xero or equivalent, or filing software, which you would use just to file the totals. The link to the HMRC Tool is here :
https://www.gov.uk/guidance/find-software-that-works-with-making-tax-digital-for-income-tax
Looking at the ‘Free’ software, the Clear Books and Freeagent products are from reputable software houses, and a couple of banks have free products (Monzo / Starling / Tide). Quickbooks and Xero have paid products which could be used where you are looking for more of a book-keeping system.
If you haven’t got a working Government Gateway, you will need to create one, which will be your login to file the return.
The first year is a so called ‘soft launch’, when returns are expected and will be chased, but fines won’t be issued for late filing. The first period end will be 6th April, 2026 to 5th July, 2026 for affected individuals, with the filing deadline being 7th August.
We may have some limited capacity to file for some individuals, but we would need early notice that you would require our help, and would need the information presenting punctually using a template we provide, without our prompting.
Where It’s Going
We appear to be moving inexorably towards quarterly tax payments, with reliance on digital records lifted directly from bank accounts, and the eradication of cash as a trading commodity. That would suit the HMRC, banks, and other state institutions. There’s a few conspiracy theories for you…
