In just over a year, the first tranche of sole traders and landlords will be required by law to keep digital records to comply with the requirements of Making Tax Digital for Income Tax (MTD IT)
Getting Ready For MTD IT
The MTD programme was first announced in 2015, and starting next year, it will include income tax. The process will happen in phases, making it easier for taxpayers to prepare. So, in this article, we’ll walk you through what will be happening in the first phase of MTD IT.
What’s Changing?
From April 2026, taxpayers with qualifying trading and property income of £50,000 or more on the 2024-25 tax return will be mandated to join MTD IT. The start date for incomes between £30,000 and £50,000 is April 2027. The Chancellor confirmed in the Spring Statement that MTD IT will be extended to those with an income of £20,000 or more from April 2028.
This is a fundamental change to the way sole traders and landlords report their results to HMRC and will eventually apply to almost everyone who receives income from self-employment and/or property.
How Do I Comply?
To comply with the requirements, mandated taxpayers must:
- Use approved software, apps or spreadsheets to record income and expenditure;
- Submit cumulative quarterly updates to HMRC by 7th August, 7th November, 7th February and 7th May each year; and
- Complete a final annual submission of taxable profit for the accounting period at the end of the year. This will replace the current self assessment tax return.
If you do not currently keep digital accounting records, do not worry, as we will be able to help you with the process. HMRC is not providing its own record-keeping software or platform. We will be able to recommend the right commercial software solutions that meet the MTD IT requirements for you.
Are There Exemptions?
An exemption from MTD IT will be available for taxpayers who are digitally excluded on practical or religious grounds. Some of the reporting rules for quarterly updates have been relaxed to simplify the process for certain categories of taxpayers.
Three-line accounts
Digital records can simply be tagged as either ‘income’ or ‘expense’ rather than specific categories, except for mortgage interest for landlords of residential properties.
Retailers
A single record of daily gross takings can be entered into the digital records rather than each individual sale.
Jointly-let property
The individual owner can record a single total amount for each category of:
- Property income received during a quarter; and
- Property expenses incurred during the tax year.
Making Tax Digital Support
At Digital Tax Matters, we can help you comply with the MTD regulations. We offer assistance in selecting and implementing digital accounting systems, provide training and ongoing support, conduct compliance checks, and ensure accurate quarterly reporting. Many of our clients choose to outsource their digital bookkeeping to us.
You’ll need to take three steps to prepare for the changes which come into force on the 1st of April 2026:
- Ensure you have set up and have access to your own gateway:
If you haven’t already, then you will be required to create a personal gateway as soon as possible; not only is this necessary for MTD, but it is also a useful tool to keep on top of your personal tax affairs. Your gateway will link to our agent services account and create a digital handshake, which will allow us to file the quarterly returns on your behalf. You can this link to create your personal gateway. - Use software to allow a seamless exchange of information with us:
We have conducted research across a number of software providers, and we advise the best and most efficient software to help you Comply is ‘Xero Simple’‘. This software is packed with features to assist you in complying with the upcoming changes, including a live bank feed and digital receipt-capturing app. The cost for this software is £7 per month. - Set up a separate business account for business use only (includes rental income and sole traders):
If you are currently using your personal account for business transactions, we advise you to set up a separate account for business use only. This will ensure the transactions being pulled through with the live feed capture business transactions only. This will help keep your accountancy fees as low as possible and allow us to report the quarterly figures as efficiently as possible.
Please contact us and discuss this in further detail with your account manager. You can get in touch with us as a new client or for general enquiries via 01234 357595 or office@digitaltaxmatters.co.uk.