In 2015 the then Chancellor first announced a digital revolution that would make tax “easier”. By the end of that year the project was named as “Making Tax Digital” (MTD) and the HM Treasury Road Map heralded quarterly filing requirements from April 2018.
A week may be a long time in Westminster but sometimes Whitehall need a little longer than three years to implement the policies.
Now, 11 years after it was first announced, the first mandatory returns for Making (Income) Tax Digital are just round the corner and the rules apply from 6 April 2026.
This regime is different from the VAT MTD regime that has applied to VAT registered businesses for some time.
HaysMac has been advising its clients of the changes for some time and published a guide to the income tax scheme in June 2025.
There are some practical aspects that are worth exploring in more depth.
Timing
The rules take effect from 6 April 2026 so the first return that will be needed will be due by 7 August 2026. This return will normally cover the three months from 6 April to 5 July but it is possible to report on the calendar quarter to 30 June instead.
School holidays will not be considered an excuse for missing that first deadline and subsequent returns are due quarterly thereafter. This means that tax returns for 2025/26 will be due by 31 January 2027 and the MTD return for the quarter ending 31 December 2026 just a week later!
For anyone eager to tell HMRC about their income more regularly, it will be possible to make returns between the quarter dates. An extra report will not change the next quarterly reporting date, so these are fixed even if extra returns are made.
If all figures are known it is possible to make a quarterly return up to 10 days before the end of the quarter. The early return would still need to cover the full quarter and as with an extra return, it will not change the due date for the next quarterly submission.
One final point about timings. The income that triggers the rules is that for the ante-preceding tax year. For the first year of reporting, starting April 2026, this means that the income is that for 2024/25- the tax returns being filed by 31 January 2026. Amending tax returns after the MTD year starts, to report a lower turnover, will not be able to take someone out of MTD.
Turnover
The initial threshold for entering the MTD Income Tax reporting regime will be gross income of £50,000 a year from sole trades and/ or rental income (both UK and overseas for UK residents).
These sources need to be combined, so £40,000 of trading turnover and £12,000 of rental income will put an individual into the system.
Only the individual’s share of a jointly owned property income is included but it must be remembered that the rental income is before expenses, not the amount paid by an agent after deducting their commission.
If any damage deposits are retained from tenants at the end of a lease, that is also included as gross income even if it simply disappears to fund the repairs.
If the income is reported including VAT on a tax return then this counts towards the gross income for threshold purposes.
As the test looks at income, not profit, any adjustments that are being made because of changes to reporting periods (eg basis period reform) are not included. Partnership profits are also ignored when determining the individual’s income for this purpose.
The entry threshold will reduce over the next two years, to £30,000 in April 2027 and to £20,000 from April 2028.
It takes one year of income over the threshold to be within MTD but three years of reduced income below the thresholds to leave it. Only if all relevant sources (sole trades and property income) cease can the MTD returns be stopped sooner.
Record Keeping
The requirement for taxpayers to maintain and retain records has existed for longer than the MTD project, with draconian penalties of up to £3,000 sitting on the statute books but rarely, if ever, imposed. It has been whispered that HMRC officers may have been dissuaded from applying them in even the most egregious cases.
Business records will now need to be kept digitally and more regularly. The proverbial plastic bag of paperwork will no longer suffice and whilst professional packages such as Xero are not obligatory, the new regime may lead to financial reminders of the need to comply with the rules.
With the new regime coming into effect only two months after the tax return deadline for the year that determines entry, solutions should be considered as early as possible. It is vital to ensure that both the record keeping and the mechanism of filing returns meets HMRC’s requirements.
If mistakes are made, they need to be corrected as soon as possible and reflected in the next return, either regular or additional.
Outside the system
There are some exemptions to the MTD regime, such as those without a National Insurance Number, executors, trustees and Digitally Excluded individuals.
Living outside the UK will not allow individuals to escape the system. Non-residents will also need to comply with MTD obligations if their UK income, typically rental income, is over the threshold. A non-UK resident’s overseas trading and foreign property income will not be included when testing to determine MTD requirements.
With the deadline to start complying with the new rules only a few months away, the HaysMac Private Client Tax Team are always happy to talk support you and ensure that the transition goes as painlessly as possible.
