Further to my Blog on MTD (Making Tax Digital), posted on 27th June, I have now received updated advice from HMRC on various aspects of MTD. The new digital tax return regime is being introduced in stages over the next three years, when it will eventually cover most individuals who have income of more than £20,000, unless that income is purely from PAYE or pensions.
The countdown has started
VAT registered businesses started submitting quarterly MTD returns from 1st April 2019, but a
temporary reprieve was granted on Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA), which was delayed until 6th April 2026, the start if which is now less than 9 months away.
MTD for ITSA starts in April 2026 for sole traders and landlords with qualifying income over £50,000. This means that individuals with qualifying income above £50,000 will need to keep digital records, use MTD-compatible software and submit quarterly summaries of their income and expenses to HMRC.
Those with qualifying income above £30,000 per annum will also be required to use MTD for ITSA from April 2027, with the threshold decreasing to £20,000 from April 2028.
What is qualifying income
HMRC’s definition of what they consider to be qualifying income is the total income you get in a tax year from self-employment and property.
All other sources of income reported through Self-Assessment, such as income from employment (PAYE), pension income, income from a partnership, interest on savings or dividends (including those from your own company), do not count towards your qualifying income.
Locked in for three years
As we transition to MTD, with it rapidly becoming the norm within a few years, the question of how you can escape from the MTD net, rises to the fore. This is especially relevant for taxpayers whose personal circumstances are about to change, such as a planned disposal of assets, sale of a property or related to your retirement.
The new rules begin with the starting point of when a taxpayer is in MTD, they will have to comply with all of its requirements (keeping digital records, filing quarterly updates etcetera) until they have spent a minimum of three consecutive years in MTD and have qualifying income below the threshold. This rule is intended to provide for fluctuating income above and below the MTD threshold from one year to the next.
What happens if qualifying income ceases
If a taxpayer, who is in MTD for ITSA and who subsequently stops receiving any qualifying income, which can happen for any number of reasons, such as retirement, the three-year lock-in period doesn’t apply as long as the taxpayer has no continuing source of qualifying income. They will, however, still need to file a quarterly update covering the period to the cessation of their business and will then just need to notify HMRC that their business has ceased, specifying the date of cessation.
If, however, there is any ongoing source of qualifying income, such as a single rental property, even if it’s well below the £20k threshold and likely to remain below, they will still need to remain in MTD for three years before they can exit the scheme.
What happens if your income drops before you’ve joined MTD
Compulsory inclusion into MTS ITSA is based on a one-year lag period. For example, the requirement to join from April 2026 is based on income reported for the 2024/25 tax year, but a year can be a long time in business and circumstances may well change between the year which determines the date when an individual has to join MTD, and that date actually coming around.
Under these circumstances, HMRC have agreed that it will not be necessary to register for MTD on the basis that all sources of qualifying income had ceased before the expected MTD mandation date. However, if that individual retained a handful of customers and continued to receive sole trader income, albeit below the threshold, they will still have to join MTD from April 2026.
Is there any way you can opt out of MTD?
Yes, taxpayers who are “digitally excluded” can apply for exemption from MTD. This is defined as being in a situation where it is “not reasonably practicable” to keep electronic records; an example of this would be someone living in a remote area that does not have reliable broadband.
Another potential circumstance under which a taxpayer may be able to claim exclusion, is a lack of suitable free software. Unfortunately, claims under these grounds have been somewhat undermined recently with several firms now making available free basic versions of their software. However, if you can demonstrate that the free software is not adequate for your business, you may still have a fighting chance.
Anyone wishing to apply for exemption on grounds of digital exclusion will need to apply to HMRC, who then have 28 days to confirm whether or not they agree with the application. It remains to be seen how generously HMRC will interpret the digital exclusion exemption.
Accountant’s view
HMRC claims that, and I quote from their press release; “These none-onerous digital requirements will help businesses save time through more efficient record-keeping, reduce errors in tax calculations, and provide a clearer picture of their tax obligations throughout the year.”
If there are any of you left that actually believes HMRC’s requirement to effectively increase the number of submissions to the tax office, from one to five per annum, is for the benefit of ordinary taxpayers as the tax office claims in their press release, also probably believes the earth is flat and the moon is made of cheese!
