Category: Making Tax Digital

Making Tax Digital Income Thresholds: What You Need to Know About Income Drop Relief

Posted on by Sidra

Thresholds move down: a phased mandate

The UK government’s Making Tax Digital Income Thresholds for Income Tax Self‑Assessment (MTD ITSA) reforms bring the UK’s largest shift in personal tax compliance for decades. From April 2026, sole traders and landlords with total self‑employment and property income above £50,000 must keep digital records and file quarterly updates using MTD‑compatible software. The threshold falls to £30,000 for the 2025/26 tax year, meaning those earning more than that will be mandated from April 2027. The Spring Statement 2025 announced a further reduction to £20,000 from April 2028, which will bring almost a million more taxpayers into scope.

These thresholds apply to qualifying income – a concept that excludes wages, dividends or pension income. HMRC defines qualifying income as the total gross income from self‑employment and property letting. In other words, digital reporting is triggered by turnover, not profits, so high expenses do not keep you out. HMRC assesses this on the tax return filed the year before mandation. Even income from a ceased business counts if there is at least one continuing source.

Making Tax Digital Income Thresholds: Understanding the Income Drop Relief

The UK government’s Making Tax Digital (MTD) initiative, set to be fully implemented by April 2026, will require businesses with qualifying income above certain thresholds to report taxes digitally. However, the system has built-in flexibility for businesses whose income fluctuates.

Under the current rules, once a business meets the qualifying income threshold—£50,000 starting in 2026, falling to £30,000 in 2027 and £20,000 in 2028—it must transition to MTD. However, if a business’s income dips below the threshold for three consecutive tax years, it can eventually opt out of MTD.

This rule helps businesses that may experience occasional income drops but prevents constant switching between the MTD system. For instance, a sole trader earning £52,000 in 2024/25 would be required to comply with MTD by April 2026. If their earnings later drop to £28,000, they must remain within MTD until their income stays below the threshold for three full tax years. Only then can they revert to traditional self-assessment.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Income Drop Relief for MTD: Why the Three-Year Rule Affects Your Costs

Digital reporting promises long‑term accuracy and productivity benefits, but the transition comes with costs. HMRC estimates that those mandated between £30,000 and £50,000 will face average one‑off costs of around £350 and annual ongoing costs of about £110 for software and additional record‑keeping. Businesses already using accounting software may face minimal additional cost, but less digitally capable businesses will need to invest in hardware, software and training. HMRC has committed to ensuring free software for the smallest, simplest businesses, but the availability and suitability of these products remain a concern.

The requirement to stay in Income Drop Relief for MTD for three years after income falls below the threshold prolongs these costs. A landlord whose rental income dips under £30,000 in 2027 may still be paying software subscriptions until 2030. This income drop relief is therefore a misnomer: relief is only available after a prolonged period of lower income. Failing to comply risks penalties and late‑filing sanctions.

MTD for Sole Traders and Landlords: How the New Rules Impact You

The phased thresholds will pull different groups into digital reporting:

  • MTD for Sole Traders and Landlords: High‑turnover sole traders and landlords, those earning above £50,000 in 2024/25, will lead the transition from April 2026. Many professional contractors, doctors, artists and landlords with multiple properties fall in this bracket.
  • Medium‑income businesses: those earning £30,000–£50,000 in 2025/26 will join from April 2027. This includes part-time landlords, tradespeople and small retailers.
  • Lower-income self-employed and landlords: from 2028, the threshold is expected to fall to £20,000. Many side hustles and microbusinesses will then be mandated.

The three‑year exit rule particularly affects those with seasonal or volatile income. Farmers, creatives and hospitality businesses often see turnover fluctuate; once mandated, they could remain locked in even after downsizing. The rule may also delay retirement: an individual hoping to wind down their business may need to maintain digital records for three extra years.

Planning for MTD: thresholds and income drop relief

Businesses should proactively monitor their qualifying income and plan for the implications:

  1. Forecast your turnover. Identify when your income is likely to exceed £50k, £30k or £20k and prepare accordingly. Early voluntary adoption may smooth the transition and help you familiarise yourself with the software.
  2. Understand the 3‑year lock‑in. If you expect income to fall below the threshold, budget for at least three more years of digital compliance. Consider the timing of asset sales or business changes to minimise these years.
  3. Choose appropriate software. Evaluate MTD‑compatible software based on your business complexity and budget. Some free options exist for straightforward businesses, but paid software may offer better functionality. Ensure the software can produce quarterly updates, maintain digital records, and connect directly to HMRC.
  4. Keep digital links. HMRC requires digital links between records and submissions. Manual copy‑and‑paste or spreadsheet bridging may not be enough. Plan for training or external support to comply with digital linking rules.
  5. Apply for exemptions if eligible. HMRC offers exemptions where it is not reasonably practicable to use digital tools, for example due to disability, age, location or religious beliefs. If your income falls very low, you may request an exemption before the three‑year period ends.
Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Apex Accountants: navigating digital reporting transitions

As the digital tax landscape evolves, specialist advice becomes essential. Apex Accountants & Tax Advisors has been following MTD ITSA developments since the first consultations. Our team can:

  • Assess qualifying income and determine when you must join MTD.
  • Develop digital record‑keeping systems, from selecting software to implementing compliant processes.
  • Advise on structuring business activities to manage threshold exposure and plan for the three‑year lock‑in.
  • Support exemption applications where digital compliance is not practicable.

Whether you’re a landlord, a sole trader or a mixed-income professional, expert guidance can reduce risk and allow you to focus on your business. Contact Apex Accountants today to discuss your position and build a bespoke MTD strategy.

Frequently asked questions

What counts as qualifying income for MTD?

HMRC counts your gross self‑employment and property income. Employment earnings, partnership profits, shares, dividends, and pensions are ignored.

When do I need to join MTD ITSA?

If your qualifying income exceeds £50,000 in 2024/25, you will join from April 2026; if it exceeds £30,000 in 2025/26, you will join from April 2027; if it exceeds £20,000 in 2026/27, you will join from April 2028.

Can I leave MTD as soon as my income drops below the threshold?

No. You must continue using MTD until your qualifying income remains below the threshold for three consecutive tax years. Only then can you opt out.

What if one of my income sources ceases? 

If you stop trading or letting property entirely, you can exit MTD after filing your final quarterly update and annual return. But if you have another source of qualifying income, you must stay in MTD until that source has remained below the threshold for three years.

Is the threshold based on profit or turnover?

 It is based on gross turnover (income before expenses). Even if your profits are low or you make a loss, a high turnover can still bring you into MTD.

Are there any exemptions? 

Yes. You may be exempted if it is not reasonably practicable to keep digital records due to age, disability, location, or religious beliefs. You can also apply for exemption if your income becomes very low and the cost of digital compliance outweighs the benefits.

As the government phases in MTD ITSA, understanding the thresholds and the delayed income drop relief is vital. Planning ahead and seeking professional advice will help mitigate risks and ensure compliance while the digital tax regime evolves.

MTD for ITSA penalties and how to avoid them

Posted on by Sidra

Britain’s push towards Making Tax Digital (MTD) will transform income-tax reporting for sole traders and landlords, with MTD for ITSA penalties for UK sole traders becoming an important compliance consideration. From 6 April 2026, those with qualifying income above £50,000 must keep digital records and submit quarterly updates. Individuals earning over £30,000 join in 2027, followed by those over £20,000 in 2028. To enforce compliance, HMRC has created a points-based penalty regime; understanding MTD for ITSA penalties and how to avoid them is vital for anyone who will come under Making Tax Digital for Income Tax Self-Assessment (ITSA).

A new approach to MTD for ITSA penalties

HMRC has introduced a points-based penalty system for late submissions instead of immediate fines.

  • Missed deadlines: Each missed quarterly update or tax return deadline results in one penalty point.
  • First year flexibility: There is no financial penalty for late quarterly updates in the first year (2026–27), although points may still be recorded.
  • Penalty threshold: Once a taxpayer reaches four penalty points, HMRC issues a £200 fine.
  • Further missed deadlines: Every additional missed submission after reaching the threshold results in another £200 penalty.
  • Points expiry: If you stay below the four-point threshold, penalty points automatically expire after two years.
  • Removing points after the threshold: If four points are reached, they remain until you:
    • Submit all returns on time for 12 months, and
    • Clear any outstanding submissions from the previous 24 months.

Keeping records up to date and meeting submission deadlines is therefore essential to avoid MTD for ITSA penalties and the accumulation of penalty points.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Late payment penalties explained

Late payment penalties are separate from submission penalties and depend on how quickly the outstanding tax is paid.

  • First-year grace period: Taxpayers have 30 days after the payment deadline to pay the tax or agree to a payment plan with HMRC.
  • Later years: The grace period reduces to 15 days after the first year of the regime.
  • No penalty window: There is no penalty if the tax is paid within 15 days of the due date.
  • 16–30 days late: A percentage penalty is applied to the outstanding tax.
  • More than 30 days late: Additional percentage penalties may apply, along with daily interest on the overdue amount.
  • Time to Pay arrangements: Agreeing to a payment plan with HMRC within the grace period can stop further penalties from building up.

Taking action quickly and communicating with HMRC early can help reduce the financial impact of late payments.

Who is affected and why it matters

The penalty regime applies to individuals who file through self-assessment and exceed the qualifying income thresholds for MTD, meaning MTD for ITSA penalties for UK sole traders will become increasingly relevant as the rules take effect. Sole traders, landlords and partnerships (once brought into the system) must maintain separate digital records for each source of income and send individual quarterly updates, making MTD for ITSA penalties for UK landlords an important risk to understand. The rules do not apply to trusts, estates and non‑resident companies. Penalty points accumulate quickly, so robust digital bookkeeping and punctual submissions are essential to avoid fines and reputational damage.

Avoiding penalties: practical steps

Being prepared is the best defence against penalties. Businesses should:

  • Adopt MTD‑compatible software and keep digital records up to date.
  • Note the quarterly deadlines (7 August, 7 November, 7 February and 7 May) and submit updates promptly.
  • Watch your penalty points and tax liabilities through HMRC’s online services; if cash is tight, contact HMRC quickly to arrange a payment plan.
  • Check if you qualify for an exemption due to digital exclusion or other specific circumstances.

Apex Accountants & Tax Advisors: guiding you through MTD

The shift to Making Tax Digital for Income Tax (MTD for ITSA) will change how many sole traders and landlords manage their tax reporting, particularly with MTD for ITSA penalties for UK landlords becoming part of the compliance landscape. Preparing early can reduce compliance risks and prevent penalties. Apex Accountants & Tax Advisors can support businesses at every stage of the transition in the following ways:

  • Assessing whether MTD applies to you and confirming when you must join the regime.
  • Recommending suitable MTD-compatible software based on your business structure and reporting needs.
  • Setting up digital record-keeping systems that meet HMRC requirements.
  • Managing quarterly update submissions to reduce the risk of missed deadlines.
  • Monitoring reporting obligations and payment timelines to help prevent penalty points.
  • Advising on payment planning if tax liabilities create cash-flow pressure.
  • Providing support with HMRC communications or appeals if penalties arise.

With structured processes and professional oversight, businesses can meet their MTD obligations without disruption.

Contact Apex Accountants today to discuss your MTD preparation or book a free consultation.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

FAQs

What triggers a penalty under MTD for ITSA? 

You earn a penalty point every time you miss a quarterly update or fail to file your annual tax return by 31 January. There is no penalty for missing quarterly updates in the first year. Four points lead to a £200 fine, and each subsequent missed deadline incurs another £200.

Are there penalties for late payment? 

Yes. You have 30 days (15 days after the first year) to pay or arrange a payment plan. Payments made after that period attract a percentage of the tax owed plus daily interest.

Do VAT points count towards ITSA penalties?

No. Penalty points for MTD for ITSA are separate from those for VAT.

Who must comply with MTD for ITSA? 

Solo traders and landlords whose qualifying income exceeds £50,000 from April 2026, £30,000 from April 2027 or £20,000 from April 2028. Partnerships will join later; trusts and non‑resident companies are excluded.

How can I remove penalty points? 

Points expire automatically after two years if you stay below the threshold. If you reach four points, you must file on time for 12 months and clear any outstanding returns from the previous 24 months to reset.

What is MTD compatible software for Income Tax?

Posted on by Farazia Gillani

Britain’s drive to digitise tax reporting has finally reached income tax. From 6 April 2026, sole traders and landlords with qualifying income above £50,000 must use software that can record transactions digitally, send quarterly updates and file an annual return. Additional bands of taxpayers will enter the regime later. The result is a new market for MTD compatible software for Income Tax, designed to support the UK’s shift toward digital tax reporting. This article explains what those tools must do, the choices available and the practical implications for small businesses.

Why digital compliance matters

HMRC aims to reduce errors and close the tax gap by requiring businesses to keep digital records and submit updates every three months. This change affects anyone who files through self-assessment and earns qualifying income above the thresholds, including landlords with rental properties and self-employed individuals who will rely on MTD software for landlords and sole traders. Limited companies and most partnerships are excluded for now. To comply, businesses must choose MTD compatible software for Income Tax that meets HMRC’s technical specifications: it must create digital records, send quarterly updates to HMRC and submit the final tax return. If a business keeps separate records for property and self‑employment, it must send separate updates for each, though the data will be consolidated in one return.

What makes MTD compatible software for Income Tax?

HMRC recognises two broad categories of software: Complete accounting packages allow businesses to directly record income and expenses, connect to bank feeds, scan receipts, and issue invoices. These tools manage quarterly updates and annual submissions within one platform. Bridging software connects existing spreadsheets or legacy systems to HMRC, enabling businesses to continue using familiar tools while meeting digital linking requirements. Digital links are essential: data must flow automatically between records and the submission software without manual copying or pasting. Businesses can use more than one product, but they must ensure the tools work together so that each tax update is sent from a single product.

An MTD‑compatible solution must:

  • Create and store digital records of income and expenses across all relevant businesses.
  • Send quarterly updates directly to HMRC, summarising income and expenditure. HMRC will provide an estimated tax liability after each submission.
  • Submit the annual return by 31 January following the tax year.
  • Support digital links so that data flows automatically between systems without manual re‑keying.
  • Incorporate other income sources (pensions, dividends or partnership profits) in the final return.
Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Complete accounting packages

For businesses looking to overhaul their systems, MTD software for landlords and sole traders and other full accounting platforms can offer a comprehensive solution. These products provide bank feeds, automated reconciliations, invoicing, and expense scanning. They are designed for users new to digital record keeping and often include tutorials and reminders. HMRC emphasises that there are both paid and free options, giving users flexibility. When assessing a complete package, consider:

  • Ease of use – the interface should be intuitive, particularly if staff will be entering transactions or scanning receipts.
  • Integration – the software should link with bank accounts, point‑of‑sale systems and any industry‑specific tools.
  • Support for multiple income sources – if you earn from both self‑employment and property, the package must handle separate records and produce separate quarterly updates.
  • Cost – providers offer different pricing models. Free software is expected to be available for basic functionality, but more advanced features may require a subscription.

Bridging solutions and spreadsheets

Not every business wants to replace its existing system. HMRC accepts spreadsheets, provided they are linked to bridging software that submits data digitally. Bridging tools act as a conduit between a spreadsheet and HMRC’s systems, generating quarterly updates and the final return. They are particularly useful for landlords with multiple properties or bespoke accounting set‑ups.

However, spreadsheets lack the time‑saving features of dedicated apps. They may also increase the risk of errors if formulas are incorrect or if manual entries break the digital link requirement. When using a bridging tool, ensure that:

  • The spreadsheet structure remains consistent across reporting periods.
  • Each cell containing figures is linked directly to the bridging software (no copying and pasting).
  • You update formulas and macros to accommodate any new income sources.

Using more than one product

It is possible to use a combination of software—for example, a specialist property management tool alongside a separate bookkeeping package. HMRC’s guidance allows multiple products, but each quarterly update must be sent from a single product and the tools must be connected via digital links. Businesses should map the flow of data between systems and test the integration well before quarterly reporting begins.

Selecting the right solution

Choosing Income Tax digital software for small businesses is not one-size-fits-all. HMRC provides an online tool that generates a customised list of options based on your circumstances. To use it, you need to know your qualifying income from self‑employment and property, any other income sources, whether you want to create new digital records or connect existing ones, and your preferred update period (standard tax year or calendar periods). An agent using the tool will see all compatible software and can filter results for clients.

Key considerations when selecting software include:

  • Scope – will the software handle all your income sources and support separate records for self-employment and property?
  • Compatibility with existing systems – can it import data from your current records, or will you need bridging software?
  • Update periods – if your accounting year does not align with the tax year, choose software that supports calendar update periods.
  • Agent access – ensure your accountant can access the system easily and that multiple agents can collaborate.
  • Future features – consider whether the software can accommodate changes to MTD, such as partnerships joining the regime later.

Once you have selected a product, you must connect it to HMRC by authorising access through a government gateway. HMRC does not recommend specific products but confirms that all listed software has been through its recognition process.

Risks and practical implications

Failing to adopt compatible software by the deadline could result in penalties. HMRC is introducing a points‑based penalty system: missing submission deadlines will accumulate points, and exceeding a threshold will trigger fines. Inaccurate or incomplete digital records could also lead to compliance issues. Businesses should therefore treat selecting Income Tax digital software for small businesses as a long-term investment. Transitioning early allows time to train staff, refine processes and identify any gaps in digital links.

Data security is another concern. Storing financial information digitally requires robust security measures and adherence to data‑protection laws. Businesses should review the provider’s security credentials and consider backup arrangements.

Choosing MTD-Compatible Software for Digital Tax Reporting

Making Tax Digital (MTD) requires businesses and individuals to maintain digital records and submit tax updates to HMRC using approved software. Choosing the right accounting platform can make the transition much smoother. MTD-compatible software helps automate record-keeping, reduce manual errors, and simplify quarterly reporting.

Several established accounting platforms already support MTD for VAT and are preparing or supporting MTD for Income Tax Self Assessment (ITSA). These tools connect directly with HMRC systems and help users manage finances more efficiently.

Xero

Xero is widely used by accountants, agents, and businesses across the UK. The platform offers cloud-based bookkeeping, bank feeds, automated invoicing, and strong reporting tools. It integrates with HMRC for MTD submissions and works well for growing businesses that want real-time financial data.

FreeAgent

FreeAgent is particularly popular among freelancers, sole traders, and landlords. It supports MTD for Income Tax and helps users track expenses, invoices, and tax estimates in one place. The software is designed to be simple and easy to use for individuals who do not have a full finance team.

Sage

Sage provides a range of cloud accounting products suitable for small and medium-sized businesses. Its MTD-ready software connects with HMRC and allows automated bank feeds, digital record-keeping, and financial reporting. Sage also offers tools for payroll, invoicing, and business management.

QuickBooks

QuickBooks Online is another widely used platform that supports full MTD compliance. It enables automated VAT submissions, expense tracking, invoice creation, and financial reporting. Many accountants recommend it because of its user-friendly interface and strong integration with banking systems.

Clear Books

Clear Books is HMRC-recognised software designed for accountants, sole traders, and landlords. It supports quarterly updates and end-of-year filings under MTD. The platform also includes tools for bookkeeping, invoicing, and financial reporting.

Landlord Vision 

Landlord Vision is specialised property management and accounting software. It helps landlords manage rental income, expenses, property records, and tax reporting. The platform includes features designed to support landlords preparing for MTD for Income Tax.

Other MTD-compatible solutions

Several other platforms also support MTD submissions and digital record-keeping, including APARI, Capium, TaxCalc, and KashFlow. These tools offer different features depending on business size, complexity, and accounting needs.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Apex Accountants & Tax Advisors: your partner in digital compliance

Navigating MTD’s software requirements can be challenging. Apex Accountants & Tax Advisors offers tailored support to ensure clients select the right tools and remain compliant. Our services include:

  • Assessment of qualifying income – analysing your turnover across self‑employment and property to determine when you must adopt MTD.
  • Software selection – helping you choose HMRC‑compatible software, whether that is a complete package or bridging solution, and guiding you through the authorisation process.
  • Digitising existing records – converting spreadsheets into digital records and establishing digital links to maintain compliance.
  • Training and support – providing hands‑on training for staff and setting up processes for scanning receipts and linking bank feeds.
  • Quarterly monitoring and year‑end adjustments – reviewing your digital records before each update, checking accuracy and claiming available reliefs.
  • Handling exemptions and penalty disputes – assisting clients who may qualify for digital exclusion or need to appeal penalties.

Book a free consultation or contact us today to ensure your systems are ready for the digital era of income tax.

FAQs

What does MTD‑compatible software need to do? 

It must create digital records, send quarterly updates summarising income and expenses, support digital links, and submit an annual return. Complete packages handle all of these tasks; bridging software connects existing records to HMRC.

Do I have to replace my existing bookkeeping system? 

Not necessarily. If you prefer to keep spreadsheets, you can use bridging software to link them to HMRC. However, dedicated packages offer features such as receipt scanning and automated bank feeds.

How do I find software that meets my needs? 

HMRC’s online tool asks about your income sources, update periods and whether you need to create new digital records or connect existing ones. It then provides a list of recognised software.

Can I use more than one product? 

Yes. HMRC allows multiple products provided they are digitally linked and each submission is sent from a single product.

Are there free options available? 

HMRC states there will be both free and paid software options. The availability of free software may be limited to basic functionality, so businesses should assess whether it meets their requirements.

What happens if I miss a quarterly update? 

HMRC plans to introduce a points‑based penalty regime. Each missed submission will incur a penalty point, and accumulating too many points will result in a fine.

Are You MTD-Exempt?

Posted on by Talha Zubair

MTD exemptions exist, but they are tightly defined and different for VAT and Income Tax in the UK. The key is checking which regime applies to you and then whether HM Revenue & Customs (HMRC) treats you as automatically exempt or expects you to apply. 

What “MTD-exempt” means

Being MTD-exempt usually changes the method of reporting, not the duty to report. If you are exempt from MTD for Income Tax, you will not have to use MTD for Income Tax, but you must continue to report your income and gains through Self Assessment as normal. 

For VAT, you are exempt only if HMRC is satisfied an exemption applies or you fall into an automatic exemption category. 

MTD for VAT exemptions

MTD for VAT applies if you are VAT-registered. The VAT registration threshold is £90,000 of taxable turnover over a rolling 12-month period (in place since 1 April 2024). 

Once registered (including voluntary registration), HMRC require VAT-registered businesses to keep digital records and submit VAT Returns using software. 

VAT exemption routeHow it works
Insolvency procedureAutomatic in HMRC guidance.
Cancelled VAT registration but still need a final returnAutomatic in HMRC guidance.
Not practical to use digital tools (age, disability/health, location, no internet)You must apply and HMRC assess your circumstances.
Religious groundsHMRC must be satisfied; the business must be run entirely by practising members of a religious society/order whose beliefs are incompatible with electronic communications/records.
Already exempt from filing VAT returns onlineHMRC can accept existing online-filing exemptions.

These routes come directly from HMRC’s MTD for VAT exemption guidance and VAT Notice 700/22. 

HMRC are clear that inconvenience is not enough. VAT Notice 700/22 says an exemption is not granted solely because switching takes extra effort, time, or cost where HMRC considers it reasonable. 

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

MTD for Income Tax exemptions

The MTD for Income Tax becomes mandatory in phases from 6 April 2026, based on “qualifying income” from self-employment and property:

  • Over £50,000 in 2024 to 2025 → mandated from 6 April 2026
  • Over £30,000 in 2025 to 2026 → mandated from 6 April 2027
  • Over £20,000 in 2026 to 2027 → mandated from 6 April 2028 

Automatic MTD for income tax exemptions includes a qualifying income of £20,000 or less, having no National Insurance number, and certain roles/statuses (for example, trustees and personal representatives). HMRC also exempts people who are not physically or mentally capable, where a power of attorney or court-appointed deputy acts for them. 

The main exemption you must apply for is digital exclusion. HMRC describes such situations as cases where it is not reasonable for you to use compatible software to keep records, send quarterly updates, or submit the return. 

Examples include disability or health issues, religious beliefs that prevent the use of digital devices, and lack of internet access without a suitable alternative. 

HMRC also lists reasons they will not accept it on their own: filing on paper in the past, unfamiliarity with software, having only a few records, or the extra time/cost of switching. 

Making Tax Digital for Income Tax: £50k Sole Traders Face Mandatory Quarterly Reporting from 2026

How to apply for an MTD exemption

For VAT and Income Tax, HMRC say you apply by contacting them (usually by phone or in writing). For VAT, HMRC asks for details such as your VAT registration number, business name and address, how you currently file, and why you cannot comply. 

VAT Notice 700/22 says HMRC will make the decision after you provide the necessary information; you will receive the decision in writing, and you should continue filing VAT Returns in the usual way while you are waiting for HMRC to decide (or while an appeal is ongoing). 

For Income Tax, HMRC set timings. If you need to start on 6 April 2026, you can apply now. If your start date is later, HMRC indicates you should apply from the summer before you are mandated. 

HMRC also notes that if an agent keeps your records digitally and submits through compatible software on your behalf, you may meet the requirements without needing a digital-exclusion exemption. 

How We Can Help Comply With MTD Regulations

At Apex Accountants, we offer tailored advice to help businesses navigate MTD regulations and exemptions. Whether you’re uncertain about your compliance obligations or need help setting up digital systems, our team can assist you every step of the way. From VAT to ITSA, we provide expert support to ensure your business stays on track.

  • VAT Planning & Compliance
  • MTD Preparation and Software Integration
  • Tax Advice for MTD Exemptions
  • Ongoing Tax Support and Consultancy

If you’re unsure about your MTD obligations or need help applying for an exemption, don’t hesitate to Book a Free Consultation with our team today.

FAQs

1. I’m under the VAT threshold. Am I exempt?

If you are not VAT-registered, MTD for VAT does not apply. If you are VAT-registered, it applies unless HMRC accepts an exemption. 

2. Does no internet count?

Potentially. HMRC cites lack of internet access (including because of where you live) as a possible basis for VAT exemption and lack of internet access with no suitable alternative as a basis for Income Tax digital exclusion. 

3. Can I use spreadsheets?

For VAT, HMRC explains that spreadsheets can be part of “functionally compatible software” when used alongside software (such as bridging software) that can submit to HMRC via the API. 

Making Tax Digital for Income Tax: £50k Sole Traders Face Mandatory Quarterly Reporting from 2026

Posted on by Farazia Gillani

A turning point for self‑employed taxpayers

The UK tax system is undergoing a critical juncture in its modernisation. From 6 April 2026, Making Tax Digital for sole traders will require sole traders and landlords with more than £50,000 of gross self-employment or property income to report their earnings digitally each quarter.

The reform, known as Making Tax Digital for Income Tax Self‑Assessment (MTD ITSA), represents one of the biggest changes to reporting obligations since Self‑Assessment was introduced in the 1990s. It will replace the familiar annual return with four “light‑touch” updates during the year, followed by an end‑of‑year tax return. Although HM Revenue & Customs (HMRC) has been piloting MTD for several years, its 2026 launch will be mandatory only for those whose turnover exceeds £50,000; the threshold drops to £30,000 from April 2027 and £20,000 from April 2028.

What counts as qualifying income

Under Making Tax Digital for Income Tax Self-Assessment (MTD ITSA), eligibility is determined by gross qualifying income, not profit.

Qualifying income is the total turnover from self-employment and property rental activities. Several income types are excluded when calculating the threshold.

Income included vs excluded

Included in qualifying incomeNot included in qualifying income
Self-employment turnoverEmployment salary
Rental income from propertyPartnership income
Combined self-employment and rental incomeDividends
Pension income

The threshold for joining the digital reporting system is currently £50,000 of gross qualifying income.

The calculation uses figures from the previous Self-Assessment tax return, and HMRC reviews those figures to determine whether a taxpayer must join the regime.

Example

Income sourceAmount
Rental income£22,750
Sole trader turnover£29,600
Total qualifying income£52,350

Because the combined turnover exceeds £50,000, the taxpayer would be required to comply with the digital reporting rules.

A critical detail is that the calculation uses turnover rather than profit. A business with relatively low profits may still fall within the regime if gross income exceeds the threshold.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Why does the government insist on digital updates?

The shift to digital reporting forms part of the government’s Tax Administration Strategy, which aims to modernise the tax system and reduce reporting errors.

Officials believe that digital records and more frequent reporting will:

  • reduce mistakes in tax returns
  • give taxpayers clearer visibility of their tax position
  • improve overall compliance

Under the system:

  • businesses must keep digital records of income and expenses
  • updates are submitted through compatible accounting software
  • HMRC receives summary totals, not individual transactions

After each submission, the software or HMRC account provides an estimated tax position, reflecting the move towards quarterly tax reporting for sole traders UK and allowing traders to track their likely tax bill throughout the year rather than only at the year end.

What quarterly reporting looks like under Making Tax Digital for Income Tax

Under Making Tax Digital for Income Tax Self Assessment (MTD ITSA), taxpayers must send four updates each year.

The reporting periods normally follow the tax year cycle (6 April to 5 April).

Standard quarterly update deadlines

Reporting periodDeadline
6 April – 5 July7 August
6 April – 5 October7 November
6 April – 5 January7 February
6 April – 5 April7 May

Some businesses with accounting periods ending at the end of each month can choose to follow calendar reporting periods, but the deadlines remain the same.

What each quarterly update includes

Each update simply reports summary totals, not detailed tax calculations.

Quarterly updates include:

  • total income for the period
  • total allowable expenses
  • basic summary figures submitted through compatible software

Important points to note:

  • no tax adjustments are required at this stage
  • even if a business has no income or expenses during the quarter, an update must still be submitted 

Compliance risks

Although MTD ITSA is designed to simplify the tax system, it introduces new compliance responsibilities.

Key risks businesses should be aware of

  • Quarterly updates will become a legal requirement once the scheme is fully mandatory.
  • Late submissions will trigger penalty points under HMRC’s late submission rules.
  • A 12-month grace period will apply to quarterly updates for those joining in April 2026.
  • Penalties for late final tax returns apply immediately.

Early voluntary registration can also create complications.

Once a taxpayer joins the MTD system:

  • they cannot simply revert to annual Self Assessment filing
  • digital reporting obligations continue unless they fully exit the system

Another risk is incorrectly calculating qualifying income. Because the threshold is based on gross turnover rather than profit, some taxpayers may register too early or fail to register when required.

Broader implications for businesses

Making Tax Digital for Income Tax shifts the system towards more frequent reporting. Instead of preparing records once a year, businesses will need to keep digital records and submit updates throughout the year. Regular reporting, including quarterly tax reporting for sole traders UK, may encourage better bookkeeping and give business owners clearer visibility of income and potential tax liabilities during the year.

However, the change may also increase administrative work. Some businesses may need to adopt accounting software, adjust their record-keeping practices or seek professional support to manage the new digital reporting requirements.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Preparing for 2026: Practical steps

With two years until the regime goes live for those earning over £50k, businesses affected by Making Tax Digital for sole traders should act now. Key steps include:

Assess your qualifying income

Review your 2024‑25 Self‑Assessment return to determine whether your gross turnover from self‑employment and property exceeds £50,000. Remember to include ceased income sources if you still have another active trade or property.

Choose compatible software

HMRC does not provide MTD software. Use the government’s software finder tool to identify solutions that fit your business. Some packages integrate bookkeeping and submission functions, while others use bridging software to link spreadsheets to HMRC. Consider whether you need features such as multi-business support, bank feed integration, and real-time tax estimation.

Digital record‑keeping

Start capturing invoices and receipts electronically. Align your record‑keeping to the periods used for quarterly updates—either standard (aligned to the tax year) or calendar periods.

Plan for deadlines

Make note of update and return deadlines. Set reminders or appoint an accountant to manage submissions. Missing deadlines will incur penalty points once the grace period expires.

Seek professional support

Without guidance, early registration can result in irreversible complications, such as premature MTD lock-in. Tax professionals can help interpret the rules about qualifying income, select the right software, and set up the system correctly.

Apex Accountants & Tax Advisors – How we can help

At Apex Accountants & Tax Advisors, we have been guiding clients through digital transformation for years. Our team of chartered accountants and tax specialists can:

  • Assess eligibility and timing. We analyse your turnover and advise whether you fall within the initial £50k threshold or subsequent phases. We help you understand if any joint property income or ceased businesses affect your qualifying income.
  • Implement MTD‑compliant systems. We assist in selecting and integrating software, ensuring that digital records are accurate and easily exported to HMRC. Our cloud‑accounting specialists can train your team to maintain records in real time and avoid common errors.
  • Manage quarterly updates and adjustments. Our accountants prepare and submit the quarterly updates and end‑of‑year adjustments, ensuring that reliefs and allowances are claimed correctly.
  • Ongoing advisory and tax planning. We provide cash‑flow forecasts based on quarterly tax estimates, helping you set aside funds and plan for tax payments. We also advise on tax‑efficient business structures, capital investment decisions and future compliance as thresholds drop in 2027 and 2028.

For a personalised consultation, contact Apex Accountants today or book a free consultation via our website. Early preparation will minimise disruption and position your business to comply smoothly when digital reporting becomes compulsory.

Frequently asked questions

What is the start date for Making Tax Digital for Income Tax? 

For sole traders and landlords with more than £50,000 of qualifying income, MTD ITSA starts on 6 April 2026. Those with income between £30,000 and £50,000 join in April 2027, and those between £20,000 and £30,000 in April 2028.

How is qualifying income calculated? 

Qualifying income is the gross turnover from self‑employment and property rental. HMRC ignores employment income, pension income, dividends and partnership profit shares. If you have ceased a source of income but still receive income from other self‑employment or property, the ceased income is still counted.

Do I still submit a tax return? 

Yes. After four quarterly updates and end‑of‑year adjustments, you must submit your final tax return by 31 January following the tax year. HMRC will transfer information it already holds, but you must add other income and confirm the calculation.

What are the penalties for missing quarterly updates? 

If you miss a deadline, HMRC may issue late‑submission penalty points. For those starting in April 2026, penalty points for quarterly updates will not accrue during the first 12 months, but late tax returns will attract penalties from the outset.

Which software should I use? 

HMRC requires compatible software. You can choose all‑in‑one accounting packages or use spreadsheets with bridging software. Some providers offer free versions, but check limits on transactions and bank feeds. Using professional accountants can help ensure you select software that meets your business needs.

If my income falls below £50,000 after joining MTD, can I opt out? 

Once you start using MTD ITSA, you generally cannot opt out even if your income later drops. You must continue sending quarterly updates unless your self‑employment and property income cease entirely. However, if your qualifying income remains below the threshold for three consecutive years after you have joined, you may be able to opt out.

A Practical Guide to MTD for ITSA for Sole Traders and Landlords

Posted on by Waheed Ahmed

Many sole traders and landlords are used to dealing with their tax once a year. Records are often pulled together close to the deadline, and the focus is on getting the return submitted on time rather than having a clear view of finances throughout the year. MTD for ITSA (Making Tax Digital for Income Tax Self Assessment) changes this approach completely. HMRC is moving towards a digital system where you must keep records electronically and report your income regularly instead of relying on a single annual submission.

For those who are not prepared, this shift can feel like a significant change. More frequent reporting, new software requirements, and different processes can increase the risk of errors, missed deadlines, and penalties if not managed properly.

The good news is that with the right preparation and systems in place, Making Tax Digital for ITSA can be straightforward to manage. In this guide, we explain what is MTD for ITSA, who it applies to, and how you can get ready with confidence.

What Is MTD For ITSA?

Making-tax-digital for ITSA is HMRC’s move towards a fully digital tax system. Instead of submitting one Self Assessment return each year, you will:

  • Keep digital records of income and expenses
  • Use MTD-compatible software
  • Submit updates to HMRC every quarter
  • Complete a final declaration at the end of the year

The aim is to make tax reporting more accurate and to give you a clearer view of your tax position throughout the year.

When Does MTD For ITSA Start?

MTD for ITSA will be introduced in phases:

  • From 6 April 2026
    Applies to individuals with income over £50,000
  • From April 2027
    Applies to those with income over £30,000

Further expansion is expected in future years.

Who Needs To Comply?

You will need to follow MTD for Income Tax Self-Assessment if:

  • You are a sole trader
  • You receive rental income
  • Your total income exceeds the relevant threshold

The introduction of MTD for ITSA for sole traders means that many small business owners will need to change how they manage their tax reporting. Even if you work with an accountant, the rules still apply. Your adviser can manage submissions on your behalf.

What Are The Key Requirements?

Making tax digital for ITSA introduces four main requirements.

1. Keep digital records

You must record:

  • Income
  • Expenses
  • Transaction dates

Records must be kept digitally. Paper records alone will not be accepted.

2. Submit quarterly updates

You will send updates to HMRC every three months.

These updates:

  • Summarise income and expenses
  • Provide an estimate of your tax position
  • Do not create a final tax bill

3. Year-end reporting (EOPS and final declaration)

Under the current MTD for Income Tax Self-Assessment (ITSA) design, you will not submit a separate End of Period Statement (EOPS) as a standalone step. Instead, after your four quarterly updates, you will complete one year-end submission.

At the end of the tax year, you will:

  • Review and confirm the income and expenses you have reported across the four quarterly updates
  • Add any year-end adjustments, reliefs, and allowances
  • Finalise your figures and submit a single final declaration by the required deadline following the end of the tax year, which replaces the Self Assessment return.

4. Final declaration

This replaces the current Self Assessment return.

It confirms:

  • All income sources
  • Your final tax liability
Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

What Are The Benefits Of Making Tax Digital For ITSA?

Although the system requires more frequent reporting, it can improve how you manage your finances.

Better visibility

You can see your estimated tax bill throughout the year, helping with planning.

Improved accuracy

Digital records reduce errors and missing information.

Less year-end pressure

Regular updates mean less work in January.

Stronger financial control

You have up-to-date information on business performance.

What Challenges Should You Expect?

Many businesses will need to change how they currently work.

Moving to digital systems

Manual records and spreadsheets will need to be replaced or linked to software.

More frequent reporting

Quarterly updates require consistent record-keeping.

Learning new tools

There may be a short learning period when adopting software.

Additional costs

Software and advisory support may increase expenses.

How do penalties work under MTD?

HMRC has introduced a penalty points system for late submissions.

  • You receive one point for each missed deadline
  • Once the threshold is reached, a £200 penalty is issued
  • Further missed deadlines lead to additional penalties

Late payments can also attract extra charges, including daily interest.

How To Prepare For MTD For Income Tax Self-Assessment

Starting early will make the transition easier. Here are practical steps to take:

Review your current system

Identify how you currently track income and expenses.

Choose MTD-compatible software

Look for software that:

  • Connects directly with HMRC
  • Automates data entry
  • Provides clear reports

Move to digital records

Start keeping digital records now to build a routine.

Keep records regularly

Update your records weekly or monthly to avoid last-minute work.

Speak to a tax adviser

Professional advice can help you stay compliant and plan effectively.

Understanding MTD for ITSA for sole traders early will help you avoid disruption and stay in control of your finances as the rules come into force.

Why Early Preparation Matters

Leaving preparation until the last minute can lead to:

  • Errors in submissions
  • Missed deadlines
  • Penalties

Starting now gives you time to adjust your processes and understand the system.

Why Choose Apex Accountants For MTD For ITSA?

Making Tax Digital for ITSA is more than a compliance change. It changes how you manage your tax throughout the year. While it introduces new processes, it also gives you better visibility and control over your finances.

At Apex Accountants, we support sole traders and landlords in adapting to these changes with confidence. We focus on practical solutions that fit your business, helping you stay compliant without adding unnecessary stress.

Our team can support you with:

  • Setting up MTD-compatible software
  • Moving your records to a fully digital system
  • Managing your quarterly submissions
  • Reviewing your figures to reduce errors
  • Providing ongoing tax advice and support

We do not just help you meet deadlines. We help you build a system that works for you throughout the year.

If you are unsure how Making Tax Digital for ITSA applies to you, now is the time to take action. Early preparation can save time, reduce risk, and give you clarity over your tax position. Speak to Apex Accountants today and get ready for MTD for ITSA with confidence.

Making Tax Digital For Sole Traders: Rules, Deadlines And Confusion

Posted on by Waheed Ahmed

Making Tax Digital is set to change how sole traders report their income to HMRC. From 6 April 2026, those earning over £50,000 will need to keep digital records and submit quarterly updates using approved software. The threshold will then fall to £30,000 in 2027 and £20,000 in 2028. Despite this, many business owners are still unsure what the changes involve. Recent surveys show that 42% of self-employed individuals do not fully understand the rules, while 37% are unclear about the income thresholds. This highlights a clear gap in awareness as the deadline approaches. In simple terms, Making Tax Digital for sole traders means moving away from a single annual return towards regular digital reporting. This guide explains what you need to know, how the rules work, and how to prepare.

What is MTD for Income Tax?

Making Tax Digital for Income Tax means moving from paper/self-assessment to digital, quarterly reporting. Official HMRC guidance explains that sole traders and landlords in scope must use compatible software to:

  • Create and store digital records of all income and expenses,
  • Send quarterly summaries (updates) of income and costs to HMRC, and
  • File a final declaration (the tax return) via the software by 31 January each year.

In other words, instead of filing one annual return, you’ll split the tax admin across the year. HMRC notes this is the “biggest change” to self-assessment in decades. For taxpayers, it means your accounting needs to be computerised: no more paper ledgers. Each quarter, you tally your income and allowable expenses (or property rent and costs) in your software and submit the totals. At year-end, you adjust for any reliefs (capital allowances, etc.) and make the final submission. This gives you and HMRC a running picture of your tax liability.

Who needs to sign up – and when?

From 6 April 2026, sole traders and landlords with total annual income above £50,000 from self-employment or property must sign up for MTD. Here income means gross turnover (total sales/rent before expenses). Example: if in 2024/25 your combined trade plus rental receipts exceed £50k, you join MTD on 6 Apr 2026. The threshold then steps down:

  • April 2027: becomes £30,000 (based on 2025/26 income).
  • April 2028: becomes £20,000 (based on 2026/27 income).

These figures match HMRC’s phased timeline. (Landlord and partner income is combined with self-employment.) HMRC will inform those whose prior-year returns exceed thresholds, but ultimately it’s your responsibility to join on time. If you don’t comply, penalties apply (see below). Certain groups are exempt (e.g. some trusts, estates, or those without a NI number), and individuals with valid digital exclusion reasons (age, disability, etc.) can apply to be exempt.

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

How reporting and deadlines change

Instead of one annual return, MTD-IT requires four updates plus a final declaration each year. Specifically, the 2026–27 tax year quarters and deadlines are:

  • Quarter 1 (6 Apr–5 Jul 2026): report by 7 Aug 2026.
  • Quarter 2 (6 Jul–5 Oct 2026): report by 7 Nov 2026.
  • Quarter 3 (6 Oct–5 Jan 2027): report by 7 Feb 2027.
  • Quarter 4 (6 Jan–5 Apr 2027): report by 7 May 2027.

Each report includes total sales/rent and total costs for that quarter. (If deadlines fall on weekends or bank holidays, HMRC usually rolls them to the next working day – e.g. the first deadline is 7 Aug.) After Q4, your software will have annual totals, and you make a Final Declaration by 31 Jan (e.g. 31 Jan 2028 for 2026/27). The final declaration includes any other income (dividends, savings) and adjustments.

Meeting MTD deadlines is important: under the new system, late filings trigger penalty points. For example, 2 late filings = £200 fine. Further late submissions earn more points and fines. (Late tax payments incur interest and additional penalties too.) In short: file each quarter on time to avoid penalties, and keep on top of records.

Software and Tools for Making Tax Digital for Sole Traders and Landlords

Under MTD, HMRC requires you to use compatible software – they do not provide it for free. Broadly, you have three categories:

Cloud Accounting Software: 

Full-featured packages (Xero, QuickBooks, FreeAgent, Sage, KashFlow, Zoho Books, etc.) that let you record income and expenses, import bank transactions, and file MTD reports directly. 

Pros: Automated record-keeping, bank feeds, clear audit trail. 

Cons: Subscription cost, learning curve.

Bridging Software: 

Tools (often free or low-cost) that connect your existing spreadsheets or bookkeeping to HMRC. You still enter your data in Excel or offline ledgers, and the bridging app “picks up” the totals and submits them to HMRC. 

Pros: Low cost, you keep your current workflow. 

Cons: More manual work, risk of errors if spreadsheets aren’t maintained carefully.

Mobile/Receipt Apps: 

Apps for smartphones/tablets that let you snap receipts, track mileage or expenses on the go. These usually integrate with a cloud accounting system. 

Pros: Convenient for capturing receipts and small purchases. 

Cons: Needs syncing to a back-end (so usually not standalone for filing).

Here is a brief comparison:

CategoryWhat it doesProsConsExample vendors
Cloud accountingRecords transactions, connects bank, files MTD reportsFully integrated, automatedSubscription fees, learning curveXero, QuickBooks, FreeAgent, Sage, KashFlow, Zoho Books
Bridging softwareLinks spreadsheets/ledgers to HMRCLow cost (sometimes free), retains existing workflowsManual entry still needed, less support[Generic bridging apps]
Mobile/receipt appsCaptures expenses/receipts via phoneEasy on-the-go data captureLimited to expense entry, must sync to accounting systemReceipt Bank, Dext, Hubdoc (examples)

HMRC maintains a list of MTD-compliant software on GOV.UK. Many providers offer free trials. The main thing is not to rely on paper or simple spreadsheets only – all MTD submissions must come from an approved digital tool. As one expert put it: if you’re “still juggling spreadsheets, paper receipts and invoices, this is the moment to change that.”

Get Free Consultation
Phone
Call Anytime 0203 883 4777
Get Free Consultation

Step-by-step checklist for MTD for sole traders

To prepare for MTD, take these steps well before April 2026:

  1. Check your turnover: Add up your self-employment and property receipts for 2024/25. If this exceeded £50,000, you will be in scope from Apr 2026. (If not, you won’t enter MTD until the thresholds fall – £30k in Apr 2027, £20k in Apr 2028.)
  2. Choose software: Research accounting or bridging software that is MTD-compatible. Compare cloud packages vs. bridges vs. apps. (See table above.) Ensure it can submit the quarterly updates. Use HMRC’s software finder and try free trials.
  3. Sign up for MTD: On GOV.UK, find the “Sign up for MTD for Income Tax” service and register before your start date. HMRC advises “don’t leave it to the last minute”. If you have an agent, ensure they are authorised.
  4. Digitise your records: From 6 April 2026, enter all new income and expenses into your software (or keep your spreadsheet up to date). Start fresh – do not mix paper with digital for the same transactions.
  5. Trial run: As April 2026 arrives, do a practice run. Enter transactions for April–May 2026 and submit an update to ensure everything works. Many accounting systems allow a test run.
  6. Set reminders: Put calendar alerts for 7 Aug, 7 Nov, 7 Feb, 7 May each year (or a few days earlier) so you prepare the quarterly update in time.
  7. Seek exemptions if needed: If you genuinely cannot use digital tools due to disability or other reasons, apply to HMRC for exemption now (though this is strictly for rare cases).

How We Help You Prepare For MTD

At Apex Accountants, we specialise in helping sole traders and landlords prepare for MTD. Our services include:

  • MTD Readiness Review: We assess your current turnover and record-keeping to determine if/when MTD applies to you.
  • Software Setup: We advise on and implement HMRC-compliant software or bridging tools, and migrate your existing records if needed.
  • Training: We train you (and any staff) on using the software, recording transactions, and meeting quarterly deadlines.
  • Filing Support: We can prepare and lodge your quarterly updates and final declaration via secure MTD links.
  • Ongoing Advice: We monitor MTD guidance updates and keep you informed, helping ensure you stay compliant as rules evolve.

Let us take the stress out of MTD compliance. Contact Apex Accountants to get set up correctly and stay on track with the new digital reporting requirements.

FAQs About Making Tax Digital For Sole Traders

Who has to use MTD for Income Tax?

Sole traders and landlords in Self Assessment whose combined gross self-employment/property income exceeds the threshold (currently £50k for 2024/25) must join MTD from the next April. If your income is below that, you can carry on as usual until the threshold lowers (to £30k in 2027).

Does the threshold mean profit or turnover?

It means turnover (total receipts before deducting costs). For example, 42% in the survey didn’t realise that “qualifying income” is basically turnover.

What if I have multiple income sources?

You add up all self-employment and property income together. (Other income like PAYE, savings or dividends doesn’t count toward the MTD threshold but is still reported on your return.)

What software do I need?

You need HMRC-recognised software (cloud accounting or bridging). Examples: Xero, QuickBooks, FreeAgent, Sage (full accounting), or bridging tools if you prefer spreadsheets. You cannot file MTD returns with manual Excel alone; you must use the software’s submit function.

What if I don’t want to use software?

You still must, unless you get an exemption. HMRC has no official free MTD-IT software. Bridging tools can be very low-cost. Without software, you cannot meet the rules.

When do the quarterly reports and final return fall due?

The deadlines are fixed to 7 Aug, 7 Nov, 7 Feb, 7 May. These correspond to the quarter just ended. After Q4, the final declaration (annual return) is due by 31 Jan. For example, Q1 (6 Apr–5 Jul 2026) is due 7 Aug 2026.

What if I miss a deadline?

Late submissions incur penalty points. For instance, two late filings incur a £200 fixed penalty. Repeated or late tax payments add further fines and interest. Early preparation avoids these.

Can my accountant handle this?

Yes. An accountant or agent can register you and submit updates on your behalf, but they must be authorised for MTD.

What if I’m below threshold?

If your income is below £50k (in 2024/25) you do not need to join MTD in 2026. You continue with Self Assessment and can enter MTD voluntarily. But watch the thresholds: if you go over £30k next year, MTD kicks in from 2027.

Making Tax Digital for Packaging Studios: What Creative Agencies Need to Do Now

Posted on by Maliha Javaid

As the UK tax system evolves, Making Tax Digital for packaging studios has become a critical part of ensuring VAT compliance. The MTD scheme requires businesses to maintain digital records and submit VAT returns through approved software. For creative agencies, including packaging studios, this means adopting new processes to stay compliant and avoid penalties. If your packaging studio is VAT-registered, it’s essential to understand these requirements and take the necessary steps to meet MTD standards.

At Apex Accountants, we specialise in helping businesses like yours navigate the complexities of MTD for creative agencies. With over 20 years of experience, we guide creative agencies and packaging studios through the compliance process, ensuring your VAT records are accurate, timely, and fully aligned with HMRC’s requirements.

In this article, we will outline the steps packaging studios need to take to meet MTD requirements, using real-life examples and practical solutions. We’ll also explain how Apex Accountants can support you in maintaining smooth, compliant operations. Read on to learn what your packaging studio needs to do now to stay ahead of MTD changes.

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a government initiative that aims to modernise the UK’s tax system. It requires VAT-registered businesses to keep digital records and submit their VAT returns via compatible software, rather than manually. The rules were rolled out for businesses with taxable turnover over the VAT threshold in April 2019 and were extended to all VAT-registered businesses, regardless of turnover, from April 2022.

For packaging studios, which often manage a variety of design and production-related transactions, MTD compliance is crucial to ensuring your VAT returns are accurate and submitted on time.

Why Packaging Studios Need to Act Now

Packaging studios are unique because they often deal with multiple stages in the production process—design, prototype creation, and final production—each of which may be subject to different VAT rates. To comply with MTD for creative agencies, it’s important to have the right tools and processes in place to track each transaction, the applicable VAT rate, and the time of supply.

Steps for Packaging Studios to Ensure MTD Compliance

To meet MTD compliance for packaging design companies, packaging studios must take the following steps:

1. Confirm VAT Registration Status

If your studio is VAT-registered, MTD applies to you. If you’re unsure about your VAT status or need to register, you can do so through HMRC. Even if your turnover is under the VAT threshold, you may still be required to comply with MTD if you’re VAT-registered.

2. Choose Compatible Accounting Software

MTD requires that you use compatible software to keep your records and submit your VAT returns. Simple spreadsheets are not enough unless they are linked to bridging software that can communicate with HMRC’s digital system. Popular MTD-compliant software includes Xero, QuickBooks, and Sage, among others.

Ensure that your software links all of your business processes, from invoicing to expenses. These digital links must be secure and capable of transmitting data to HMRC’s system without manual intervention. You can no longer rely on manual input for data or paper records.

4. Record Every Supply and VAT Rate

For packaging studios, each part of a project (design, tooling, production) may have different VAT rates or timings of supply. You need to record the supply time, VAT rate, and value of each transaction separately. Use your software to automatically capture this data.

5. Submit Your VAT Returns Digitally

Once your records are set up, ensure that VAT returns are submitted via MTD-compliant software. Avoid using the HMRC portal for VAT submissions, as it will not accept submissions unless they’re routed through approved software.

6. Regularly Review Your Processes

MTD is an ongoing commitment. Regularly review your processes and software to ensure you’re staying compliant. This includes checking for any updates to tax rates or software changes, especially if you switch to new platforms.

Challenges for Packaging Studios

While MTD can seem like a daunting task, many packaging studios have successfully navigated it with the right tools. However, challenges still exist, such as:

  • Tracking Multiple Phases of Work: Packaging studios often manage complex, multi-stage projects. Each phase—whether it’s design, tooling, or final production—requires accurate VAT tracking.
  • Overseas Purchases: If you import materials or work with overseas suppliers, these transactions must also be recorded digitally.
  • Software Integration: Ensuring that your existing systems integrate seamlessly with your chosen MTD-compliant software can require additional setup time.

Case Study

A Manchester-based packaging studio faced challenges with Making Tax Digital (MTD) compliance due to its manual VAT tracking system, which was incompatible with the new requirements. The studio worked with Apex Accountants to implement MTD-compliant software (Xero), set up digital VAT record-keeping, and streamline their VAT return process. With multiple phases in their packaging projects and international suppliers, it was essential to ensure each supply, VAT rate, and transaction was accurately recorded.

By adopting cloud-based accounting and linking all systems digitally, the studio was able to automate VAT calculations and submit returns directly to HMRC. This shift significantly reduced the time spent on VAT submissions by 60% and eliminated the risk of errors. With Apex Accountants’ ongoing support and regular reviews, the studio avoided penalties, improved efficiency, and remains fully compliant with MTD compliance for packaging design companies.

How Apex Accountants Can Help with Making Tax Digital for Packaging Studios

At Apex Accountants, we specialise in supporting creative agencies and manufacturing businesses with MTD compliance. Our experts will guide you through:

  • Choosing the right software for your business needs
  • Setting up and linking your digital records correctly
  • Submitting your VAT returns on time
  • Avoiding common pitfalls in MTD compliance

With over 20 years of experience, we help packaging studios ensure they’re not only compliant but also positioned to thrive in the digital age. We offer personalised consultations and ongoing support for all your VAT and MTD-related needs.

Ready to make the shift to MTD?
 Book your consultation today with Apex Accountants.

FAQs

Q1. Do all VAT-registered packaging studios need to comply with MTD?

Yes, all VAT-registered businesses must comply with MTD, regardless of their turnover. Since April 2022, MTD applies to all VAT-registered firms.

Q2. Can I still use Excel for VAT records under MTD?

You can use Excel, but only if it is connected to bridging software that communicates with HMRC’s system.

Q3. What software is compatible with MTD for VAT?

Common MTD-compatible software includes Xero, QuickBooks, and Sage. You can find a full list of approved software providers on HMRC’s website.

Q4. What happens if I don’t comply with MTD?

Failing to comply with MTD may result in penalties from HMRC, including fines for late submissions or incorrect records.

Q5. Can I get help from my accountant with MTD compliance?

Yes, accountants can help you select software, set up digital links, and ensure your records are maintained in compliance with MTD requirements.

Q6. How do I track VAT for multi-phase packaging projects?

Each stage of the project (design, production, tooling) must be recorded separately, with VAT rates and time of supply accurately logged.

HMRC Update on Making Tax Digital: The ‘Biggest Change’ to Income Tax in 30 Years

Posted on by Waheed Ahmed

The UK government is preparing to roll out Making Tax Digital (MTD), a transformative update to the country’s tax system. Starting next year, certain taxpayers will be required to use this digital platform to record and submit their tax information. This change will affect businesses, self-employed individuals, and landlords, fundamentally altering the way they interact with HMRC. Currently, thousands of volunteers are trialling the system, and in response to their feedback, the HMRC Update on Making Tax Digital has been released, outlining key adjustments designed to make the transition smoother for all involved. 

These Making Tax Digital changes aim to ensure a more accurate, efficient, and user-friendly system for everyone who engages with the UK tax process.

Why is MTD a Game-Changer?

The shift to Making Tax Digital for Income Tax (MTD for ITSA) represents the most significant change to the UK income tax system in over 30 years. Under MTD, taxpayers will no longer rely solely on submitting a single annual self-assessment tax return in the traditional format. Instead, they will provide quarterly digital updates on their income and expenses through HMRC-approved software, helping to streamline the tax process, reduce errors, and ensure more timely reporting. 

However, taxpayers must still submit an annual final declaration after the quarterly updates, which reconciles and confirms all income, expenses, allowances, and tax liabilities for the year. This final digital submission replaces the traditional annual tax return and completes the tax reporting cycle under the new MTD regime, effective from April 2026.

Key Updates from Testers’ Feedback

HMRC has been conducting trials of the MTD system, with a focus on improving its functionality and addressing user concerns. Participants’ feedback has led to the implementation of several important changes:

Improved Communication: 

Testers requested better communication from HMRC about their submissions. In response, HMRC has now introduced a quarterly newsletter for participants. Throughout the trial period, testers will receive updates, guidance, and answers to frequently asked questions through this newsletter.

Confirmation of Submissions: 

Another concern raised by testers was the lack of confirmation receipts after submitting their quarterly updates. Currently, no confirmation emails are sent to acknowledge receipt of the submission. HMRC acknowledged this issue and responded by saying that, although some software products may already provide these confirmations, taxpayers and agents can check the status of their submissions at any time via their digital tax accounts. HMRC has also committed to updating its guidance to make this process clearer.

Expanded Customer Support: 

Testers pointed out that there are more diverse support options as the number of participants grows. In response, HMRC has introduced a comprehensive support model for participants. This includes a dedicated customer support team to assist testers with any issues they may encounter during the trial phase. This support will continue once the system becomes fully operational.

Multiple Agents for Different Submissions: 

Participants also pointed out the need for functionality that allows multiple agents to manage different aspects of their tax submissions, such as one agent for quarterly updates and another for end-of-year filings. HMRC has been trialling this feature and will refine it before the system’s official rollout.

What’s Happening During the Testing Phase?

The testing phase, which began in April 2025, focuses on fine-tuning the platform’s capacity to handle high user volumes. HMRC has been trialling the sign-up process to ensure that the system can accommodate a large number of participants, and since August 2025, users have been able to submit their first quarterly updates using MTD software.

During the testing phase, HMRC has been checking that estimated payments are correct and making sure the system can perform certain actions in the digital tax account, like adding or stopping an income source and choosing to join or leave the service.

Key Features of MTD for ITSA

Once fully operational, Making Tax Digital for Income Tax (MTD for ITSA) will enable businesses, self-employed individuals, and landlords to:

  • Maintain Digital Records: Users will be required to maintain digital records of their income, expenses, and other financial details.
  • Submit Tax Returns via Software: Tax returns will be submitted through MTD-compatible software, which will eliminate the need for paper-based recordkeeping.
  • Access Digital Tax Accounts: Taxpayers will manage their accounts and submissions through a secure digital tax account, offering more transparency and ease of use.

What Does This Mean for the Future of Tax Reporting?

The HMRC’s push for digital tax reporting reflects a broader effort to modernise the UK’s tax system. The move to MTD will simplify and streamline processes for many taxpayers, although there are concerns about the impact on smaller businesses and those less familiar with digital tools. However, HMRC is confident that these changes will provide long-term benefits, including:

  • Fewer Errors: Digital submissions and more frequent updates reduce the risk of errors that often occur during the annual self-assessment process.
  • Faster Processing: Real-time data collection allows HMRC to process returns more quickly and respond to issues faster.
  • Better Engagement: Taxpayers will engage with their tax records more regularly, making it easier to manage their financial obligations.

What Should Taxpayers Do Now?

The official rollout of MTD for ITSA is scheduled for April 2026. However, taxpayers who meet the required criteria have been using the system voluntarily since 2024. To prepare for the transition:

  • Check Eligibility: Ensure you meet the thresholds for MTD compliance (e.g., self-employed or earning over £10,000 annually from property income).
  • Select MTD-Compatible Software: Research and choose software that will enable you to record income and submit quarterly updates digitally.
  • Start Digital Record-Keeping: Begin maintaining digital records of your income and expenses if you haven’t already.

Why Apex Accountants is the Right Choice Following the HMRC Update on Making Tax Digital

With the HMRC update on MTD, businesses and self-employed individuals must adapt to new tax reporting rules. At Apex Accountants, we specialise in helping clients navigate these Making Tax Digital changes smoothly:

  • Expert MTD Knowledge: Stay ahead with our in-depth understanding of MTD requirements and HMRC compliance.
  • Tailored Solutions: We offer personalised MTD services, from selecting the right software to submitting quarterly updates.
  • Seamless Digital Transition: Let us handle the shift to digital tax reporting, ensuring your records are compliant.
  • Proactive Tax Planning: Maximise tax reliefs and minimise liabilities while staying compliant with MTD.
  • Ongoing Support: We provide continuous guidance to ensure smooth MTD compliance and updates from HMRC.

Contact us today to ensure a smooth transition to Making Tax Digital and keep your business compliant and efficient.

Book a Free Consultation