“Making Tax Digital: Bringing business tax into the digital age”, the strapline of the George Osborne led Treasury department in 2015 when Making Tax Digital (MTD) was first announced. At the time the plan was that within 5 years all sole-traders, partnerships, companies and property landlords with a turnover in excess of £10,000 per annum would be sending quarterly reports to HMRC detailing their income and expenses. The plan being to cover income tax, corporation tax and VAT under these new systems. Granted VAT return reporting moved to a Making Tax Digital system from April 2019 onwards, however roll forward with 10 years of set-backs, delays and relaxation in rules we’re here now in 2025 and finally have assurance (as we write!) that the first group of businesses will be required to move to this MTD for Income Tax quarterly reporting system from April 2026.

This article seeks to address the implications of MTD: what the rules are, what you will need to do and when you will need to do it.

What is Making Tax Digital for Income Tax/Corporation Tax?

Making Tax Digital is a UK government initiative designed to simplify and modernise tax reporting. Instead of scrambling to gather paperwork at the end of the year, businesses will need to keep digital records and submit tax information electronically on a quarterly basis (like we do with VAT returns).

The slight twist; it also brings property landlords into the mix i.e. rental income received by individuals, regardless of whether you have self-employment income or not.

HMRC’s goal? According to the original consultation documents, is to reduce the “Tax Gap” and also help businesses get their tax right up front rather than tackling errors once things have gone wrong.

It also allows both HMRC and you (the taxpayer) to build up a picture of what potential tax liabilities are going to be for the year. Of course, although not stated by the government it is also a clear step closer to businesses of all shapes and sizes having to make tax payments on a more regular basis than they currently do – which has both its pros and cons, but rest assured is not a requirement at this point.

Does this affect me / my business?

Yes, this will affect a lot of businesses and property landlords at some point over the coming few years and into the future:-

• Individuals with Sole-Trader turnover and/or* rental income for 2024/25 over £50,000 – Required to move to MTD ITSA (Making Tax Digital for Income Tax Self-Assessment) from April 2026 and file quarterly returns thereafter. The returns will cover calendar quarters, and will have a deadline one month and 7 days after the quarter end i.e. the first return covering Apr – Jun ’26 will need to be filed by 7 August.
• Individuals with Sole-Trader turnover and/or* rental income for 2025/26 over £30,000 – Required to move to MTD ITSA from April 2027
• Individuals with Sole-Trader turnover and/or rental income under £30,000 – No indication yet if or when MTD ITSA will apply.
• Partnerships – No indication yet when MTD ITSA will apply, however currently thought to be no later than 2030.
• Limited Companies – No indication yet when MTD for Corporation Tax will apply, however currently thought to be no later than 2030.

(* Sole trader business turnover and gross rental income are added together, as applicable, and then compared against the relevant threshold)

What do I need to do?

This really depends on your current bookkeeping set-up:-

• Who will be least affected – Those who currently use software such as Xero or QuickBooks, and maintain those records on a regular basis will be least affected. The good news is that these 2 popular packages are already ready for MTD ITSA filing, as confirmed on this HMRC page of compliant software > . If you currently use another software package, check the link to see if it is already compliant, or expected to become compliant.

For those already on compliant software you will just need to ensure your records are continued to be kept up to date, but thereafter it is likely all MTD ITSA will mean to you is a few extra clicks of a button every quarter.

• Who will be most affected – Those who currently don’t use any form of regular record keeping and only really gather together their business records at the end of each tax year. Typically, this will be property landlords and businesses that are not VAT-registered.

The move to MTD ITSA will be a big change, as choices will need to be made about which software to use, how often the bookkeeping will be done and who will complete the bookkeeping, not to mention considerations around costs involved.

The above clearly won’t cover every scenario e.g. you may be a business that does have some form of bookkeeping, perhaps spreadsheets or a handwritten book or software that is not yet on the HMRC approved list. These businesses may not have such a change in terms of getting to grips with the actual record keeping, but instead will need to consider what software they use going forwards to enable the quarterly returns to be filed.

Alternatively, you may be a sole-trader currently using software to maintain your business records but also have rental income. You will need to consider how the rental income will/can be reported alongside the business income.

Is there anything else I need to think about?

Yes, there are various other things to consider, such as….

• When to make changes……If you know you will need to make a change, then why not do it sooner rather than later. From 2024/25 most businesses will have a financial year end of 31^st March/5^th As we approach the MTD ITSA rollout there is no better time to move across to a new bookkeeping system, why not do it now, in advance so that you can get used to it.
• VAT quarters not in line with calendar quarters……If your business is VAT registered and doesn’t have VAT quarters in line with calendar quarters it may be worth changing them to bring them in line. Otherwise you may have 8 individual quarterly returns (4 VAT + 4 MTD ITSA) to make each year, opposed to 4. For some businesses this won’t be an issue because you maintain your records regularly enough, but for others it will.
• Whether you are digitally excluded……Digitally excluded businesses do not have to comply with the rules. You can apply for an exemption if by reasons of age, disability, location, religion you are unable to comply. Sadly, whilst it may sound like a good get out of jail card, the chances of it applying in the modern era are relatively slim.
• Should I change my business structure?……As noted above there is not yet any definitive timescale for Partnerships or Limited Companies to join quarterly MTD reporting. Therefore, for some businesses it may now be a good opportunity to review the current structure and see whether a change would be beneficial – but beware, you are only delaying the inevitable!

Does this remove the need for a tax return?

No, sadly not. Once the 4 quarterly returns are made each year, a final return has to be made with all year end adjustments etc. and reporting any other income received, e.g. employment, bank interest, dividends etc. This last return is therefore akin to the tax return that is currently filed, it is just likely to take a slightly different format going forwards.

Self-assessment tax returns will still remain in place for all taxpayers not caught by MTD ITSA.

Why should you care about MTD?

Let’s be honest—change isn’t always easy. But MTD ITSA isn’t just about compliance; it’s about making your life easier and improving the way you manage your business finances.

• Less Paperwork, More Automation: With MTD, you can say goodbye to piles of receipts and paperwork. Digital accounting software integrates transactions, can automate certain calculations, and submit returns at the click of a button.
• Fewer Errors, Fewer Headaches: Manual data entry can lead to mistakes, which in turn can result in penalties. Digital records can reduce human error and help you stay on top of your business finances.
• Better Cash Flow Management: With real-time tax reporting, you’ll have a clearer picture of your business’s financial health. No more nasty surprises at year-end when a big tax bill lands out of nowhere.
• Future-Proofing Your Business: Tax legislation is only going to get more digital. Embracing a move to digital record keeping now means you won’t be left scrambling with any future changes.

How can Smarter Accounting help?

We know that adapting to new systems can feel overwhelming, which is why we’re here to guide you every step of the way. Here’s how we can make it easy for you:

• Choosing the Right Software: We can recommend and set up MTD-compliant software like Xero, QuickBooks, or FreeAgent based on your business needs. There is no one size fits all solution.
• Seamless Transition: We’ll help migrate your records to digital platforms without disrupting your day-to-day operations.
• Ongoing Support: Whether it’s training you or your team, or perhaps even handling bookkeeping and submissions for you, we’re on hand to make MTD stress-free.
• Tax Planning & Advice: MTD isn’t just about compliance—it’s an opportunity to get to grips with your business finances, which in turn helps Smarter to give the best advice and guidance possible when questions arise.

Ready to get started?

Making Tax Digital for Income Tax is coming whether we like it or not, but with the right preparation, we think it can be a game-changer for some businesses. If you need help making the switch, Smarter Accounting is here to make the process simple, smooth, and stress-free.

Please do not hesitate to get in touch with your usual Smarter Accounting contact to discuss further.

We will update in later blogs with any future MTD ITSA related information as and when it is released by HMRC in the run up to the April 2026 start date.

The information contained within this article is correct as of March 2025 and is only intended to give an illustration of the current legislation. This article should not be considered definitive advice, and as such we would always recommend speaking to your usual Smarter Accounting contact to review your specific circumstances in more detail.