Individuals and businesses need to be prepared for its introduction.
It comes into effect in April 2026 for businesses, self-employed individuals and landlords with an income over £50,000. It comes into effect a year later for businesses that earn over £30,000.
Businesses can voluntarily join the MTD scheme earlier if they wish. Those with incomes below these thresholds have the option of continuing to use the existing Self-Assessment system or using the MTD system. Partnerships will be required to join MTD at a later date.
The thresholds apply to the gross rental income or business turnover, and not profits. The gross income of all businesses in one entity is to be combined when considering these thresholds. For example, if the business of a sole proprietor earns £40,000 gross in a year, and property rental income of £12,000 is received, this gives a combined gross income of £52,000. As this exceeds the MTD threshold, the individual must use comply with MTD.
MTD requires MTD compatible software be used. Separate records and separate submissions must be made for each business even if each business or property rental is below the MTD thresholds. Where property income is received from more than one property, all properties that are in the UK are treated as one UK property business.
Businesses do not need to follow the MTD rules if:
it is not practical for them to use digital tools to keep digital business records due to age, disability, remoteness of location or any other reason
the business is run entirely by practising members of a religious society or order whose beliefs do not permit the use of electronic devices.
Applications need to be made to HMRC to claim the above exemptions. Trusts are exempt from MTD.
IT requirements
MTD will remove the need to submit the current annual Self Assessment Tax Return. MTD instead requires a computerised system that keeps your tax affairs and accounting records up to date using MTD-compatible software. Businesses will need a computer software system that is compatible with MTD. Most accounting software suppliers will provide an MTD-compliant software.
Lots of small businesses use Excel to maintain their accounting records. Special bridging software is available to link Excel records to the HMRC systems.
Software packages will keep the digital records and submit quarterly ‘Tax Returns’ to HMRC. HMRC will provide a quarterly update as to the amount of tax that is owed so businesses can set aside the amount. The payment dates for income tax will not change, even though submissions are made to HMRC each quarter ended.
MTD requirements
The prime requirement is that MTD-compliant software is used. This must allow:
creation and storage of digital records
sending quarterly digital updates of the totals of business income and expenses
sending an annual digital update or End of Period Statement.
A final declaration is also required. This can be either through the MTD-compliant software or the HMRC online service account.
Self-Assessment changes
For each business, a quarterly update will be required to be submitted. This includes a quarterly update for any rental property portfolio. The quarterly updates follow the tax year to 31 March / 5 April, not necessarily the individuals accounting year, if different.
The standard quarterly periods and deadlines are as follows.
​Quarterly period | ​Quarterly filing deadline |
​6 April to 5 July | ​5 August |
​6 July to 5 October | ​5 November |
​6 October to 5 January | ​5 February |
​6 January to 5 April | ​5 May |
It is expected that an option will be introduced to use calendar quarters e.g. 1 April to 30 June rather than 6 April to 5 July.
These quarterly tax updates will not include any adjustments for assets purchases, capital allowances or other annual tax reliefs. As a declaration is not being made there are theoretically no penalties for inaccuracies.
An End of Period Statement must also be made for each business and for property income. This is to include any adjustments that are needed. Adjustments can include accounting adjustments for accruals and prepayments, adjustments for disallowable expenses, claiming reliefs and allowances and for any elections that are to be made. As is currently the case, complex calculations may be required from the business’s accountant.
By 31 January each year, a single final declaration needs to be made for all taxable income and gains. This will finalise the individuals and their business tax position. The software will allow the business to see the final income tax estimates that have been calculated by HMRC. This will include information regarding income, expenses and allowances that HMRC has been told about. This will then require a final declaration to combine all the information from the business and properties as provided by the quarterly updates and End of Period Statement plus any income that is outside MTD, for example, dividends and interest.
Agents
The individuals and business owners can authorise an accountant or tax agent to make MTD returns on their behalf. This also authorises HMRC to exchange data with the agent. The agent can sign the business up for MTD, use the MTD software to create records, edit and store them and send the data to HMRC. An agent currently authorised for Self-Assessment will not need to be re-authorised for MTD.
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