Britain’s most significant tax administration overhaul in three decades will take effect on April 6, yet close to half of those affected remain unaware of the changes.
Making Tax Digital for income tax will require nearly 900,000 higher-earning landlords and sole traders to adopt authorised software to maintain digital records and submit quarterly updates to HMRC.
The programme, first announced more than 10 years ago, requires anyone earning above £50,000 from self-employment or property income during 2024/25 to comply with the new digital reporting requirements.
The scope will widen in the coming years, with those earning above £30,000 brought into the system from April 2027, followed by individuals earning more than £20,000 from April 2028.
Tax professionals have raised concerns about HMRC communication efforts and whether affected taxpayers are prepared for the shift in reporting obligations.
Research conducted by the Association of Independent Professionals and the Self Employed alongside software provider Sage found nearly 40 per cent of sole traders had “never heard of” Making Tax Digital, while only around a third reported full awareness of the policy.
The research also found that only one-in-10 currently use cloud-based accounting software.
Josh Toovey, senior research and policy officer at IPSE, said: “Our biggest worry is that hundreds of thousands of sole traders will only find out about this whole MTD change when they come to submit their annual return.”
He warned that those completing tax returns without professional assistance face the greatest risk of being unaware of the changes.
Reporting overhaul will require hundreds of thousands to submit quarterly digital updates
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GETTYStephen Relf, technical manager at the Institute of Chartered Accountants in England and Wales, said: “Raising awareness of MTD income tax has been, and continues to be, a huge challenge.”
The institute has warned that some taxpayers may not receive notification letters until April, when digital record-keeping requirements begin.
Affected taxpayers must submit quarterly summaries of income and expenses by August 7, November 7, February 7 and May 7.
A final declaration, which is due by January 31, replaces the traditional annual self-assessment return.
Software costs are a major concern for many taxpayers preparing for the transition.
The IPSE survey found 45 per cent of sole traders aware of the changes cited software costs as a key concern, while uncertainty remains over whether these costs will be tax deductible.
Tax experts have questioned the need for an overhaul to the system
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GETTYTaxpayers must select from a Government-approved list of software providers, although free options typically only support the most straightforward tax affairs.
Mr Relf said: “There could be a steep learning curve for many people, and errors may be made. It is important that taxpayers choose software wisely or risk having to change at a later date, further complicating matters.”
For many taxpayers, this will represent their first experience using commercial accounting software.
The quarterly reporting requirement has drawn criticism from some affected taxpayers.
Adrian Ashton, a consultant, said: “I will comply with it but I think it’s going to put many businesses under a lot of pressure.”
Chris Norris, chief policy officer at the National Residential Landlords Association, added that the reform coincides with other changes affecting residential landlords.
Mr Norris said: “We’re a bit worried about the cumulative load and whether this will lead to people making mistakes. We’re anticipating it’s going to be a disruptive year, which could create a few problems.”
The Institute of Chartered Accountants in England and Wales supports digital record keeping but has questioned the need for quarterly submissions.
According to its research, 65 per cent of respondents believe administrative burdens and costs will outweigh potential benefits.
Seb Maley, chief executive of tax insurance provider Qdos, said Making Tax Digital is “seen as a bit of a pain for most people with no obvious benefits.”
Meanwhile, HMRC said the system will improve accuracy and help taxpayers manage obligations more effectively.
Experts warn that sole traders may not be aware of the changes before its too late
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GETTYCraig Ogilvie, director of Making Tax Digital at HMRC, said: “It will make it easier for sole traders and landlords to stay on top of their tax affairs and help ensure everyone pays the right amount of tax.”
Errors currently account for nearly half of the UK tax gap, which stood at £46.8billion in 2023/24.
Mike Lewis, director at TaxWatch, said the system is “by no means a panacea” for reducing the tax gap, particularly as it does not address those who fail to report income entirely.
Claire Roberts, tax partner at Moore Kingston Smith, questioned extending requirements to lower earners.
“It’s hard to see how someone with a turnover of £20,000 would benefit from MTD, but that’s coming down the track,” she said.
Elsa Littlewood, tax partner at BDO, added: “The fear of this is going to be far worse than the reality.”