Making Tax Digital (MTD) made simple for sole-traders and Landlords

A full guide to Making Tax digital (MTD) for self-employed (sole-trader) and landlord taxpayers

HMRC has introduced MTD for Income Tax for certain sole-traders and landlords with a phased starting date as follows:

Phase 1: Self-employed and landlords with qualifying incomes above £50,000 reported in their 2024-25 tax returns should have began complying with MTD from 6 April 2026.
Phase 2: Sole-employed and landlords with qualifying incomes above £30,000 to be reported in their 2025-26 tax returns will begin complying with MTD from 6 April 2027.
Phase 3: Sole-employed and landlords with qualifying incomes above £20,000 to be reported in their 2026-27 tax returns will begin complying with MTD from 6 April 2028.

Complying with MTD is relatively straightforward provided you plan well ahead of the start date. You will need to make substantial changes as to when and how you go about recording and reporting your tax affairs in future. This guide explains in detail what MTD is all about. You may prefer to read our summary guide that headlines the key elements taxpayers should understand about the new tax reporting regime.

Making MTD Simple

A practical guide to Making Tax Digital (MTD): For sole-traders and landlords

This guide is published to help MTD sole-traders and landlords understand their new tax reporting obligations under the new reporting scheme.

Latest News - October 2026: You may have read in the press that Andrew Griffith, the Tory Shadow Chancellor, called for a pause on any further roll outs of MTD for Income Tax in their 2026 Conference. ICEAW have made similar calls. MTD is unsurprisingly proving very unpopular with the Phase 2 and Phase 3 taxpayers who are arguably the least able to afford the additional time and costs the new regime places upon them. That said, until such time that HMRC announce a postponement, Phase 2 tax payers must assume they are still up next, and start planning for next April 2027. Phase 3 taxpayers can sit back and watch what happens in the coming year.

The HMRC will notify those sole-traders and landlords they require to begin reporting under MTD based on the amount of qualifying income they report in their tax return each year. MTD will not apply to sole-traders and landlords with qualifying gross income of less than £20,000.

You will find no shortage of good and bad advice about MTD published on the Internet. If you feel confused by all the conflicting advice, then we suggest reading the guidance published by HMRC. They own MTD, and although their guidance can sometimes be black-and-white when shades of grey are more likely to apply in practice, HMRC do have the last word on any tax compliance matter, unless you are rich enough to challenge their decisions in court.

Though the point of this guide is to encourage you to plan ahead for MTD, it is all too easy to be misled into signing up to a sledgehammer solution to crack a nut. There are many simple, and inexpensive solutions available to you, not all of which require you to subscribe to expensive MTD software. All you have to do is find the right solution that best meets your needs.

So where do you begin? Start by reading any chapter that captures your interest in the Index below. You will will find one chapter leads to another, and you will quickly build a broader understanding of what the new regime is all about, and what you must do to prepare for the day you must start complying with MTD.

If there is one takeaway from this guide, it has to be the need for you to plan how you will meet your new MTD obligations well ahead of the date you must start complying. Your goal should be to reach your start date having completed the registration of your MTD account with HMRC, and be confident your new accounting system will allow you to file your first quarterly MTD-return by 7 August that same year. Those MTD-taxpayers with tax-advisers should already have received the same advice given here. If you are contemplating going it alone, then this guide will prove to be a useful indicator of what is involved.

Disclaimer: Although every effort is made to ensure the information and guidance published here is correct, we give notice that no person can rely upon the advice or guidance published in this guide. The specific circumstances a person may find themselves in might require a different approach to the generalised advice published here. For this reason, anyone relying upon the information and guidance published here does so entirely at their own risk, and they cannot hold the publishers or the authors of this guide responsible or liable for any losses, costs, or damages they suffer as a result.

Index

Chapter 1.	What is MTD?
Chapter 2.	Why has HMRC introduced MTD for sole-traders and landlords?
Chapter 3.	Which classes of taxpayers must comply with MTD for Income Tax?
Chapter 4.	What are the qualifying conditions and income thresholds that trigger the obligation to comply with MTD?
Chapter 5.	Are there any exemptions for the need to comply with MTD?
Chapter 6.	Why is it unwise to use a private bank account for business?
Chapter 7.	What extra accounting information must I record and retain to comply with MTD
Chapter 8.	What are the MTD 'categories' to be reported in the MTD return?
Chapter 9.	What are my obligations to keep proper accounting records?
Chapter 10.	How long must I keep my MTD records for?
Chapter 11.	What extra returns must I make under MTD?
Chapter 12.	What changes will MTD require me to make concerning when and how I prepare my accounting records?
Chapter 13.	Can I continue keep my accounts on paper ledgers or spreadsheets? Answer: A qualified Yes.
Chapter 14.	Must I buy MTD software? Answer: A qualified No.
Chapter 15.	How much extra will complying with MTD cost me?
Chapter 16.	Do I need a tax adviser to help me comply with MTD?
Chapter 17.	What penalties will apply for failing to comply with MTD?
Chapter 18.	What we learned from the Phase 1 taxpayers beginning their MTD journey
Chapter 19.	What is the MTD tax trap?
Chapter 20.	Will MTD make it more likely HMRC will audit my business affairs?

1. What is MTD?

In so far as it applies to sole-traders and landlords, MTD is essentially a recently introduced tax reporting regime that requires them to use HMRC-approved software to record details of their relevant qualifying income and expenditure in a defined digital format, and then submit online four quarterly returns during the tax year to HMRC for processing, analysis, and compliance checks. Each of these four returns reports the year-to-date figures.

A fifth return will be posted online by HMRC after the tax year, which can only be accessed by MTD-approved software. It will be pre-populated with information already submitted to HMRC, and the taxpayer must update, amend, and approve the return before the following 31 January. This new return effectively replaces the SA100 Self Assessment Tax Return that MTD-taxpayers would have submitted in past years. It allows the MTD-taxpayer to:

Finalise any adjustments required to the four reports already submitted during the tax year just ended.
Add details of other taxable income and allowable expenditure not caught within the scope of MTD.
Claim any tax allowances and make elections as necessary.

HMRC first introduced MTD-reporting for VAT-registered businesses from April 2016. HMRC first announced sole-traders and landlords would be mandated to comply with MTD in 2015. The first wave of MTD sole-traders and landlords began reporting their MTD-qualifying income and expenditure from 6 April 2026.

HMRC originally planned other groups of taxpayers to comply with MTD. The requirement for companies to report under MTD was dropped. The requirement for partnerships to report under MTD has been postponed. Like it or not, the requirement for sole-traders and landlords to comply with MTD has already started and is here to stay. Meaning those notified by HMRC that they must start complying with MTD from the start of the next fiscal tax year, must accept the challenge no matter what hardship and extra costs that may involve.

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2. Why has HMRC introduced MTD for sole-traders and landlords?

MTD is an essential part of HMRC's plan to create a modern, fairer and more cost-effective tax system for its customers. If you can get your head around the concept that HMRC views taxpayers as customers, then anything that improves the current customer experience has to be a move in the right direction. The quality of service has left a lot to be desired for many years since HMRC closed their local tax offices and focused on telephone support.

In fairness, HMRC has made significant improvements to the service they provide in recent years, not least of which is improving the quality of information they provide on their dot.gov websites.

Another reason for MTD aligns with HMRC investment in using modern technology to improve the efficiency with which it collects and processes taxpayers' information to determine what tax they should pay. If our experience of guiding our Phase 1 clients through their first MTD-reporting cycle in August 2026 is anything to go by, HMRC is moving in the right direction.

HMRC's other stated MTD goal is to close the tax gap, which will work in favour of honest taxpayers … obviously less so for those who are not.

HMRC estimates the tax gap for 2024-25 was £59.2 billion. It reflects the difference between what tax was expected to be collected for that tax year, and what was actually received by the Treasury. To put some perspective on the magnitude of the tax collection shortfall, the UK spent £62 billion on UK National Defence. The NHS budget for 2025-26 was set at £208 billion. Any initiative that fairly and equitably closes the tax gap has to be welcomed by compliant taxpayers who are currently paying for the shortfall of tax collected from those who are not.

MTD for sole-traders and landlords is just another step in HMRC's ongoing campaign to ensure everyone pays their fair share of tax in a group of taxpayers renowned for being the least tax compliant.

Here are some links to key legislation and HMRC guidance you may care to explore:

Regulation 15 of The Income Tax (Digital Obligations) Regulations 2026 (SI.2026 No. 336).
The HMRC guide Use Making Tax Digital for Income Tax.
HMRC Notice: Making Tax Digital for Income Tax: Quarterly update direction (updated 20 March 2026) provides further clarification about the MTD-reporting procedure.

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3. Which classes of taxpayers must comply with MTD for Income Tax?

They will be taxpayers already registered with HMRC for Self Assessment, and who are:

Sole-traders: Who earn an income through operating a UK business on their own account (self-employed).
UK-property landlords: Who hold an interest (owner) or part-interest (joint-owner) in one or more UK properties from which income is received.
Overseas-property landlords: Who hold an interest (owner) or part-interest (joint-owner) in one or more overseas properties from which income is received.

… and whose total qualifying income derived from any, or a combination of all three regulated sources, exceed specified thresholds reported in a previous tax year.

Qualifying Income includes the combined gross income from all self-employment and property (UK and overseas) before any tax allowance or expenses are deducted. It does not include income from employment (PAYE), partnerships, or dividends received. Only the apportioned share of gross income from each jointly-owned property is taken into account in determining an individual's qualifying income.

Details of the income thresholds that determine when an in-scope taxpayer must start complying with MTD are given in the next section.

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4. What are the qualifying conditions and income thresholds that trigger the obligation to comply with MTD?

Based on the level of qualifying income reported in the previous year's tax return, HMRC will issue a notice to the sole-traders and landlords they require to begin reporting under MTD. There will be a phased introduction as follows:

Phase 1: Self-employed and landlords with qualifying incomes above £50,000 reported in their 2024-25 tax returns should have began complying with MTD from 6 April 2026.
Phase 2: Sole-employed and landlords with qualifying incomes above £30,000 to be reported in their 2025-26 tax returns will begin complying with MTD from 6 April 2027.
Phase 3: Sole-employed and landlords with qualifying incomes above £20,000 to be reported in their 2026-27 tax returns will begin complying with MTD from 6 April 2028.

Sole-traders and landlords with qualifying incomes less than the above thresholds, can voluntarily register for MTD, provided they are:

Registered with HMRC for Self Assessment; and
They have submitted a tax return in the last two years.

A taxpayer who registers for Self Assessment as a new sole-trader or landlord in 2026-27 will be required to complete a normal SA100 Self Assessment tax return for this year, and submit it after 5 April 2027 and before 31 January 2028. The earliest they could voluntarily register for MTD would be from 6 April 2028.

HMRC has indicated they will review all Self Assessment tax returns each year, and they will write to those taxpayers they require to begin complying MTD from the next fiscal tax year. Nonetheless, it is worth noting that the responsibility for complying with MTD still remains with the taxpayer. If you believe you should report in future under MTD rules, but have not yet received a formal notice to that effect, contact HMRC or take professional advice to clarify the matter.

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5. Are there any exemptions for the need to comply with MTD?

HMRC has published guidance on the available exemptions for certain taxpayers to avoid or delay having to comply with MTD.

The stated exemptions include:

Sole-traders and landlords with total qualifying income of less than £20,000.
A taxpayer who has not yet been issued with a National Insurance number before the start of the tax year enjoy a temporary postponement of the date they must comply with MTD.
Partnerships are currently exempt.
Non-resident companies submitting an SA700.
Trusts submitting an SA900.
Taxpayers are automatically exempt of the included any of the following information in their 2024-25 tax return:

the SA103L supplementary page as a Lloyd's member in relation to your underwriting business.
that you are not physically or mentally capable of providing information to HMRC and have either:

given power of attorney to someone in the UK to act on your behalf and it is currently in place, or
a legally appointed deputy, controller or guardian in place.

We recommend those intending to take advantage of an exemption confirm with HMRC they are entitled to rely upon it well before the date they would otherwise need to comply with MTD-reporting.

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6. Why is it unwise to use a private bank account for business?

There are sound reasons why banking institutions differentiate between personal and business use accounts. We have noticed a recent increase in banks taking issue with customers who misuse their private accounts for business use presumably because of the increasing Anti Money Laundering Regulation hoops they must jump through to remain compliant. That is a matter for individuals and their banks to sort out.

What we are more concerned about here is explaining why MTD-taxpayers would be extremely unwise to pass their private and business transactions through the same bank accounts.

The first reason is one of the extra cost of preparing MTD-returns when private and personal income and expenditure become mixed together. Most MTD-software can import digital bank statements for analysis as part of the process for preparing the four quarterly MTD-returns. If the statements contain both personal and private transactions, it will prove necessary to remove the private items from the digital records submitted to HMRC. This will prove not only costly to complete, but it increases the risk of letting a few private transactions slip through and come to the attention of the HMRC. Carelessly inviting the unwanted attention of HMRC to non-allowable expenditure is never conducive to a good night's sleep.

If HMRC decides to open a section 9A investigation, they will ask for copies of all relevant bank accounts that contain business transactions. If you have mixed your private and business affairs in the same bank accounts, you will quickly come to regret that decision because you have just handed HMRC on a plate the opportunity to investigate your private affairs as well.

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7. What extra accounting information must I record to comply with MTD?

Taken in isolation, the MTD regulations only require the following information about each transaction to be digitally recorded and retained in the HMRC-approved software that must be used:

The date of the transaction.
The amount of each transaction.
The category to which each transaction must be allocated and reported within the submitted MTD-return. Categories are explained in Chapter 8.

As you will read in Chapter 9 there are other regulations that require more information to be recorded and retained in what are described as proper accounting records.

You can quickly appreciate there is a potential here for taxpayers to misunderstand what information they should record and retain in order to fulfill their MTD obligations. There are substantial penalties for failing to keep the proper records.

References:

Regulation 15 of The Income Tax (Digital Obligations) Regulations 2026 (SI.2026 No. 336) states the need for MTD-taxpayers to keep digital records.

The HMRC guide Use Making Tax Digital for Income Tax confirms that HMRC-approved software will create a digital record for each income and expense item relating to self-employment property, to include: the amount; the date income was received or expense occurred; and the category of the income or expense (using the same categories that would be used for Self Assessment).

HMRC Notice: Making Tax Digital for Income Tax: Quarterly update direction (updated 20 March 2026) provides further clarification about what information is required.

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8. What are the MTD 'categories' to be reported in the MTD return?

The analysis of different categories of MTD reporting listed below, are taken from HMRC Notice: Making Tax Digital for Income Tax: Quarterly update direction (updated 20 March 2026).

The reporting categories prescribed for sole-traders:

Income:	Expenses
Turnover	Cost of goods bought for resale or goods used
Other business income	Construction industry - payments to subcontractors
	Wages, salaries, and other staff costs
	Car, van, and travel expenses
	Rent, rates, power, and insurance
	Repairs and maintenance of property and equipment
	Phone, fax, stationery, and other office expenses
	Advertising
	Business entertainment costs
	Interest on bank and other loans
	Bank, credit card, and other financial charges
	Accountancy, legal, and other professional fees
	Other business expenses

The prescribed reporting categories for UK landlords:

Income:	Expenses
Total rent	Rent, rates, insurance, and ground rent
Other property income	Property repairs and maintenance
Premiums for granting a lease	Non-residential property finance costs
Reverse premiums and inducements	Residential property finance costs
	Residential finance costs brought forward
	Legal, management, and other professional fees
	Cost of services provided, including wages
	Travel expenses
	Other allowable property expenses

The prescribed reporting categories for foreign (overseas) landlords:

Income:	Expenses
Total rent and other receipts	Allowable property expenses (rent, repairs, legal fees, costs of services provided)
Premiums for granting a lease	-

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9. What are my obligations to keep proper accounting records?

The HMRC's Compliance Handbook CH1020 require taxpayers to prepare proper accounting records that are sufficiently detailed to support an accurate tax return and permit HMRC to verify the figures reported. All expenditure claimed against taxable income must be wholly and exclusively for the purposes of carrying on the business (HMRC: BIM37007).

This information must be retained for HMRC inspection for at least five years from the 31 January filing deadline to which they relate.

If you are a sole-trader, a landlord, or indeed both, you must record and report details of all the individual qualifying income and expenditure transactions from the following separate sources each tax year to comply with MTD:

As a sole-trader you must keep separate records for each self-employed activity you undertake. For example, if you are an electrician by day, and a musician and martial arts teacher by night, you must record and report three separate MTD returns every quarter for each trade.
If you are a landlord with one or more UK properties, MTD requires all of the income and expenditure derived from all UK properties to be reported digitally in aggregate as effectively one UK property rental income business.
- It is important to understand that although HMRC's MTD guidance specifically indicates there is no need to keep separate records if you have more than one UK property, there are other considerations that do require keeping separate records of income and expenditure by source. These are:
- Notwithstanding the statutory precedents mentioned above, there is logical reason for keeping separate records of income and expenditure by property simply because it allows the owner to better manage and make more informed decisions about how to maximise their return-on-investment from each property.
If you are a landlord with overseas properties, to comply with MTD you are required to keep separate records of income and expenditure for each overseas properties in digital format, even though the MTD quarterly returns submitted to HMRC report the income and expenditure in aggregate.

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10. How long must I keep my MTD records for?

MTD records must be kept for at least 5 years after the 31 January submission date to which they relate.

For example, the records for 2026-27 is due 31 January 2028. So, the digital records must be kept until at least 31 January 2033. The period of retention can be extended if an HMRC inquiry is in progress at the time.

We would argue any supporting paperwork that underpin the digital records must also be retained and be available in some resemblance of order to allow the HMRC to inspect and trace digital transactions back to the relevant invoices and receipts. This obligation is one of the main reasons why we recommend Sage and Xero, amongst others, that allow the user to store digital images of the related invoices or receipts. A lot more work to scan the images at the time of data entry, but the pay back comes if you every find yourself the subject of a future HMRC inquiry.

Another important consideration is for the taxpayer to keep checking the software they use is backward compatible to allow the opening of data sets going back five years. This becomes increasingly more complex if different software has been used in any 5 year period. There is a concern that many of the current software houses offering HMRC-approved software may not remain in business for the next

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11. What extra returns must I make under MTD?

Instead of filing just one SA100 Self Assessment tax return by 31 January in the following year after the tax year has ended, MTD-taxpayers must start recording transaction from the start of the tax year and file their first of four quarterly MTD-return in August within the tax year. MTD-taxpayers can report on a fiscal or calendar year basis.

After the tax year has ended, HMRC will pre-populate a fifth return to be completed online by the following 31 January. This fifth return removes the need for the taxpayer to file an SA100, and allows them to post details of other taxable income, allowable expenditure, make claims, and elections as before.

Clients can choose to use the following fiscal date reporting periods:

Quarter	From		To	Filing Deadline
1.	6 April	-	5 July	7 August
2.	6 April	-	5 October	7 November
3.	6 April	-	5 January	7 February
4.	6 April	-	5 April	7 May

HMRC will also accept quarterly reporting on a calendar month basis as follows:

Quarter	From		To	Filing Deadline
1.	1 April	-	30 June	7 August
2.	1 April	-	30 September	7 November
3.	1 April	-	31 December	7 February
4.	1 April	-	31 March	7 May

You will note the quarterly returns must report the accumulating year-to-date results and not just the figures for each quarter.

After the 7 May each year, HMRC will use the MTD information submitted by each MTD taxpayer to pre-populate their personal Self Assessment tax return, and make it available through your chosen MTD software. The taxpayer will then have until the next 31 January to add other earned and investment income, claim allowances, and make any necessary elections to complete the full MTD tax return for that tax year.

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12. What changes will MTD require me to make concerning when and how I prepare my accounting records?

If you are accustomed to keeping sales, purchases, and bank accounting day books on a regular basis, then apart from adjusting how you analyse your expenditure to match the categories HMRC require, complying with MTD-reporting will not require any significant change to the way you work.

If you are someone who stores up all your relevant paperwork and only makes a start to pull it altogether to prepare your tax return after the tax year end has ended, then MTD will require a modest change to way you work in future.

If keeping paperwork is not really your thing, and you prepare your tax return directly from bank and credit card statements just before the January filing deadline, then complying with MTD will require you to make significant changes about how you keep your accounting records.

There are many simple solutions available that will help with the day-to-day mechanics of complying with MTD. There are, however, two key compliance issues people must get heir heads around.

The first involves a significant time shift in when taxpayers must engage with dealing with their tax affairs. Under MTD, the taxpayer must start recording the details of relevant income and expenditure from the start of the relevant tax year instead of leaving it to well after the tax year has ended.

The second compliance issue is a less obvious one. People quickly come to terms with the extra work involved in digitally recording all the extra transactional information required to prepare and submit the MTD-returns each quarter. What is important to understand is that MTD provides HMRC with an incredibly effective tax compliance audit tool it can choose to apply to a taxpayer's affairs for up to five years retrospectively in the years to come. For decades taxpayers have been living with a false sense of security believing they will never be audited by HMRC. MTD has the potential to change that, and whether that might impact on you can be answered by one single question. Could you provide HMRC with a copy of the receipts, invoices, or paperwork that validate a random selection of transactions that date from 2020/21? If you can, you have nothing to worry about. If you can't … then you would be well advised to fix the problem before moving forward with MTD.

If a taxpayer cannot make available proper accounting records, and provide the underlying documentary proof to validate the nature of the income or expenses reported in the last 5 years tax returns, then HMRC can levy fines and back-duty assessments for every year in default.

MTD has the potential to return us to the days when every business could expect an HMRC tax compliance visit every 3 years. The only difference is this time around it will be an AI agent auditing the digital MTD returns you have submitted, instead of a tax inspector camped out in your offices for a few days.

In summary, the most significant change MTD has introduced is the need for taxpayers to be far more honest and circumspect about what they put through the proper accounting books they would be well advised to prepare and retain. The risk of discovery for dishonesty and failing to keep proper records are too high under MTD.

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13. Can I continue keep my accounts on paper ledgers or spreadsheets? Answer: A qualified Yes.

Despite what you may have read or heard, you can continue to keep your accounting records on paper or spreadsheets, provided you work with a third party who will digitalise the records you prepare each quarter and submit the necessary MTD-returns to HMRC on your behalf. It will probably prove to be the most expensive way for taxpayers to comply with MTD, but some clients will no doubt prefer to do it this way.

How much of the preparation work the taxpayer will shoulder in this situation is a matter of personal choice, but it must be understand that whatever system of book-keeping is used, it must maintain a full paper audit trail from the digital summary information reported in the MTD-returns submitted to HMRC, back through to the individual items of income and expenditure stored digitally in the MTD bridging software, which in turn must link back in some way to the physical copies of the invoices and receipts that make up those digital records.

As HMRC require MTD records to be retained for five years from the 31 January filing deadline date to which they relate, the challenge is to devise a reliable system that keeps each year's records in a fit state to be inspected should the HMRC open a tax investigation. The worst possible situation a taxpayer can find themselves in is finding they cannot provide HMRC with the accounting records statute required them to retain and produce on demand. The position is nearly always indefensible, and will proves very expensive to reach a settlement of unpaid tax and penalties with HMRC.

We have clients who deliver their loose paperwork to us each quarter, and we prepare the accounting records and MTD-returns on their behalf. We have other clients who prepare sales, purchases, and bank day books in spreadsheet format, which they submit to us on a regular basis in good time to allow us to prepare and submit the MTD-returns. Either options are MTD-compliant.

MAAP has developed an easy-to-use suite of accounting day book in MS Excel spreadsheets we offer our clients free-of-charge to streamline the MTD-reporting cycle. We have been doing this since 1 April 2019 when MTD-reporting for VAT was first introduced.

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14. Must I buy MTD software? Answer: No.

While it is true HMRC will only accept MTD returns in electronic format generated from HMRC-approved software, it is perfectly permissible for a taxpayer to continue to drop off a box of disorganized paperwork at the end of each MTD quarter, and pay a firm of accountants like MAAP to prepare the necessary MTD returns and submit them to HMRC on their behalf. Arguably, this is the least efficient and most expensive way of complying with MTD, but some clients prefer paying for a service that requires the least involvement on their part.

Many of our clients keep their accounts on paper or spreadsheets, and we work with them to allow us to fulfill their MTD obligations. This is a happy half way house.

Entry-level accounting software has become far more user-friendly in recent years, and certainly more powerful and useful management tools for enterprises of all sizes.

We genuinely believe every taxpayer stands to benefit from adopting the correct software for their needs, and we are more than happy to guide them on that choice. For the record, MAAP never accepts or receives any consideration for recommending software to our clients. We tend to recommend Sage and Xero on an equal footing because we genuinely believe they a offer a range of entry-level and more advanced MTD-approved software that will allow the user to better manage their financial affairs beyond just complying with their MTD-reporting obligations.

Although we advocate the benefits of using MTD-compliant accounting software, it won't appeal to everyone for the following reasons:

You must invest the necessary time to learn and fully understand how to operate your new software and integrate it into your operations. If an adviser tells you it will be painless, inexpensive, and easy to execute … find another adviser.
Adopting accounting software never saves you time in preparing your accounts. If anything, it creates more work.
MTD compliance requires meticulous recording of detailed transactional data because you are submitting that information to HMRC for review. Carelessly recording incorrect or incomplete information will result in an unwanted HMRC inquiry.
Operating accounting software is an ongoing expense that will most likely increase in the future.
Your staff will require extensive training to competently operate accounting software. You can't learn what you need in a day.
You will find your reliance on professional advisers increases if you use accounting software.
There is an existential risk of losing or corrupting the accounting data held by software. Maintaining effective backup systems is essential.
Software users must continue to operate the necessary checks and controls to ensure the accuracy and completeness of the data they collect and process. Many an operation has been brought quickly to its knees because they have allowed their accounting system to be compromised by not protecting the continuing integrity of their data, often as a result of cost-cutting decisions to stop carrying out the checks and controls they started with. The classic rubbish-in, rubbish-out syndrome, which has no remedy except to start all over again from scratch.

You can explore what HMRC have to say on about choosing from their approved list of MTD software here.

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15. How much extra will complying with MTD cost me?

The honest answer is far more than it need be if you make the mistake of failing to carefully plan to meet your MTD obligations when your time time comes to start complying with MTD.

Increased professional fees will be a significant extra cost. For example:

Landlords : We normally charge around £150 fee to complete an annual Self Assessment tax return for a non-MTD landlord. The fee for acting for a MTD landlord starts at £50 a month to reflect the significant amount of extra work involved in preparing and submitting the five MTD returns each tax year.
Sole-traders: Our fee for working with a non-MTD sole-trader starts at £65 a month. It rises to £100 a month for MTD sole-trader to reflect the more care that is required to ensure accurate and complete returns are prepared and submitted in the annual reporting cycle.

A word of caution here. An Internet search will reveal there are service providers claiming they can deliver a MTD-compliant service for under £30 a month. Commonsense should question how any competent professional firm, with their substantial operating and qualified staffing costs, can deliver any kind of viable service with this kind of pricing model. The honest answer is they can't, which either means you need to read the small print to discover what hidden charges lurk behind the opening quote gambit, or ask them exactly what they will be doing for you in reality.

There may be the extra costs of subscribing to HMRC-approved software solutions. You may find our advice concerning choosing the right MTD-compliant software helpful.

There will be the opportunity cost of all the extra time you will have to devote to first preparing to comply with MTD, followed by the extra time it takes to prepare and submit each quarterly return. While it is true you will become more efficient as you settle down into a routine after the first few submissions, MTD does require a more information to be recorded for each transaction that must be posted to the MTD software.

The final cost to be borne is the possible penalties you might face for non-compliance. While many taxpayers honestly declare their taxable incomes and allowable expenditure, they often fail to take the necessary steps to ensure they retain the underlying paperwork for future HMRC inspections. For many years, HMRC has not had the resources to carry out regular compliance audits, but MTD will radically change that position. New technology provides HMRC with an inexpensive, and very effective compliance-checking and enforcement tool they can apply to every taxpayers' MTD-return, at any time. MTD requires detailed records of each transaction are retained for inspection for at least five years after the 31 January filing deadline. If HMRC opens an inquiry into a taxpayer's income tax affairs, they will start with requesting sight of bank statements, invoices and receipts as a matter of course. This is why many market-leading MTD software solutions sensibly provide the facility to link electronic copies of the underlying paperwork to every transaction. If to ensure they can be inspected by HMRC if required.

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16. Do I need a tax adviser to help me comply with MTD?

If you are an enlightened taxpayer with a sufficient understanding of the MTD regulations you must follow, there is no reason why you cannot subscribe to an HMRC-approved MTD software solution and manage the whole reporting cycle yourself without the need to engage an adviser.

As we obviously have a vested interest in answering this question, we start with pointing out that it takes a minimum of three years of study to qualify as an accountant, and then several more years learning their craft before they become a competent adviser. If an informed taxpayer believes they can match that level of professional knowledge and expertise, then they will have no reason to engage a tax adviser to help them comply with MTD. There is truly nothing difficult about the processes involved. One must merely know what they are, and when to execute them.

Perhaps, the question should have asked is it wise to go it alone? The reality is that unsupported taxpayers are far more likely to make fundamental mistakes in complying with their MTD tax obligations without the guidance of a competent tax adviser.

In the last year, a few sole-traders and landlords who have previously dealt with their own tax affairs have contacted us to take advice about MTD for next year. It quickly became apparent that they had been submitting incorrect tax return for years, and that left them in a very difficult position where they had no choice but to come clean with the HMRC to sort out the unpaid taxes involved. Sometimes a little knowledge can be a dangerous thing.

Ignorance of the law is never an acceptable defense. Taxpayers who unintentionally continue to file incorrect tax returns under MTD are far more likely to be discovered by HMRC. Coming to the attention of HMRC this way often proves to be more expensive than the alternative of ensuring you submit correct tax returns in the first place.

One last point about what we mean by a competent tax adviser. Fortunately, there are many firms offering advice on how to comply with MTD that possess both the technical IT expertise to advise you on which software you may need to adopt, as well being qualified practicing accountants and tax advisers in their own right. Unfortunately, there are also firms exploiting the situation by offering MTD advice that is not fit for purpose. So, if you feel inclined, three pointers about choosing a good MTD adviser:

Only choose a practicing firm of qualified and licensed accountants who can give you sound tax advice beyond the need to address MTD compliance.
Be wary of advisers who promise their software solution is the panacea to all your MTD-reporting needs. No such product exists.
Be even more wary if you find yourself under pressure to sign-up to a binding contract to use their software and support solution package.

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17. What penalties will apply for failing to comply with MTD?

HMRC have published guidance on the penalties that will be applied to taxpayers who fail to comply with their obligations under MTD. They can be summarised as follows:

1. Late filing of the quarterly MTD update returns.

One penalty point is gained for missing the filing deadline of each quarterly update.
Reaching four points triggers a £200 fine.
A further £200 is levied for further late filings while at four points.
Each penalty point is automatically removed 24 months after the missed deadline.
All points are reset to zero after the next two returns are filed on time, and all outstanding returns have been filed from the preceding 24 months.
HMRC has announced a soft-landing concession where no penalty points will accrue for Phase 1 taxpayers who miss their deadline in 2026/27.
No penalty points are gained for late filing by taxpayers who have elected to sign-up early for MTD during their voluntary period.

2. Late payment penalties for 2026/27.

Late payment penalties are not applied for delays in making payment up to 15 days after the due date.
A late payment penalty of 3% of the amount outstanding at day 15 will be applied to delayed payments between 16 and 30 days.
Delaying payment for 31 or more days will incur further penalties that include 3% of balance at day 15 + 3% at day 30 + 10% annual daily charge from day 31.
Taxpayers who contact HMRC within 30 days of the due payment date may be able to agree a time-to-pay arrangement that will avoid the penalties suffered.
Regardless of any time-to-pay arrangements, the normal HMRC late payment interest charges apply from the first late day to the date of payment.

3. Failure to keep proper accounting records.

Under S.12B of the Taxes Management Act 1970, HMRC are empowered to levy a penalty of up to £3,000 for each tax year where the records kept have proved not to be sufficient to make a correct and complete tax return. This would include preparing and retaining the digital records required by MTD for of the required 5 years moving forward.
HMRC tend to reserve the £3,000 for more serious cases, such as deliberate destruction of records, obstruction of an inquiry, or a history of record-keeping failures. A first non-deliberate failure will ordinarily receive a warning. The more likely penalties a defaulting taxpayer will suffer receive where poor record keeping results in an understatement of the tax liability due in any tax return made will vary according to the perceived reason for the failure:

Failure to take reasonable care: 0-30% of the potential lost tax revenue.
Deliberate inaccuracy: 30-70% of the potential lost tax revenue.
Deliberate and concealed inaccuracy: 30-100% of the potential lost tax revenue.

It should be obvious the HMRC has considerable scope to vary the size of the penalty applied. A taxpayer who made an isolated, careless mistake in one tax year, and who has fully cooperated with HMRC to determine and settle the undeclared involved tax can expect to only suffer a low penalty, if any at all. A taxpayer who has deliberately concealed a significant source of trading or rental income for many years, can expect the highest penalties, which could easily spell severe financial hardship for them and their families.
The absence of proper accounting records also leaves the door wide open for HMRC to estimate what undeclared tax liability might exist. Unsurprisingly, such back-duty assessments are often far more than the defaulting taxpayer had in mind. If the taxpayer choose to challenge the determination, they can expect their tax liability to double if they lose their appeal.

In summary, MTD require honest and proper accounting records to be kept and retained for five year, returns to be made on time, and the income tax liability arising paid on time. Failing to meet any of these conditions comes with quickly escalating financial penalties.

The concern many professional advisers share, is the sole-traders and landlords who are about to fall into scope of MTD in the next two years are the least likely to act in good time to prepare for the changes that are about to overtake them. They are also a group of taxpayers who may decide they cannot afford the tax advisers they need to engage to save them from the higher penalties they may end up attracting because of their failure to meet their MTD obligations. A Catch-22 situation with interesting times ahead.

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18. What we learned from the Phase 1 taxpayers beginning their MTD journey?

All of our Phase 1 taxpayers who started complying with MTD from 6 April 2026 experienced no problems in preparing and submitting their first quarterly MTD-return due by 7 August 2026.

It is worth observing that all of these clients already kept proper accounting records, or worked with us to allow us to prepare them on their behalf before the need to comply with MTD became a priority. So, all that was required was tweaking the established accounting reporting processes to align with the categories HMRC required under MTD.

Some of our clients took the opportunity to change the way they kept their accounts by switching from a manual system to either Sage or Xero. We worked closely with those clients between January and March 2026 to install their chosen software, train their staff, and establish the procedures they would use to capture, process, post, and check that the income and expenditure posted were correct and complete. They simply weer prepared to go live on 6th April without a hitch.

The clients who made this leap of faith trusted our forty years of change-management experience to guide them through the process of adopting their software of choice. They understood the significant costs involved, and accepted the extra work and training required to integrate their chosen software into their operations. It is interesting to note that if the need to comply with MTD disappeared, we doubt any of them would go back to the previous systems they had in place before. They now value the extra management control of their day-to-day business affairs such software delivers. Complying with MTD has been reduced to simply another chore that must be dealt with each quarter.

Although it will not affect our clients, one problem concerning the choice of MTD-approved software has been reported in the financial press. It is becoming apparent that some of the less expensive MTD-compliant software are functionally capable of completing the four quarterly MTD-returns, but lack the ability to complete the fifth and final MTD-return. It is a problem that is easily overcome, but requires those affected to subscribe to another system that will allow them to complete the fifth return, or engage a professional adviser to do the same for them. This will cost them more than had they subscribed to software that did allow them to complete the fifth return. A classic case of the cheapest option is rarely the best choice to make.

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19. What is the MTD-tax-trap?

One of the intended consequences of requiring all sole-traders and landlords with gross qualifying incomes in excess of £20,000 to report under MTD rules is that it will force them to submit more reliable and accurate tax returns in future. If you have submitted honest and accurate tax returns in the past, then MTD will cause you no problems. That will not be the case for taxpayers who deliberately understated their taxable income, or over claimed expenses in past years.

The moment someone who has filed inaccurate tax returns in the past starts submitting more honest tax returns under MTD, it is inevitable that HMRC will pick up the differences in more recent years when compared to the past. Over the next five years a lot of people with skeletons in the closet will be brought to account.

A dishonest taxpayer will immediately leap to the conclusion that all they have to do moving forward is to keep cooking the books under MTD so the year-on-year results remain consistent. It would probably work if it were not for the following reasons:

Although only summarised data is transmitted to HMRC in the four MTD-returns each tax year, the MTD-approved software used to compile those reports will contain the details of each transaction. Should the HMRC open an inquiry into a MTD-taxpayers affairs they will demand access to the full records contained in that software, which for a dishonest taxpayer, will be the nightmare equivalent of opening Pandora's Box.
HMRC have been collecting data about taxpayer's income, expenditure, and margins for many years from a surprising range of third party sources. MTD will only serve to enahance that quality of date collection. Their Connect system and the wider use of AI Agents to process that vast and complex pool of data will inevitably result in identifying and targetting more taxpayers whose affairs warrant further investigation in future.
There are moves afoot to more tightly regulate who can legally offer accounting and tax services in the near future. This will result in a smaller pool of professional firms who will be far more concerned about who they act for. Many taxpayers do not realise that firms are required to file Suspicious Activity Reports (SARS) with teh for any person they believe is engaged in criminal activities. Tax evasion and avoidance count amongst such activities.
As more taxpayers comply with MTD, the chances are they will be the unintentional source of identifying other taxpayers who do not submit complete and accurate tax returns. Cash-in-hand and off-book payments are rife in certain sectors. All it would take is to identify one defaulter in a chain of workers and engagers, and HMRC could use the MTD records to expose other potential dishonest taxpayers in a rapidly expanding and cascading discovery action.
HMRC operate an online portal, which allows individuals to report a person or a business they think is not paying enough tax or is committing another type of fraud against HMRC. Apparently HMRC received 164,670 reports of alleged fraud from the public in 2024-25. A relatively insignificant number, unless you happen to be one of the people investigated as a result. All it takes is for one dissatisfied cash-in-hand customer, or a disenfranchised cash-paid worker, to make a report to ruin someone's day.

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20. Will MTD make it more likely HMRC will open a tax inquiry into my business affairs?

To understand what might happen in the future, a good place to start is what has happened in the recent past.

The number of Self Assessment taxpayers registered with HMRC was reported to be 12,029,168. HMRC expect 864,000 Phase 1, 1,077,000 Phase 2, and 975,000 Phase 3 taxpayers to sign-up for MTD by 2028. The total of 2,916,000 MTD taxpayers means that by 2029, HMRC will be receiving far more accurate tax data from the 24% of the Self Assessment pool of taxpayers that was previously the equivalent of a black hole to them. HMRC receive a huge amount of corroborative information from third parties about certain kinds of taxpayers' income. This includes employed income from employers, and investment income from the banks and investments institutions. Up until now the HMRC have had to rely upon the honesty of self-employed and landlord taxpayers to declare their true taxable income. Although MTD still relies upon the integrity of those who make the returns, many more taxpayers will now be engaging with tax-advisers and using approved MTD-software. This will result in more reliable and accurate tax accounting information flowing through to HMRC to process, analyse, and audit. It would be reasonable to assume that using AI-agents, HMRC will be in a far stronger position by 2029 to identify those MTD-taxpayers who deserve closer attention because their returns do not fit the expected norms.

A formal inquiry into an individual's Self Assessment return requires a notice under section 9A of the Taxes Management Act 1970. Unfortunately, we could not find any statistics of how many section 9A inquires were opened by HMRC each year. We did find a reference that HMRC opened 330,000 compliance cases in 2024-25 across all taxes, which serves to indicate they are actively engaged in tax enforcement activities.

What our research also uncovered was that HMRC wrote to 243,000 (1:50) Self Assessment individuals about checking or amending earlier or missing Self Assessment tax return in the same year. As tax advisers, we deal with a few of these types of HMRC inquiries every year. They were easily resolved, and none came close to HMRC extending the investigation with a section 9A notice.

Nonetheless, we were surprised how many low-key inquiries HMRC launched in 2024-25. By extension, MTD-taxpayers would be wise to accept that because they are providing more qualitative information about their tax affairs to HMRC, it is more likely they will receive more low-key inquiries from HMRC. As every one has the potential to develop into section A investigations, one can see what could happen here.

What is a concern for many tax-compliance stakeholders is that in April 2028, sole-traders and landlords with gross incomes around the National Minimum Wage will be joining the MTD scheme. It will be a huge challenge for this group of taxpayers to bring their book-keeping up to the necessary standard MTD requires, and they are the least able to afford the extra costs involved. This makes them the least likely to seek professional help, and the most vulnerable to finding themselves falling foul of HMRC in the years to come.

One last point of interest. We were surprised to discover that HMRC only carry out just over 1,000 random audits a year on Self Assessment tax returns. The odds of 1 in 12,000 of being picked for a random audit should not cause undue concern for even the most risk-averse taxpayer, but it does highlight why MTD-taxpayers should be concerned to keep proper accounts that are sufficient and accurate to support the tax returns they make in future.

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