Making Tax Digital

Exemptions for digital exclusion

The government recognises that not everyone can comply with digital requirements. Exemptions are available for individuals who:

• Cannot use digital tools due to age, disability, or location (e.g., lack of broadband access).
• Avoid digital technology for religious reasons.

Applications for exemption must be submitted to HMRC, which assesses each case individually. Don’t worry – we can explain all this to you and apply for your exemption.

Software requirements

To comply with MTD, taxpayers must use software that is compatible with HMRC’s systems. The software must be able to:

• Maintain and preserve digital records.
• Submit quarterly updates.
• Make corrections to records when necessary.

While a lot of free software will be advertised, please note most individuals are going to need specific commercial software in order to complete and file the various returns HMRC require submitting throughout the year. RHJ Accountants have the dedicated software; we can give you peace of mind that everything is in order.

Digital record-keeping in detail

Under MTD, taxpayers must record each transaction digitally, including:

• Financial details of income and expenses.
• Dates and amounts of transactions.
• Categories for each transaction (e.g., rent, utilities).

For property income, UK and overseas properties are treated as separate businesses. Jointly owned properties require each owner to maintain their own digital records for their share of income and expenses.

Retailers can opt to record daily gross takings instead of individual transactions, mirroring VAT requirements.

Quarterly updates: what to include

Quarterly updates are summaries of income and expenses, categorised similarly to the current self-assessment tax return. Small businesses with turnover below the VAT threshold can continue to use simplified “three-line accounts,” reporting only income, expenses, and profit/loss.

Each business or income source requires separate updates. For example, a sole trader with a property business must submit eight updates annually—four for each income source.

Year-end tax return process

The year-end process involves two steps:

1. Adjusting Quarterly Figures: Taxpayers reconcile quarterly updates with any necessary adjustments, such as tax reliefs or non-tax year accounting periods.
2. Final Declaration: All income sources and claims are combined into a single tax return, which includes a declaration of accuracy.

Taxpayers can use the same software for quarterly updates and the year-end return or opt for separate tools.

Penalties and compliance

To ease the transition, HMRC will not penalise late submissions of quarterly updates during the first year of MTD (2026/27). However, penalties will apply for late year-end returns.

Taxpayers can only exit MTD if their income falls below the threshold for three consecutive years.