It is perhaps the most significant development in UK tax of recent times: making the tax returns of hundreds of thousands of sole traders digital.
Making Tax Digital (MTD) has been on the way for more than 10 years and involves the movement of millions of tax records from legacy systems to a modern IT platform. But while the changes are ambitious and meet with widespread agreement, there remains concern that they have not processed as smoothly as hoped.
‘What we’re seeing is a huge level of confusion, misunderstanding and, in a significant number of cases, a complete lack of awareness,’ says Daren Moore FCCA, group chief executive at TaxAssist.
Timing challenges
So far, there have been four delays to the introduction of MTD for self-assessment returns. In a critical 2023 report, the National Audit Office noted that HMRC had underestimated both the scale of work required and the ‘additional complexity of introducing digital record keeping for business taxpayers as the same time as replacing legacy systems’.
Originally HMRC had estimated the total cost of implementing MTD for the three taxes involved – corporation, VAT and self-assessment – would be £226m. By 2023, that figure had risen to £1.3bn.
Despite years of preparation (see ‘Phased approach’ box), final regulations only became clear in March this year. As Fiona Fernie, a partner with Blick Rothenburg, notes, the eleventh-hour publication is causing its own issues.
There is a general belief that practitioners have been left to spread the word alone
‘Many bits of information about the regulations have been kicking around for a long time, but until it’s actually finalised people don’t take as much notice,’ she says.
Low awareness
The main worry among professionals is that taxpayers lack awareness of the changes, with practitioners being left to spread the word alone.
Tina McKenzie, policy chair at the Federation of Small Businesses, believes that HMRC saw its task as simply making taxpayers aware of MTD, without adding much detail. ‘By this measure, the tax authority can state that “preparedness” levels are quite high,’ she says. ‘However, how prepared the new MTD inductees truly are is more of an open question.’
At the end of April, HMRC confirmed that 281,969 of the 864,000 people expected to sign up had done so. But many of those came very close to the deadline. In a statement, HMRC says that it has engaged with two million customers and delivered 400 events and webinars. ‘Tailored guidance’ continues to be offered, it adds.
Nonetheless, there is disappointment. Josh Toovey, senior research and policy officer at the Association of Independent Professionals and the Self-Employed, says that HMRC’s letter-writing campaign ‘hasn’t really reached the intended audience’.
HMRC defends its communications efforts. ‘Raising awareness is key and it’s working, with thousands of people signing up every week,’ a spokesperson says. ‘This is in line with expectations based on our experience of successfully launching Making Tax Digital for VAT.’
No incentive
News that penalties would not be imposed in the first year may be adding its own issues, with some taxpayers deciding that there’s no reason to act until when the first quarterly reports are due. Others may even wait until it’s time to submit the annual return.
‘I don’t think we’ll see much activity until the summer,’ says Suzanne Briggs, another partner at Blick Rothenberg.
Phased approach
HMRC began work on MTD in 2015 after a decision by the then Conservative government. The original intention was for MTD for income tax to take effect in 2018, followed by VAT in 2019 and corporation tax in 2020. It took until April 2022 for MTD for VAT to be fully implemented; in 2025, HMRC scrapped plans to implement MTD for corporation tax.
The registration deadline for the first wave of sole traders and landlords (earning above £50,000) was 6 April. This will extend to those with incomes above £30,000 in April 2027, and to those with incomes above £20,000 in April 2028.
Taxpayers must keep digital records of income and expenses and submit these quarterly using software, either directly or through their agents. At the end of the year a final return must be made.
There are penalties for late submissions, though they have been suspended for the first year of the new regime.
While HMRC says it has a ‘dedicated’ MTD support team and the ‘ability to bring in more MTD-trained advisers in line with demand’, practitioners worry about the ability of call centres to deal with MTD-related queries; Moore says that, in his experience, HMRC is ‘massively under resourced’.
Meanwhile, in 2024 HMRC announced that it would recruit 5,000 new compliance officers, but they will need time and training and there is scepticism that they will be effective.
Software concerns
There is also the question of software options, with McKenzie believing that HMRC missed an opportunity to play a greater role in providing information. ‘HMRC should put as much energy into making businesses aware of its software-finder tool as it did making businesses aware that MTD was coming in the first place,’ she says.
Practitioners believe the burden of managing MTD may cause some practices to close
An HMRC spokesperson told AB that its customer letters point to ‘comprehensive guidance’ on MTD on GOV.UK.
It is not easy bringing about wholesale change to a tax system, especially when it involves complex new technology platforms. Even now, practitioners believe the burden of managing MTD and the increased role of software vendors may cause some practices to close.
Advisers will be busy supporting clients in the coming months of this first phase, while keeping a watchful eye on what this means for their service offering.
