With a threshold set at £90,000 per annum, most British sole traders are not registered for VAT, and so have not yet been affected by the MTD (Making Tax Digital) rules in place since 2019. This is set to change from April 2026, with implications for how thousands of self-employed individuals manage their tax liabilities. Making Tax Digital marks a shift away from the traditional annual Self Assessment system to a more streamlined and digital approach based on quarterly reporting.
The Timeline For Change
The transition to MTD for income tax self-assessment follows a phased approach based on earnings thresholds. From April next year (2026), sole traders earning over £50,000 per year will be required to comply with the new digital requirements. The threshold will drop to £30,000 in April 2027, and reduce further to £20,000 per year from April 2028. Sole traders earning below these thresholds can continue to use the existing Self-Assessment System. Fortunately, the timeline provides ample opportunity to prepare and adapt systems gradually, making the transition far less onerous than it might initially appear.
What Are The Main Changes Under MTD?
The biggest change under Making Tax Digital is the replacement of the annual Self Assessment tax return with a system of quarterly digital updates. No one looks forward to completing their Self Assessment, so we would like to reassure sole traders that the new rules do not involve replacing one annual burdensome task with four of the same. The new quarterly reports are far more streamlined and straightforward. Instead of compiling your financial information once a year, you’ll need to submit a summary update of your business income and expenses to HMRC every three months using an MTD compatible platform.
As well as this, you’ll need to submit a digital tax return covering all income sources by 31st January following the tax year end, also through a compatible platform. This replaces the traditional Self Assessment form but maintains the familiar deadline structure.
However, the underlying tax rules remain unchanged. Payments are made by 31st of January and 31st of July as under the current rules, and allowable expenses, personal tax allowances, and National Insurance contributions will follow the same regulations as before. Only the reporting processes changes.
Digital Record-Keeping Requirements
Under the MTD rules, all your financial records must be maintained digitally using functionally compatible software, i.e. software that can submit reports directly to HMRC. This spells the end of dusty ledger books and basic spreadsheets unless they are used with bridging software that maintains digital compliance. The software platform must be capable of creating original digital records, generating HMRC updates, and submitting information electronically without manual copying between systems. This digital chain of accountability maintains data integrity and helps to streamline the reporting process.
So, Do You Need To Work With An Outsourced Accountant?
If you’ve gotten on well enough so far without an outsourced accountant, you may not need one under the MTD rules either, which make reporting easier and less time-consuming, not more so. What you will need is access to an HMRC-approved, MTD compatible software platform, such as QuickBooks or Xero. However, many sole traders do find it beneficial working with an outsourced accountant, such as Vanilla Accounting, and this could be especially useful during the transition period. An experienced accountant can give you valuable guidance on software selection, system set up, and ongoing compliance management, for example, helping prepare you for the change when your threshold deadline arrives.
What Next?
Embracing Making Tax Digital as an opportunity to modernise your financial management systems can make the change a win-win for both compliance and business growth. To find out more, please contact one of our accountants today by clicking here.
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