Policy paper

Technical note: Modernising the tax system through Making Tax Digital 

Published 26 March 2025

1. MTD’s role in modernising and reforming the tax system 

Making Tax Digital (MTD) places UK businesses on a digital footing, prepares them for the future and gives them the tools they need to succeed in an increasingly competitive landscape. It ensures businesses can benefit from a modern, digital service when managing their tax affairs, enabled by a diverse market of commercial software that is tailored to their needs.  

Since April 2022, all VAT-registered businesses have been required to keep digital records and file returns through MTD-compatible software. It is now the default way to manage their VAT affairs. Customers using it have reported benefits such as being able to prepare VAT returns faster and having more confidence in getting their tax right.  

HMRC’s evaluation of MTD shows that around two-thirds of businesses (67%) felt that using compatible software has reduced the potential for mistakes in at least one aspect of their record keeping, whilst 80% of businesses have commented that they found the process of using compatible software easy. Evidence suggests that beyond their tax affairs, MTD is acting as a catalyst for businesses to digitalise other elements of their business due to productivity benefits.     

2. Expanding the benefits of digitalisation 

The government is today announcing that the rollout of Making Tax Digital (MTD) for Income Tax will be expanded to include a wider range of small businesses. This will help ensure more businesses are able to adopt new digital ways of working, supporting their productivity and growth.  

This builds on the government’s confirmation, at Autumn Budget 2024, that MTD for Income Tax will start from April 2026 for sole traders and landlords with qualifying income over £50,000 and extend to those with incomes over £30,000 in April 2027. MTD for Income Tax will now also be extended to sole traders and landlords with income over £20,000 from April 2028. Today’s decision to reduce the threshold to £20,000 will ensure that 900,000 sole traders and landlords, who will now join MTD from April 2028, have the time they need to prepare for the changes.  

As part of the ongoing rollout of MTD, the government will continue to explore how we can best bring the benefits of digitalisation to a greater proportion of the 4 million sole traders and landlords who have income below the £20,000 threshold.    

3. Improving design and securing delivery of Making Tax Digital 

The government is today also announcing several practical changes to the design of MTD for Income Tax. These simplify and improve the experience for users and ensure HMRC is on the best footing to deliver the rollout of MTD to all user groups through to 2028.  

Exempting and deferring certain groups from MTD

The government believes there are some taxpayer groups who will face disproportionate barriers to operating MTD and should be exempt.  

The following groups will not be required to use MTD for Income Tax, (subject to notifying and satisfying HMRC that they are exempt):  

• customers who have a Power of Attorney
• non-UK resident foreign entertainers and sportspeople who have no other income sources that count as qualifying income for MTD
• customers for whom HMRC cannot provide a digital service

There are some small taxpayer groups where building additional requirements represents cost and complexity for HMRC. In order to prioritise successful delivery of MTD, the following groups will not be required to join MTD for Income Tax over the course of this Parliament:  

• ministers of religion  
• Lloyd’s Underwriters  
• recipients of the Married Couples’ Allowance  
• recipients of the Blind Persons’ Allowance  

Additionally, individuals will not be required to use MTD until April 2027 if they have information that they would need to submit using the SA109 schedule. HMRC will work with stakeholders to finalise the design of a one-year deferral for these groups. This allows time to incorporate into MTD the government’s changes to the taxation of non-UK domiciled individuals.  

The government will introduce legislation to defer or exempt these groups from MTD for Income Tax. The criteria for deferrals and exemptions will be set out in guidance once legislation is finalised. 

Improving end-of-year processes for MTD users 

Some users of MTD for Income Tax will have other sources of income that need to be reported in Self Assessment. These additional income sources must be reported at the end of the tax year, alongside any necessary adjustments to their business income and expenses. Under the previous design, users would use software to submit quarterly updates of their MTD mandated income sources. But they could choose to use HMRC’s online filing service to submit their final tax return.   

To improve this customer journey and simplify processes, HMRC will now require MTD customers to file their tax return through their MTD software. They will be able to choose one or more MTD-compatible software products to meet their Self Assessment obligations. The government believes this will provide a better customer journey than one that allows reporting to be split across commercial software and HMRC’s online services. It means users will have a consistent format for the completion of their Self Assessment obligations, and it maximises the productivity and wider benefits that innovative and tailored commercial software can provide for MTD users. The government will adopt this change and introduce legislation ahead of April 2026. 

Finalising the policy framework for MTD and penalty reform

The government has identified several further improvements to the design of MTD and penalty reform. These include: 

• changes to enable customers with an accounting date of 31 March to start their MTD obligations on 1 April in the first year of operating MTD — this will avoid the need for burdensome manual adjustments at the end of the tax year 
• a power for HMRC to cancel or reset late submission penalty points and to cancel associated financial penalties — this enables HMRC to cancel penalty points, for instance, in periods prior to insolvency, so that penalty reform reflects HMRC’s general approach to insolvent customers

HMRC will continue to engage stakeholders on these changes before legislation is introduced ahead of April 2026.