HMRC letters about Making Tax Digital for Income Tax
Written by
Ray Coman
HMRC are writing to individuals whose self-employment and property income is likely to bring them into Making Tax Digital for Income Tax (MTD ITSA) from April 2026. The letter sets out the reporting system if a person’s income is above certain thresholds. MTD ITSA is an extension of work Coman & Co already carry out for quarterly VAT. Therefore, while the rules are new, their requirements can be handled by our existing processes. The guidance below expands on who is affected, how the quarterly reporting will work, and how Coman & Co intend to handle it.
How the thresholds operate, and when they take effect
How the quarterly reporting works
Coman & Co system for handling and charging for MTD ITSA
Next steps until implementation
What HMRC require
MTD ITSA requires an individual with self-employment and property income to:
- Keep digital records of that income and related expenses.
- Send quarterly updates to HMRC using MTD-compatible software.
- Continue with yearly Self Assessment through a final declaration after the year end.
As noted above, four reports are required during the tax year. A final declaration (in effect, an online tax return) is due by 31 January following the tax year.
How the thresholds operate, and when they take effect
For MTD ITSA purposes, qualifying income is gross income before expenses. It is the combined total from self-employment, and UK and overseas property businesses.
Anyone with qualifying income over £50,000 in 2024/25 will come into MTD ITSA from 6 April 2026. The income threshold is reduced to £30,000 from 6 April 2027 (based on 2025/26 figures), and from 6 April 2028 the new reporting will be mandatory for those with qualifying income over £20,000.
MTD ITSA does not apply to people without self-employment or property income, for instance those whose only income is from employment or pension earnings. HMRC have stated that affected individuals can leave MTD ITSA if income drops below the applicable threshold.
How the quarterly reporting works
The new regulation affects the timing of reporting but does not at this stage affect what income is taxable, or other aspects of the tax rules.
It will be a requirement to keep records in digital format. Most accounting records consist primarily of income and expenses from self-employment and property. The recording can be in accounting software, or in a spreadsheet that is connected to MTD-compatible “bridging” software.
Once every three months, the income and expenditure summary for the quarter will be submitted to HMRC. The deadline for reporting will be about one month after the end of the quarter.
After the end of the tax year (on 5 April), HMRC will require a final declaration which makes any adjustments and confirms final figures.
Even though the requirement is to submit reports once a quarter, tax is still paid in the same way as now. By way of recap, that means by 31 January following the end of the tax year. The payments on account system will also be unaffected. The quarterly submissions are solely informational and tax liability will be established by the final declaration.
VAT-registered businesses will be able to align MTD ITSA quarters with VAT quarters, so that the same underlying records support both submissions. Coman & Co can assist with this so as to reduce hassle and confusion for affected businesses.
Digital records explained
Under MTD, transactions must be recorded in electronic form (software or spreadsheet), not solely as paper ledgers.
The affected self-employed people and landlords will keep full digital records of every transaction, using software or a spreadsheet linked to “bridging” software. The quarterly reports sent to HMRC will be a summary of income and expenses, but not an itemisation of every transaction. Notwithstanding, HMRC can request inspection of the transaction-level information if necessary.
It is not a requirement to operate a full accounting system, as for many that would be disproportionate for the size or complexity of the business. A clean bank feed, a structured spreadsheet, and properly stored digital receipts can be enough, provided the bridge to HMRC is in place.
PDF or email receipts should be retained where they exist. For small recurring items such as bank charges and many pay-as-you-go transport costs under about £100, the bank statement will often be the only realistic “receipt”, and in practice that is acceptable as the backing evidence.
The usual Self Assessment record-keeping period (broadly up to six years) continues to apply.
Subject to formal agreement with HMRC, a digital exclusion can be agreed for certain individuals, for instance on the basis of age, disability or location.
Coman & Co system for handling and charging for MTD ITSA
For Coman & Co, MTD ITSA sits alongside quarterly VAT as another structured reporting cycle. The skills, software and reminder systems are already in place; the main change is the volume of quarterly work.
The client decides how much of the record-keeping they want to do themselves, and we then build the HMRC-facing work around that.
At the time of writing, our working structure is:
- Quarterly filing service – currently costed at £40 per quarter for a straightforward landlord or sole-trade position, based on digital data provided in a usable format.
- Bookkeeping service – if we are also taking on the bookkeeping, data entry is charged at £0.50 per transaction, using existing systems that we already use for VAT and management accounts work.
- Annual Self Assessment Return – where we handle the annual return as well as the quarterly work, the fee is as it is currently, but we would normally apply a £60 reduction to the annual tax return fee (all other things being equal) where we carry out the quarterly service. The fee discount reflects the reduction in year-end work expected for clients for whom we carry out quarterly reporting.
We already operate a robust reminder system covering VAT, Companies House, and Self Assessment deadlines. MTD ITSA quarterly dates will be built into those same systems with the same expected reliability.
Options on software and data
Clients can either maintain records on MTD-compliant software (such as Xero, QuickBooks, FreeAgent or similar). The client grants Coman & Co access. The benefit of using software is mainly to have proper reporting tools: transaction search, supplier and customer analysis, and export functions. This tends to suit businesses and landlords who either already use software, or who want to make more active use of management information.
Alternatively, a client can maintain simpler electronic records — for example spreadsheets or CSV bank exports — and send them to us each quarter. We import them into our own system, which satisfies the digital-records requirement and is then used for quarterly submissions and the year-end work.
The “spreadsheet” approach suits individuals disinclined to use accounts software and/or for whom the transactions are few. However, reporting will be more limited: an Excel download or bank statement is the practical backing schedule, and there is no separate SQL-type query tool sitting above. It will be possible to switch between spreadsheet and accounts software as applicable.
Both routes are fully compatible with the MTD rules.
Next steps until implementation
There is no immediate reporting action required now, but affected businesses should consider:
- Filing the 2024/25 tax return if not already done so, as that tax year is used to determine if the business has a requirement from April 2026.
- Keeping business and personal bank accounts as cleanly separated as is sensibly possible.
- Getting into the habit of retaining digital receipts and invoices where they exist.
You do not need to move onto accounting software immediately unless you want to become familiar with it early. The core requirement is that, once within MTD ITSA, the records are in digital form and can be passed to HMRC quarterly.
We will contact those clients we expect to be in scope ahead of April 2026 to confirm their position and agree the most appropriate route.
Coman & Co intends to be in contact again around February and March next year with an update to affected clients setting out the requirements and deadlines and to establish the level of service required.
Summary
MTD ITSA alters the timing and format of reporting, not the underlying tax rules. The core tasks — determining income, checking expenses, calculating tax — remain the same. Once the quarters and processes are established, it should feel like an extension of work that is already familiar from VAT and annual Self Assessment.
Making Tax Digital for Income Tax is widely viewed in the business world as disruptive. There is limited upside to the regulation. At Coman & Co we have already prepared a workflow that sits alongside the way clients already manage their affairs. We have adapted to new regulation before: quarterly VAT reporting, real-time PAYE, Companies House verification requirements. Our role is to reduce the burden and make the process become routine.
