HMRC clarifies MTD exemption rules and year one waiver

Sara White, Editor, Business & Accountancy Daily. Croner.

Following some confusion about exemptions to Making Tax Digital for Income Tax, HMRC updates guidance to clarify situation for those claiming averaging relief in year one waiver.

The HMRC guidance on Making Tax Digital (MTD) for Income Tax has been updated to clarify the exemption criteria for not being physically or mentally capable of providing financial information to HMRC, for not having a National Insurance number and for non-resident taxpayers using the SA109 supplementary page when filing their tax returns.

It now also mentions the 2025-26 self assessment tax return, partnerships and the supplementary pages used to claim averaging relief as well as permanent exemptions for Lloyd’s members.

The section on automatic exemptions for the first year of MTD for Income Tax clearly sets out the various categories, although it is important to note these are only a one-year exemption. These same taxpayers will have to file under MTD from the 2027-28 tax year onwards, when the threshold drops to £30,000 upwards.

In year one of MTD, HMRC confirmed taxpayers do not need to use quarterly reporting for 2026-27 tax year, regardless of qualifying income, if in your 2024-25 self assessment tax return you: 

• claimed averaging relief (as a farmer, market gardener or someone who personally creates literary or artistic works) using either the SA103 supplementary page as an individual, or the SA104 supplementary page as a partner, who would otherwise need to use MTD for Income Tax;

• claimed qualifying care relief, ie, foster carers or kinship carers;

• included the SA107 supplementary page to report income from trusts or estates; 

• included the SA109 supplementary page, to report residence and foreign income and gains, and were not resident in the UK.

In addition, taxpayers falling under these exemptions simply need to complete a 2025-26 self assessment tax return in the normal way by the 31 January 2027 deadline, and do not need to take any other action.

HMRC stressed: ‘If one of these exemptions applies, you do not need to contact or apply to HMRC.’ 

For those who still need to apply for an exemption either for themselves or on behalf of someone else, they must either phone or write to HMRC to make the request. In terms of response times, HMRC said it ‘will aim to respond within 28 calendar days of receiving an application’. This process may take longer if the tax authority asks for extra information to justify the claim.

Future dates to apply for an exemption have also been set out, reflecting the extension of MTD to lower earning landlords, sole traders and self employed from April 2027 onwards.

Anyone in wave one of MTD can apply now but must ensure they do so before the first critical quarterly filing deadline of Friday 7 August.

Failure to apply and have an exemption approved by HMRC by this key date will result in the taxpayer falling into mandatory MTD during the 2026-27 tax year.

Those with qualifying income over £30,000, who are in wave two of MTD for Income Tax effective from 6 April 2027, will be able to start applying for an exemption ‘from summer 2026 onwards’, HMRC confirmed. Wave three for £20,000 plus earners should apply from summer 2027 onwards.

‘If you’ve already signed up and your circumstances have changed, you should apply for an exemption and continue to use Making Tax Digital for Income Tax whilst you wait to hear from us,’ HMRC added.

Agents can apply for exemptions for clients using the agent dedicated line.

In a second separate update to guidance, HMRC confirmed the late payment and filing penalties regime will apply in the normal way to those who have the one-year waiver from MTD, regardless of the fact there will be no penalties for MTD non-compliance in year one only.

HMRC stated: ‘The guidance has been updated to clarify that if you are exempt, you will remain on the current late payment and filing penalties for self assessment. It has also been updated to clarify that you must continue to keep records or supporting documents for self assessment as normal if your application or appeal is not accepted.’