MTD tax traps: getting the detail right matters

Croner.

David Truman, partner, private client at Menzies explains the common mistakes and tax traps for people reporting quarterly under Making Tax Digital from receipts and expenses to allowable deductions and defining income.

The first quarterly deadline for Making Tax Digital (MTD) for Income Tax has been and gone on 7 August, bringing a new system into effect for hundreds of thousands of sole traders and landlords.

From April 2026, people with more than £50,000 of qualifying income from self employment and/or property rental have been required to keep digital records and to send quarterly updates to HMRC using compatible accounting software, with the first update covering income and expenses from 6 April to 5 July or 1 April to 30 June.

This is not simply an administrative change; it alters the rhythm of compliance. MTD points toward a system that expects taxpayers to be better organised and more proactive, and one in which the annual catch up is no longer a workable way of managing tax affairs.

What the rules require

The quarterly update goes to HMRC and contains totals of income and expenses set against HMRC's fixed category headings, which follow the self-employment and property pages used for self-assessment.

Sole traders report turnover and allowable deductions. Allowable deductions include cost of goods, subcontractor payments, staff costs, car and travel, premises, repairs and renewals, office costs, advertising, loan interest, financial charges, irrecoverable debts, professional fees, and other business expenses.

Landlords report rent received, and can deduct rent and rates, repairs and maintenance, loan interest, professional fees, cost of services and other allowable property costs. Anyone with turnover below £90,000 has the option to submit one consolidated total for income and another for expenses instead.

At the moment, the quarterly updates leave out capital allowances, losses brought forward from earlier years, and other income such as income from employment, dividends or savings. So, while the quarterly filings do not include all of the detail, there is the possibility of estimating tax payments through the year to enable individuals to budget for the tax due.

The final tax position is prepared by filing a final declaration, due by 31 January, following the end of the tax year.

The digital element is the requirement most often underestimated, since each transaction needs to be captured individually as it occurs, with its date, amount and category recorded, rather than a total being worked out at the quarter end or year end from a folder of receipts.

Where more than one source of qualifying income is involved, each is reported separately. This means there is no longer scope for leaving record keeping until the end of the year and trying to reconstruct everything from bank statements, receipts and invoices.

Awareness remains lower than it should be, with around 428,000 taxpayers, just under half of those in scope, failing to file on time for the first deadline - although a proportion of this could be due to the lack of penalties for this submission.

For many, the first submission will have been a learning curve, particularly for those who have previously been able to deal with their tax affairs through one annual self assessment tax return.

HMRC has included a soft landing with no penalties during the first year of the system, however ongoing compliance will require a change in habits to avoid significant penalties moving forward.

Landlords face their own challenges

Landlords in particular are facing significant changes. While many self-employed individuals will already have some familiarity with bookkeeping software, historically, many landlords have had little need to use accounting software.

Records may have been maintained using spreadsheets, bank statements, invoices and information from letting agents, with the relevant information provided to their tax adviser as part of the annual self-assessment process.

MTD changes that relationship. Landlords brought within the regime now need to consider how their records will be maintained digitally throughout the year and how they will interact with the software and their adviser on a much more regular basis.

For someone accustomed to providing information once a year, this can represent a significant change in both technology and routine.

Our experience of the first quarterly filing has reinforced the importance of allowing time for that transition. Setting up software is only the first step; taxpayers also need to become comfortable with how information gets into the system, how records are maintained and what they need to do between quarterly submissions.

Landlords also need to pay special attention where they own several properties or receive different types of property income. All UK properties are treated as a single property business, so a portfolio produces one combined quarterly update, while overseas properties count as a separate business with each property requiring updates of their own.

Jointly owned property is reported by each owner in their own share, with each tested against the threshold separately, so one co-owner can be inside MTD while the other is not.

An easement allows joint owners to report income alone in their quarterly updates and deal with expenses at the year end, either by amending the fourth update or through the final declaration, although residential loan interest still has to be reported separately from other costs.

Rental income and expenses need to be recorded digitally, and taxpayers need to be able to identify what individual costs relate to. Repairs, insurance, management fees and other property costs can become difficult to track where several properties are involved, especially if payments are being made through the same bank account or as one payment on account of multiple properties.

Keeping these records up to date throughout the year should make the quarterly process much easier, while also avoiding the need to spend time before each deadline working out what individual payments were for and which property they relate to.

Don’t leave everything until the deadline

There is a temptation to treat quarterly reporting as four separate deadlines rather than as a change to the way records are managed throughout the year, but leaving three months of transactions until the last minute increases the chance of mistakes and of missing the deadline altogether. From the 2027-28 tax year this will incur points under the new penalty system.

Missing receipts and payments that are difficult to identify take time to resolve, particularly when there is already pressure to submit an update on time.

Those who adapt early and communicate regularly with their tax adviser gain a clearer view of profits and emerging tax liabilities as the year progresses, which supports better cashflow planning and earlier decision making, and can also support conversations with creditors or potential investors.

The first wave of MTD taxpayers only signals the beginning of this process, with qualifying income thresholds set to fall to £30,000 from April 2027 and £20,000 from April 2028, by which point the regime is expected to cover around 2.9 million people.

That will bring in many more sole traders and landlords, including people who do not currently see themselves as running a business, or who have relatively small amounts of self-employed or property income alongside other work.

We’d advise that any taxpayers with self-employed income should use the time available to review how they currently keep their records and consider what software they will need to report quarterly updates, having checked where their income sits against the falling thresholds, rather than waiting until the rules apply before making changes.

Making Tax Digital will take some adjustment, but treating it as a reason to improve how records are kept, rather than as a quarterly obligation, keeps visibility of tax affairs and business performance front of mind and reduces the need for reactive decision-making should economic conditions shift.

Getting expenses right under MTD

One of the areas where taxpayers could easily run into problems is the way expenses are recorded, particularly where a cost has both a business and personal element.

A phone, car or home office, for example, may be used privately as well as for business purposes, so taxpayers need to make sure that only the appropriate business element is included in their records. Putting the full cost through without accounting for private use could result in an inaccurate tax position and create more work when the figures are reviewed later.

Similar difficulties arise from categorisation, where costs put under the wrong heading become harder to identify the longer they sit unchallenged. The same applies where income arrives through a platform or agent that deducts fees before paying out, as the gross figure and the deduction need recording separately rather than the net amount being entered as income.

Income also needs careful consideration when deciding whether someone falls within MTD at all, since the £50,000 threshold is based on gross qualifying income, so the figure to check is what comes in before costs are taken off rather than the profit left after them.

That matters most for people with several income streams, where a small self-employed business alongside another activity or property income may each appear modest while the combined total takes them over the threshold.

Exemptions are also limited in number and subject to HMRC approval rather than being automatic, so assuming that one applies and acting on that basis could itself be a route to non-compliance.

As expected, one of the clearest challenges from the first round of quarterly submissions has been adapting to the new software, working out the allocation of responsibilities between the client and the adviser, and the processes required for digital reporting. We have seen clients needing additional support to understand how their software should be used, what information needs to be recorded and how transactions should be dealt with before the quarterly update is submitted.

The experience of the first filing period reinforces an important point: MTD is not simply an additional filing requirement. For many taxpayers, it requires a change to the way their financial records are maintained and how frequently they engage with those records and their adviser.

The next quarterly reporting deadline for MTD is Saturday 7 November.

About the author

David Truman FCCA, partner, private client at Menzies LLP