What can MTD for VAT teach us about MTD for Income Tax?

As we approach the Chancellor’s Spring Statement on 26 March, it’s expected one of Rachel Reeves’s areas of focus will be on tackling tax avoidance and encouraging taxpayers to meet their obligations on time. Reports indicate that this may include plans to increase penalties for taxpayers that fail to submit their Making Tax Digital for Income Tax Self-Assessment (MTDfITSA) tax returns and pay any associated tax on time.

So, what is MTDfITSA and what do taxpayers need to be aware of? Ten years on from the announcement of Making Tax Digital (MTD) and following the implementation of MTD for VAT, new digital record keeping and reporting requirements are set to take effect for income tax. Despite several delays, HMRC is pushing ahead to implement MTDfITSA. From April 2026, some sole traders and landlords will be required to maintain digital records, file quarterly statements of income and expenses followed by a final declaration which replaces the current self-assessment tax return.

Some taxpayers may already be accustomed to MTD for VAT, but for many, MTD will bring the greatest change to the income tax system in a generation. HMRC’s objective remains to utilise the opportunities provided by digitalisation to make it easier for taxpayers to get tax right. HMRC estimates that the tax gap for self-assessment businesses is around £5bn, with MTDfITSA expected to raise around £780m additional tax revenue by 2028/29.

HMRC’s view is that MTDfITSA will reduce errors, save time in submitting the end of year tax return and, in turn, support wider productivity. However, there are fundamental differences between income taxpayers and businesses filing under MTD for VAT, which HMRC has been warned will significantly challenge its assumptions.

The most obvious example is that VAT returns were regularly filed monthly or quarterly, so the move to digital monthly or quarterly reporting was not a great leap. However, individuals are accustomed to filing a single annual tax return up to 22 months after the start of the tax year. While contemporaneous record keeping may lead to less time spent on the final tax return, this ignores the potentially up to fourfold increase in time and costs arising from the new quarterly submissions required. Professional bodies support the digitalisation of accounting records and HMRC services but oppose the quarterly reporting element of MTDfITSA on the basis it adds significant cost for no significant benefit.

Professional bodies repeat the warning to HMRC that the software costs of MTDfITSA far exceed HMRC’s estimates, in addition to the professional costs taxpayers will face if engaging an advisor for the first time or if agents are asked to take on more work. HMRC’s evaluation of MTD for VAT cites that 23% of smaller businesses reported that the costs outweighed the benefits. There appears to be an expectation on the rollout of MTDfITSA that the benefits for the Exchequer will outweigh the costs and effort that taxpayers will incur, and that individual taxpayers are unlikely to see many direct or indirect benefits. For many landlords for example, the income they receive is a return on a passive investment, so it is unrealistic to expect the same productivity gains arising from MTD for VAT.

HMRC and professional bodies are however agreed on this; the biggest warning is to taxpayers themselves to be ready. HMRC has started communicating with taxpayers who are expected to need to comply with MTDfITSA, so taxpayers need to get ready for these changes come April 2026, or risk facing penalties for non-compliance.