Making Tax Digital for Tradespeople

Quick Answer: Making Tax Digital (MTD) is HMRC's mandatory programme requiring digital record-keeping and quarterly submissions via HMRC-recognised software. MTD for VAT has applied to all VAT-registered businesses since April 2022. MTD for Income Tax Self-Assessment (ITSA) starts 6 April 2026 for sole traders and landlords with turnover above £50,000, expanding to those over £30,000 from April 2027, and £20,000 from April 2028. Reference: VAT Notice 700/22 and the Finance (No.2) Act 2017.

Summary

Making Tax Digital is the biggest change to how UK tradespeople deal with HMRC in a generation. For decades, sole traders kept a paper book, gave it to an accountant once a year, and paid the tax bill in January. From April 2026 that workflow stops working for a large slice of the trade — anyone with self-employment or property income above £50,000 must keep digital records and file quarterly updates to HMRC through recognised software. From April 2027 it extends to £30,000+. From April 2028, £20,000+.

The MTD programme has two strands that affect tradespeople directly:

• MTD for VAT — already in force; affects any VAT-registered tradesperson
• MTD for Income Tax (MTD for ITSA) — coming April 2026; affects sole traders, partnerships and landlords above income thresholds

A third strand — MTD for Corporation Tax — has been postponed indefinitely and is not currently scheduled. Limited companies file CT600 via existing iXBRL/online filing.

This article focuses on what UK tradespeople need to do to comply: how to choose software, what counts as a "digital record", what to submit and when, how MTD interacts with CIS deductions, and what happens if you miss a deadline. The penalty regime changed in 2023 to a points-based system that is more forgiving for one-off slips and harsher for repeat offenders.

Key Facts

• MTD for VAT — mandatory for ALL VAT-registered businesses since 1 April 2022 (previously >£85k taxable turnover from April 2019)
• MTD for ITSA timeline:
  • 6 April 2026 — sole traders and landlords with gross income >£50,000
  • 6 April 2027 — gross income >£30,000
  • 6 April 2028 — gross income >£20,000
  • Partnerships — date to be confirmed (not in scope for April 2026 launch)
  • General partnerships with only individuals as partners — date to be confirmed
  • Limited companies — not in scope; CT MTD postponed indefinitely
• Gross income test — total gross income from self-employment AND property (combined), not net profit
• Quarterly update periods (standard quarterly dates):
  • Q1: 6 April – 5 July (file by 7 August)
  • Q2: 6 July – 5 October (file by 7 November)
  • Q3: 6 October – 5 January (file by 7 February)
  • Q4: 6 January – 5 April (file by 7 May)
  • Calendar-quarter election available (1 April – 30 June etc) — must elect once
• Final Declaration (replaces Self Assessment tax return) — due 31 January following end of tax year (same as old SA deadline)
• Digital records required for ITSA:
  • Each transaction: amount, date, category
  • Digital link between record-keeping software and submission software (no manual re-keying)
• VAT Notice 700/22 — the authoritative HMRC guidance on MTD for VAT
• Software requirement — must be HMRC-recognised. HMRC maintains a published list of compatible software. Bridging software allows spreadsheet-based records to submit digitally — accepted by HMRC but not exempt from "digital links" rule.
• Penalty regime (from 1 January 2023 for VAT; aligned for ITSA from April 2026):
  • Points system for late submission: 1 point per late submission; penalty (£200) triggered when threshold reached (4 points for quarterly filers, 5 for monthly, 2 for annual)
  • Points expire after 24 months of compliance
  • Late payment: 0% for first 15 days, 2% for days 16–30 (proportion of unpaid tax), 4% annualised thereafter
• Exemptions (must apply to HMRC, granted case-by-case):
  • Age, disability or location making digital impractical
  • Religious objection to electronic communications
  • "Digitally excluded" applicants
• CIS interaction — CIS deductions appear on quarterly updates as income (gross of CIS) and offset claimed at Final Declaration. Subcontractors must keep digital records of CIS deductions per payment.

Quick Reference Table

Detailed Guidance

MTD for VAT — already in force

If you are VAT-registered (mandatory above £90,000 taxable turnover since April 2024; voluntary below), you must:

1. Keep digital records of every sale and purchase
2. Submit VAT returns through HMRC-recognised software (no more manual entry into the HMRC VAT portal)
3. Maintain "digital links" between any software/spreadsheet used (no manual re-keying of figures)

Digital records required:

• Business name, address, VAT registration number, VAT scheme
• For each supply made: date, net value, VAT rate, VAT amount
• For each supply received: date, net value, input VAT claimed
• Adjustments (partial exemption, capital goods scheme, fuel scale charge)

Digital link means data flows between systems without manual intervention. Acceptable links:

• Import/export of XML, CSV with formulas
• API connection between systems
• Bridging software that reads cells in a spreadsheet
• Linked workbooks (Excel)

Not acceptable:

• Typing a figure from one system into another
• Copy-paste between cells (HMRC view: depends on context — generally avoid)

Soft-landing period: ended April 2021. Full digital-link compliance now mandatory for all VAT MTD users.

MTD for ITSA — starts April 2026

This is the change most sole-trader tradespeople need to prepare for.

Who's in scope:

• Sole traders (any trade — plumbing, electrical, building, roofing, etc.)
• Landlords (residential or commercial property income)
• Combined sole trade + property income counts (the £50k/£30k/£20k thresholds apply to total gross)
• Not in initial scope: limited companies, partnerships (date TBC), trustees, foreign nationals' UK income

Income threshold test: HMRC looks at your gross income (sales/turnover + property income gross of expenses) on your last filed Self Assessment return. The 2024–25 SA return (filed Jan 2026) determines whether you're in MTD ITSA from April 2026. The 2025–26 return (filed Jan 2027) determines the April 2027 cohort. And so on.

What you must do once in scope:

1. Sign up to MTD ITSA via HMRC's MTD service — your accountant can do this for you
2. Use HMRC-recognised software — see HMRC's published compatible software list
3. Keep digital records of business income and expenses, categorised per HMRC's required categories
4. Submit quarterly updates — totals per category, by the 7th of the month following the quarter end
5. Submit a final declaration by 31 January after tax year end — equivalent to the old Self Assessment, plus property-specific and tax-relief data

Quarterly update content: Each quarterly update reports totals of income and expenses per HMRC category (similar to the boxes on Self Assessment SE form). It is NOT a tax calculation — no tax is due quarterly. The quarterly update is informational; tax remains payable at 31 January (and Payment on Account 31 July) as before.

Categories (Self Assessment SE form-aligned):

• Turnover / income
• Cost of goods bought for resale or goods used
• Construction industry — subcontractor payments
• Wages, salaries and other staff costs
• Car, van and travel expenses
• Rent, rates, power and insurance costs
• Repairs and maintenance of property and equipment
• Phone, fax, stationery and other office costs
• Advertising and business entertainment costs
• Interest on bank and other loans
• Bank, credit card and other financial charges
• Irrecoverable debts written off
• Accountancy, legal and other professional fees
• Depreciation and loss/profit on sale of assets
• Other business expenses

CIS and MTD ITSA

The Construction Industry Scheme adds complexity. CIS subcontractors receive payments with 20% (or 30% if not verified) deducted at source. The full gross amount is your turnover; CIS deduction is reported separately and credited at Final Declaration.

On quarterly updates:

• Report gross turnover (the full invoice amount before CIS deduction)
• CIS deduction is NOT a deductible expense category — it's a tax payment on account

On Final Declaration:

• CIS deductions for the tax year are summed and offset against the Income Tax bill
• Often results in a refund for subcontractors whose 20% CIS deductions exceed their actual tax liability

Digital records for CIS:

• Keep digital records of each subcontractor payment received (date, gross, CIS deducted, net)
• Most CIS contractors issue monthly statements (CIS payment and deduction statement) — store these digitally
• Many MTD software packages have CIS-aware features

Contractors paying CIS subcontractors:

• CIS monthly returns continue separately (CIS300) — not part of MTD ITSA
• Subcontractor payments appear as an expense category on your quarterly update

Choosing software

HMRC publishes a list of MTD-compatible software at gov.uk. Categories:

Full record-keeping + submission:

• Examples in this category (representative, not endorsed): FreeAgent, QuickBooks, Xero, Sage, FreshBooks, Coconut, Crunch, Pandle
• Pricing: £10–£40/month typically; some bank-bundled (e.g. FreeAgent free with NatWest/RBS business accounts)

Bridging software (spreadsheet + bridge):

• Examples: Tax Optimiser, VitalTax, 123Sheets, BTCSoftware
• Suits trades who prefer Excel; bridge tools submit figures to HMRC

Specialist trade software:

• Some construction-focused systems (Powered Now, Quickbooks Trades, AccountingForBuilders) include CIS handling, quote-to-invoice workflow, and MTD submission
• Particularly relevant for trades with multiple subcontractors

Selection criteria for a tradesperson:

1. MTD ITSA compatible — must be on HMRC's published list
2. Bank feed — automatic import of bank transactions
3. Receipt capture — phone app to photograph receipts (Dext, Hubdoc, in-built)
4. CIS handling if you're a contractor or subcontractor
5. Mobile app — record on site, not at the kitchen table
6. Quote-to-invoice if you don't use a separate quoting tool
7. Bridging accepted — if you keep spreadsheets, choose a bridging tool

Digital record-keeping standards

For each business transaction:

• Date of supply
• Amount (net, VAT if applicable, gross)
• Category (per HMRC categories above)
• Description (recommended, not mandatory)

The record must be stored digitally. Acceptable forms:

• Cloud accounting software (most common)
• Locally-installed accounting software with regular backup
• Spreadsheet (Excel, Google Sheets) with bridging software at submission

Paper receipts are still legally allowed AS LONG AS the data has been transferred digitally to your software. You don't need to scan or photograph every paper receipt — the digital record of the transaction is what counts. However, HMRC can demand the original receipt during enquiry (up to 6 years), so retain paper or digital copies.

Penalties

The points-based system (in force for VAT since 1 January 2023, extending to ITSA from April 2026):

Late submission points:

• 1 point per late submission
• Threshold depending on filing frequency:
  • Quarterly filers: 4 points
  • Annual filers: 2 points
  • Monthly filers: 5 points
• At threshold: £200 penalty
• Each further late submission while at threshold: another £200
• Points expire after 24 months of full compliance

Late payment penalties:

• Days 1–15 late: no penalty
• Days 16–30 late: 2% of unpaid tax
• Day 31+: further 2% of amount unpaid at day 30; then 4% annualised
• Interest also charged from day 1 at Bank of England base rate + 2.5%

Inaccuracy penalties:

• Careless error: 0–30% of additional tax
• Deliberate (not concealed): 20–70%
• Deliberate concealed: 30–100%

Reasonable excuse: HMRC accepts late submission/payment without penalty if there is a "reasonable excuse" — illness, bereavement, software failure, etc. — and the submission is made as soon as the excuse is removed.

Exemptions

You can apply for exemption from MTD on grounds:

• Age, disability, remoteness — impractical to use digital tools (rural broadband, no digital literacy, physical impairment)
• Religious belief — incompatible with electronic communication
• Insolvency — formal insolvency proceedings

Applications go via HMRC's MTD exemption process (write or call the VAT/SA helpline). HMRC reviews case-by-case. Exemption is rare for trades unless genuine digital exclusion.

Practical preparation for tradespeople

If you'll be in scope April 2026 (>£50k turnover):

Now (well before April 2026):

1. Confirm with your accountant whether you'll be in scope
2. Choose software — try a 30-day free trial of two or three options
3. Set up bank feed to import transactions automatically
4. Get a system for receipts — phone app capture, weekly review
5. Categorise transactions consistently
6. Run a parallel test (1–2 months) before April 2026 to find friction

April 2026 onwards:

1. Record income and expenses week by week, not month by month
2. Reconcile monthly to bank statements
3. Submit Q1 by 7 August 2026 — get this one right; first quarter sets the habit
4. Don't wait until Q4 to clean up old quarters

Limited companies and partnerships — current position

Limited companies file Corporation Tax CT600 annually, VAT under MTD if registered, PAYE in real time, and a Confirmation Statement. MTD for Corporation Tax has been postponed indefinitely (announced December 2022) with no new date set. Limited companies are NOT in scope for MTD ITSA. However, a director with separate sole trader or landlord income above the threshold IS in scope for MTD ITSA on that personal income.

General partnerships with individual partners are within MTD ITSA scope but the start date has been deferred and is not set. They continue to file the partnership Self Assessment (SA800) until announced.

Frequently Asked Questions

I'm a sole trader making £45,000. Am I in MTD ITSA?

Not from April 2026 (>£50,000 threshold). You're in from April 2027 if your income remains above £30,000. Use 2025–26 SA return income (filed January 2027) to confirm whether you're in for April 2027.

Can I keep using a paper book and have my accountant input it?

Not from the point you're in MTD scope. HMRC requires digital records and digital submission. Your accountant can still process the data, but the records must originate digitally — either you input them or they're captured by software (bank feed, receipt scanner). Paper-only books with year-end keying are not compliant.

What software does HMRC recommend?

HMRC publishes a compatible list but does not recommend specific products. Choose by what fits your workflow: cloud accounting (FreeAgent, QuickBooks, Xero), spreadsheet + bridging (123Sheets, VitalTax), or trade-specific (Powered Now). Free trials let you compare before committing.

How does MTD interact with the Construction Industry Scheme?

CIS continues separately. Contractors file CIS300 monthly returns regardless of MTD. Subcontractors record gross income on quarterly MTD updates; CIS deductions are offset at Final Declaration (31 January). Most MTD software handles CIS — check before choosing.

What if I miss a quarterly update?

You get a penalty point. Four late submissions (over any 24-month period) trigger a £200 penalty. Points expire after 24 months of compliance. The system is more forgiving than the old £100 instant fine — but persistent lateness gets expensive.

Do I have to pay tax quarterly?

No. Quarterly updates are informational. Your tax remains due by 31 January (balancing payment + payment on account) and 31 July (second payment on account). MTD does not change WHEN tax is paid, only when data is reported.

I'm under £20,000 income. Will MTD ever apply to me?

Not currently. The April 2028 threshold is £20,000. Below that, you continue with Self Assessment as before (until or unless HMRC reduces the threshold further — no announcement at present).

Regulations & Standards

• Finance (No.2) Act 2017 — Primary legislation for MTD

• VAT Notice 700/22 — Making Tax Digital for VAT (HMRC technical guidance)

• VAT (Amendment) Regulations 2018 (SI 2018/261) — VAT MTD record-keeping rules

• Income Tax (Digital Requirements) Regulations 2021 (SI 2021/1076) — MTD ITSA framework

• Finance Act 2022, Schedule 24 — MTD points-based penalty system

• HMRC Notice — MTD for Income Tax Manual — Operational guidance

• HMRC's published list of MTD-recognised software — Updated regularly at gov.uk

• CIS Reform — Finance Act 2021 and 2023 amendments — Construction Industry Scheme alignment

• Making Tax Digital — HMRC overview — UK Government

• VAT Notice 700/22 — Making Tax Digital for VAT — HMRC

• MTD for Income Tax — software you can use — HMRC compatible software list

• Penalties for not paying VAT — HMRC — Points-based penalty system

• Construction Industry Scheme — HMRC — CIS overview for contractors and subcontractors

• ICAEW MTD Guidance — Institute of Chartered Accountants in England and Wales — practical interpretation

• vat registration for tradespeople — When and how to register, flat rate vs standard

• cis construction industry scheme — CIS registration, deductions and monthly returns

• sole trader vs limited company — Tax and admin trade-offs for trade businesses

• expenses allowable self employed trades — What you can claim against tax as a tradesperson