Making Tax Digital – a Disaster in the Making or a Brilliant Innovation?
In a recent piece on this site called How Have We Ended Up Paying For Everything While Doing All the Work Ourselves? I included a discussion about the looming introduction of Making Tax Digital from April 6th 2026. Toby asked me to write something more about Making Tax Digital, so here it is.
This will only apply to sole traders and landlords, at least for the moment. Making Tax Digital (MTD) has been impending for years but was postponed. Now it’s about to happen, but it has the potential, at least in the short term, to be another self-inflicted government shitshow.
Let me make it clear that it’s obviously right and proper that people pay the correct tax in a timely fashion. HMRC expects MTD to raise an extra £780 million in revenue, though that remains to be seen. Whether the Government spends it wisely is another matter entirely. But that doesn’t take into account the costs of administering MTD imposed on taxpayers or the possibility that some small businesses will be wound up rather than get embroiled.
What I am concerned about is that the way HMRC has decided to operate MTD is not only going to impose a great deal of work and costs on taxpayers but also drive some sole traders and landlords into ceasing trading. It also risks driving others underground.
MTD is based on turnover (‘qualifying income’), not profits, and is supposed to make your reporting to the Revenue ‘real time’. If your turnover is:
- £50,000 for the 2024 to 2025 tax year, you will need to use MTD from April 6th 2026
- £30,000 for the 2025 to 2026 tax year, you will need to use MTD from April 6th 2027
- £20,000 for the 2026 to 2027 tax year, the Government has set out plans to introduce legislation to lower the qualifying income threshold (so this tier isn’t yet in law but should be before too long). If so, you will need to use MTD from April 6th 2028
The likelihood is that eventually all sole traders and landlords will be obliged to go digital, regardless of turnover.
It gets worse. Even if your turnover later drops below the threshold, you’ll be stuck with using MTD for at least three years unless you cease trading.
If you already file a self-assessment tax return, you’ll be familiar with filling it out online on HMRC’s own website. Everyone works through the same tool.
That isn’t what’s happening with MTD. Originally, the plan was that HMRC would provide the software free. That idea has been abandoned. In my view, this is outrageous. The decision has exposed taxpayers to the vagaries of the commercial software accounting market. HMRC has only come up with a tool that supposedly helps you choose the right software.
All that tool does is present you with a list of software providers, and from thereon you’re on your own, left floundering. I wouldn’t have the slightest idea which one to choose. Worse, if you choose the wrong software, the obligation to keep records for five years could well mean you’re trapped with that software provider because all the records must be kept in the cloud. If you switch to another software provider because it turned out the package you’d chosen is Crapola XL5, you risk losing your records, to say nothing of the risk of cyber security.
Those obliged by HMRC to use MTD will have to have sourced, downloaded, installed and learned to use commercial software chosen from a list of approved providers, which could cost several hundred pounds a year (they vary wildly – there are one or two free options, but they have limited functionality). The reason HMRC is not providing any software itself is presumably because the complexity of what it wants is beyond existing government systems, so the idea is to impose all the costs on taxpayers.
These taxpayers will then have to report four times a year by quarters during the tax year from April 6th to April 5th and a fifth time at the end of the year to summarise the year’s trading and incorporate other sources, if any, of income such as pensions. Tax, however, will still be paid as it is at present (on January 31st and July 31st).
Sole traders and landlords can either use the software themselves or hire an accountant to administer it all for them. It doesn’t take a genius to work out that doing it for oneself will involve a great deal more administrative work over the tax year. If one chooses to use an accountant, the far greater necessary contact time will mean much higher fees. MTD has already been introduced for VAT, but such businesses (with turnovers of £90,000 plus) are already more likely to be large enough to support and need more complex administration. There are many small businesses that might have turnover that creeps into the MTD threshold of £20,000 (in the tax year 2026–27) but generate a tiny profit, only to find that profit reduced even further by the costs of MTD.
Just as an example of what MTD means, it will involve scanning and digitising every receipt and uploading it to the business’s account, for example through an associated app on a phone. The software will also access your bank account to tie every transaction to bank account activity. Moreover, the business will need to have a dedicated business bank account (and guess what? They aren’t free either), though how on earth businesses run from home will be able to record and distinguish partial home running costs this way is not something I have fathomed out yet.
The Telegraph says about the software:
It should allow you to create, store and correct digital records of your self-employment and property income and expenses, send your quarterly updates to HMRC, as well as submit your tax return.
Some accountants are seeing this as the chance to rake in far more income from clients. Others are planning to dump clients who are below the threshold and won’t go digital. Some accountants, especially older ones, are looking at retiring early rather than get involved.
Some accountants are being genuinely helpful in explaining in a no-obligation way what is involved and what can be done. I downloaded a useful pack from this one, but there are others around.
Needless to say, if you get it wrong there are penalties. According to the Telegraph:
It’s important to understand the newest rules to avoid facing a fine. Under MTD, late payment penalties for VAT taxpayers and income taxpayers will be 3% of the tax outstanding where tax is overdue by 15 days and 6% where tax is overdue by 30 days.
A self-employed person owing £25,000 in income tax will likely find themselves owing £26,913 after four months with tax or interest. Under the new MTD rules, this could be over £28,000, an increase in fines of around 6%. It’s estimated that the increased fines could bring in £370 million by 2030.
As for me? I’ve been an author for almost forty years, though along the way I’ve been employed in other jobs at the same time. I’m 68 now and was planning to wind down anyway. Books don’t make much money at the best of times (believe it or not), and most writers depend on alternative sources of income to make the profession viable and pay for living costs.
My solution to MTD is simple, after reading widely about the prospect and what it entails – I’ll accelerate the wind down and cease my self-employment altogether within 18 months. It simply isn’t worth carrying on. I have already started turning down work. Writing books was mostly fun, but drowning in admin or admin costs isn’t.
It’s something governments never get, especially this one: the more tax you try and raise or the more complicated and onerous you make running a business, the only outcome is to disincentivise. The VAT threshold already means that some businesses slow down or stop during their accounting year rather than cross the £90,000 threshold. MTD is likely to have the same effect on some small businesses.
In my opinion, HMRC’s failure to produce dedicated software that everyone could use, just as they do to file self-assessment tax returns, is likely, in the short term at least, to result in a chaotic Tower of Babel as taxpayers and accountants flounder about. It’s inevitable that there will be problems with some of the software and there will be businesses that simply fall apart in the face of trying to cope. The whole system is being rushed in, with almost no time to review the first wave before the second and third waves are drawn in, says Tax Adviser Magazine, quoting an expert:
We’re concerned that this rushed timetable won’t allow for sufficient time to review outcomes for the first group of MTD taxpayers, and to make any changes needed before the newest cohort comes in. This risks exacerbating any initial problems with the regime.
The April 2028 expansion of MTD will also bring in lower income taxpayers, who may be less able to afford professional advice and specialist software to help them transition to and comply with MTD.
It’s likely, of course, that eventually it’ll all settle down and businesses will become used to the new practices. But it might take a while.
One thing is certain though. MTD is not going away. If you’re a sole trader or a landlord whose turnover is above £20,000 per annum, you’ll be stuck with MTD unless you wind up the business. It’s a straightforward choice. And it seems that all too many are woefully unprepared, said a website called bytestart earlier this year:
According to a survey of 2,000 UK self-employed taxpayers with untaxed income of over £50,000, commissioned by Intuit Quickbooks, confusion around MTD is still widespread:
- 21% don’t believe they are affected by MTD, despite clearly meeting the income threshold
- 41% incorrectly believe MTD is mandatory or will be by this month (April 2025)
- 8% think the deadline is as late as 2027
- Half (47%) still plan to complete their tax return manually, which will no longer be allowed
The same survey revealed further uncertainty:
- 1 in 4 taxpayers are unsure whether MTD for income tax applies to them
- Only 59% say they’re fully aware of their tax compliance obligations
- Even among those who expect to be affected, only 36% are “somewhat aware” of what they need to do
It’s a case then of watch this space. If MTD doesn’t apply to you, how lucky you are. If it does, maybe you think it’s all a great idea or maybe you think it’s time to say goodbye. As the title asks, is this a disaster in the making or a brilliant innovation? Will it be the best of times or the worst of times, an age of wisdom or an age of foolishness?
After all, what could possibly go wrong?
Guy de la Bédoyère is (for the moment) a self-employed writer, retired former schoolteacher and broadcaster, with numerous books to his name, mainly on the ancient world. His latest is The Confessions of Samuel Pepys (Abacus 2025).
Stop Press: Being fairly tech-savvy, I’m quite capable of operating the necessary MTD software. It’s merely a question of whether I can be bothered at my age. However, in the spirit of finding out more I’ve signed up with one of HMRC’s approved software providers. To date I am still waiting for the manual approval the software provider insists on before letting me download the accounting software. That’s a problem HMRC doesn’t seem to have considered, and it’s going to get worse as the deadline approaches. And now the Mail has a story about a Labour think-tank recommending, among other impositions, that the VAT threshold be dropped to £30,000 from the current £90,000 (the only softener is that in some EU countries like Belgium it’s even lower than that). If that happens in the UK the impact on countless small businesses will be drastic.
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Who would have guessed that people who have spent their entire lives studying politics and/or working in the Civil Service, don’t have a clue how businesses work and how real people respond to stupid ideas.
Unless of course, it is intentional managed decline..
I doubt very much they care.
We have created a society that has made paying taxes a virtue.
So the more taxes, the more virtuous. The stricter the compliance rules, the more virtuous.
We reap what we sow.
Just takes an EMP or a Cyber attack and the whole thing is fubar’d.
I work in Enterprise Cyber Security, its always a case of playing catch up, eventually everyone will be breached, you can’t know the unknowns, the next attack vector.
Not to mention (IT vet of 25 years experience) that large public sector IT projects are alnost all disastrous. Even when contracted out – e.g. PO system.
I’m going to sticky neck out and write that it will cost the good guys a lot of money and that the ones profiting from it won’t be the good guys.
I’m not going to bet against you
Spot on.
I’ve been using MTD for a while with my ltd company. No problems. I opened a Mettle bank account and got the use of Freeagent software for nothing. I also pay no bank charges.
Aha! You run a business and therefore have experience and can learn, unlike it seems the author and other commentators.
“Let me make it clear that it’s obviously right and proper that people pay the correct tax in a timely fashion.”
I used to think so. I pay the correct amount of tax because I don’t want to go to prison but I think the amount of tax we pay and most of the things we pay it for are immoral and damaging so I no longer disapprove of people who manage to avoid it.
Everything in life should be a trade. The exchange may not necessarily be a fair trade, but it should, at least, be a trade that both parties agree to. Taxation is no longer a fair trade – a trade of the worth of our work in the form of money for the worth of services provided by the state. And it is not an agreed trade either -:prison awaits you if you do not unquestionably hand over your hard earned cash. So, actually, it’s very clear now that the tax system is theft. It is a system that extorts money from the masses and spends that money on whatever they want, but virtually nothing that the masses want the money spent on. It’s why we pay ever increasing taxes and get an ever decreasing return. We shouldn’t just not disapprove of people who manage to avoid it, but understand that it is a corrupt system of extortion and, under the current criminal arrangement, nobody should be paying the taxes they are being forced to pay. It is only legal because the people allow it and a captured judiciary enforce it. Law no longer equates to what is morally right –… Read more »
If you think in terms of systems instead of goals, the tax system was always going to evolve into what it has.
If you give the state, with its monopoly on violence, the power to collect money from one group of people and give it to another and add to that some sort of moral authority as cover, you are creating a system where more and more will be demanded from the public, where the administrators of tax will demand more and more money and more power to collect. That’s the inevitable outcome of the system.
But people aren’t good at understanding systems. They understand outcomes much better and the whole thing was sold from the outset as taking care of the poor and destitute who can’t help themselves. But what prevails isn’t the outcome – that shifts.- what prevails is the system.
And it’s going to get worse. Inevitably. Because of the system.
Great post. This probably isn’t going to be popular, because any criticism of capitalism get you called a Marxist (which I’m most certainly not), but I’d argue the same points apply to unrestricted capitalism. If individuals, which become groups with the same underlying motives, can become so wealthy that their power emanates up, across, and down into all aspects of the economy and society, then that is the prevailing system – a system that exists and dominates outside of the supposed system of democracy.
Tax avoidance should be encouraged, it’s legal, as you know TOF. As Denis Healey said, “The difference between tax-avoidance and tax-evasion is the thickness of a prison wall.”
Except that they’ve made tax avoidance semi-legal, semi-illegal. A bit like non-crime hate incidents. Not a crime, but not allowed.
The relationship between the public and the tax authorities used to be a bit of a cat and mouse game. Yes, they were doing what they had to do to catch you, but it was sort of accepted that you would do whatever you could to get away.
But our society is much more tax puritanical now, and avoiding taxes has become some sort of moral failure. Probably related to the growing number of people who don’t contribute but rather receive from the state. Many more pensioners, many more benefits recipients. And as the pool of contributors shrinks, the knives of the recipients get longer and sharper.
I agree about the inevitability of it. If we had a serious collapse leaving a
large part of the population impoverished it’s possible that we could have a complete re think of what taxes can morally be for and what the proper limits of state power should be. You could enshrine that in a new constitution though of course it would require buy in from the public. I think the collapse would have to be widespread and much worse in effect and duration than the Great Depression. Even then there might be some slippage but perhaps it could be minimised and would buy a few centuries of freedom and prosperity. Although this might seem optimistic, we should bear in mind that we’ve never been here before so we would have some mistakes to learn from. I’m not holding my breath though.
Oh I certainly pay only the tax I have to by law by being aware of what the law says.
I pay the correct amount of tax because I don’t want to go to prison but I think the amount of tax we pay and most of the things we pay it for are immoral and damaging so I no longer disapprove of people who manage to avoid it.
The myriad of indirect taxes and taxes on indirect taxes (government actually taxes people for paying tax) are much more “immoral and damaging.” But nevertheless, the proper way to resolve political disagreements is to work towards a change of policy and not to try to ‘avoid’ obeying to the law. Especially considering that this ‘avoidances’ is something only rich people can afford while poor people can always collect thrown-away cigarette butts when they cannot afford to pay the tobacco tax and the VAT this tax payment is being taxed with.
The total tax take across all forms of tax is outrageously high. If people find ways to pay less, legal or illegal, then I no longer disapprove of that behaviour.
I think we’ve gone beyond resolving political differences. If it undermines the current system, it is to be welcomed.
I used to think in this way but spending some years in the close company of a lot of long dead men (via books written by them) who held positions of responsibilty in Germany while it still existed (ie, until October 1918) have changed my mind on this.
Besides, it doesn’t really undermine the system. As somebody once said: An individual man is a mysterium but a million men are just a statistic. The proper amount of lost earnings due to tax evasion or sale of black market tobacco is doubtlessy factored into the system.
Maybe your long dead men would do a better job – if only we could bring them back
How exactly?
I’m not the guy who claims that we’re living in a democracy or at least something which once was one.
🙂
Whatever you can think of. Found your own party and win an election. Start a violent insurrection to establish the free and independent republic of your own lawn. Threaten to marry the daughter of your MP. etc.
And avoiding tax is perfectly legal.
This is the mindless mantra that enables every abuse and indignity heaped on the public by the state’s tax authorities. Because by definition, anything they decide to impose on you is right and proper.
And that is how we get to this point, where we are no longer all just tax slaves, but whereas previously we had certain freedom to roam with obligations to fulfil, we now have the equivalent of electronic ankle bracelets to monitor our every movement.
But hey, because it’s right and proper to pay the “correct” tax, there will never be an end to this. Be sure that whenever this has “settled down” something else will follow. As sure as night follows day and day follow night.
This will kill start-up businesses and small retailers who wish to trade legally.
This will create more opportunities for HMRC investogators to locate the increasing number of tradespeople who decide to fly under the radar.
That’s what it’s designed to do!
A easonable reader would regard the early closure of businesses as a disaster for the economy and for the individuals involved. The self regarding elites will consider it a triumph – to drive out of business people whom they don’t like and don’t trust is a desirable outcome for them. Besides, most of them don’t vote Uniparty.
Indeed- they don’t vote Uniparty because it’s not good for their businesses and because they understand that socialism does not work
I assume that thousands of hmrc employees are now being made redundant as their roles are now being undertaken by the tax payer.
My guess is not, I suspect the opposite more will be taken on to deal with the mess
The words “Post Office ” and “Horizon” spring to mind.
Living on benefits is clearly much simpler, and stuff like this will just make some people think “why bother” and take the path of least resistance.
Direct taxation is theft, pure and simple.
Even worse, they are making people become their own tax collectors and charging them to do it!
“Let me make it clear that it’s obviously right and proper that people pay the correct tax…”
And let me make it clear nobody “pays” tax, it is expropriated from them by the coercive powers of the State. This is obviously wrong and quite improper: Thou shalt not steal. Thou shalt not covet thy neighbour’s goods.
If people didn’t have their money stolen by the State – to pay for our wonderful public services, like sending money and guns to Ukraine, providing luxury living for criminal invaders, etc – people would be able to choose which public services they wanted in a competitive, private free market and pay for them themselves, directly.
“All that tool does is present you with a list of software providers, and from thereon you’re on your own, left floundering. I wouldn’t have the slightest idea which one to choose. Worse, if you choose the wrong software…”
Exaxtly the same situation applies in chosing the best accounting and payroll software for your business.
Maybe the author has never run a business. He bemoans HMRC won’t provide the software and people will have to shop around in the free market… Choice! What horrors!
He overlooks that software from Government is likely to be… correction… will be crap, and cost £millions – which we pay for via our taxes, and will be one size fits all.
How? Is that an estimate of how much people are underpaying currently? Is MTD intended to close some current loopholes? Why not just close the loopholes first?
Or is this an estimate of how much they expect to fine people?
It sounds like a number pulled out of someone’s nether regions.
Makes you see why the government does not like cash…..
Like you, Guy, and many of my professional colleagues, I am still working at 68, not because I need to, but because I offer a service that people value, and it allows me to remain engaged with people of all ages.
I work three days a week, but this will take me to the MTD next year.
I had planned to work into my early 70s. However, as mentioned above, I shall retire next year, as will many of them.
What a shame.
The people I have told (I work in a relatively niche area) are very disappointed. Still, after 50 years of paying taxes on time and accurately, I am not willing to jump through these hoops and be treated as a potential tax dodger and cash cow.
The suggestion here is that this is exclusive to the UK, but it is actually, yet another example of global manoeuvres as it is being rolled out certainly across Europe and I would guess other western countries too. In France, businesses are being encouraged to move onto the auto invoicing and card payment schemes ‘to make it easier to reconcile digital tax declarations’ whilst obviously losing money to those organisations providing these services on every transaction too.
I fear that this is another back door push towards digital currency and obviously digital ID
I am not scanning every single bill. Nor are they having access to my bank account.