Mark the date on your calendar: April 6, 2026, because that’s when HMRC will introduce Making Tax Digital (MTD) for income tax in its first phase. All UK-based sole traders and landowners with business or property income over £50,000 in April 2026 must begin digital filing below the MTD thresholds. They will need to maintain digital records, submit four quarterly declarations during the year, and file one final declaration at the end.
Failure to adhere to MTD requirements will not go unnoticed. Those companies and individuals who fall short of the rules risk incurring a series of penalties, including points-based fines for late filing, interest charges, and further penalties for late payment.
The reason for such a change in the tax system is one of the biggest changes in UK tax administration in many years. By transitioning from paper records and manual filing, Tax Digital for Income Tax aims to reduce typical errors, become more efficient, and provide taxpayers with greater clarity over their finances.
For most, it will involve taking on new software, acquiring digital processes, and reorganizing the way economic information is held and reported.
How MTD Will Change Daily Workflows
Making Tax Digital (MTD) is set to significantly transform the way accounting professionals manage their day-to-day operations. These changes aim to improve accuracy, efficiency, and compliance with tax regulations.
Continuous Record-Keeping:
Rather than compiling financial data solely at year-end, businesses must now record and update their income and expenses digitally regularly, typically on a monthly or weekly basis.
Regular Reconciliations:
With quarterly submission deadlines, businesses and accountants must perform frequent reconciliations. This involves verifying that the digital records match bank statements and other financial documents. Regular checks help identify discrepancies early, making year-end audits smoother and more accurate.
Enhanced Collaboration Between Clients and Accountants:
To meet ongoing reporting needs, clients and accountants should foster collaboration by sharing accounting software access, providing regular financial updates, and continuously updating records to stay informed and meet compliance deadlines.
Automation Opportunities:
The adoption of advanced accounting software opens up numerous automation possibilities. Tasks such as calculating VAT owed, tracking invoices, generating financial reports, and even reconciling accounts can be automated. This not only saves time but also reduces human errors, allowing accountants and business owners to focus on more strategic activities.
What UK-based accounting firms should watch out for?
As Making Tax Digital (MTD) grows in the next few years, accounting practices need to get both themselves and their clients ready for compliance. Almost 45% of UK sole traders say they are not prepared, which poses risks but also provides firms with an opportunity to enhance their advisory capabilities.
The following are some of the critical areas that accounting practices need to concentrate their efforts on:
Tax & VAT for Compliance
MTD rules, in particular with regard to Income Tax Self-Assessment (ITSA), are under constant evolution. Companies abiding by the regulations need to be watchful for HMRC notifications, software updates, and potential fines.
With reliable support in keeping up with tax compliance, VAT returns, and corporation or individual tax administration, clients can concentrate on business activities and be in line with the current laws, without concern.
Bookkeeping & Year-End Outsourcing to Maintain Data Integrity
Effective MTD submissions are based on accurate data. Bookkeeping or quarterly filing errors can lead to redundant work down the line. Utilizing bookkeeping outsourcing, accounts payable/receivables outsourcing, and year-end accounts support, companies can guarantee their data is not only timely but double-checked carefully before it reaches HMRC.
Management Quarterly Accounts and Tax Planning
Quarterly filing provides companies with regular client information, providing a precious opportunity to go beyond mere compliance. By enhancing management accounts and tax knowledge, companies can gain insights into profitability, cash flow, and planning opportunities. This strategy enables accountants to become trusted advisors, turning compliance data into strategic business information.
Maintenance of Digital Records
The most important feature of tax digitization for income tax is the upkeep of precise and updated digital records. For compliant businesses, the next step is to regularly update these records in processes such as bookkeeping, accounts payable and receivable, and VAT reporting. High-quality digital data reduces compliance risk and gives a reliable foundation for management accounts, tax planning, and year-end reporting.
MTD-Friendly Software: FAQs
On the HMRC website, there is a list of HMRC-approved and regulated software. Accounting businesses make it a point to utilize only HMRC-approved software that will satisfy their compliance requirements for functions such as accounting, bookkeeping, payroll, audit support, and tax return preparation. Otherwise, it is imperative to make the transition while consulting with the client as soon as possible.
Now, let’s answer the most frequently asked questions about HMRC-approved software:
Penalties for failure to comply
HMRC has put in place a points-based penalty regime, and accounting companies are required to adhere to the regulations. If these requirements are not met, then penalties will be imposed.
Penalty points are incurred when there is a late submission, non-compliance with digital records, or non-adherence to digital links. When a specific point limit is achieved, a penalty will be charged.
For annual submissions, accumulating two points results in a penalty. For quarterly submissions (also applicable to MTD for IT), four points lead to a penalty. For monthly submissions, accruing five points will result in a penalty.
Here are the criteria for implementing the penalty system that accounting firms must follow:
Submitting Incorrect or Incomplete Figures
Providing false or incomplete self-employment, property income, or VAT figures is a penalty point offence. Should the points tally reach a certain level, HMRC issues a £200 fixed penalty for every threshold breached.
Not Keeping Digital Records
Unless client records are kept digitally in an HMRC-approved format, firms are penalized between £5 to £15 per day for every day the condition is not fulfilled. Firms need to keep client records completely digital to prevent these daily penalties.
Failure to meet submission deadlines
Late submissions quarterly, monthly, or annually incur penalty points. When thresholds are met, HMRC imposes a £200 fine per instance for annual, quarterly, and monthly submissions, respectively.
Failure to Use HMRC-Approved Software
Preparing returns using software that is not fully functional and HMRC-compatible is non-compliant. One return submitted in the wrong manner can incur up to a £400 penalty, making it imperative that firms adopt approved systems for their clients.
Conclusion
HMRC is tightening Making Tax Digital (MTD) compliance, and failure to comply can result in penalties for late submission, incorrect data, poor digital record-keeping, or use of unauthorized HMRC software. For accountancy practices and businesses, strict compliance means careful monitoring, good-quality digital records, and timely submission.
With AcoBloom’s assistance, UK accounting firms don’t have to worry about such issues. We ensure record precision, timely submissions, and optimal usage of HMRC-approved software. AcoBloom maintains compliance and prevents penalties, enabling businesses to focus on development while we handle regulatory requirements efficiently.
