MTD: half of first cohort missed deadline as next wave looms

Nearly half of the first group of taxpayers brought into Making Tax Digital (MTD) for Income Tax missed their initial quarterly update deadline, according to HMRC figures cited by Oxfordshire-based chartered accountancy firm Ridgefield Consulting. Of the 864,000 sole traders and landlords expected to file by 7 August, only 436,000 had done so by the deadline, suggesting widespread difficulty adapting to the new regime.

The shortfall is particularly significant given that a further 1,077,000 sole traders and landlords are due to enter MTD from 6 April 2027, when the qualifying income threshold drops from £50,000 to £30,000. HMRC confirmed the expansion on 5 October. A further reduction to £20,000 is then scheduled for April 2028.

The qualifying income trap

One of the most commonly misunderstood aspects of MTD is that the threshold applies to gross qualifying income, not net profit. A sole trader turning over £32,000 but retaining only £14,000 after expenses still falls within scope. Equally, people with both self-employment and property rental income must aggregate those two streams to determine whether they cross the threshold, even if neither individually appears significant. Pension income, dividends and employment earnings do not count.

Simon Thomas, Managing Director at Ridgefield Consulting, said: "The £30,000 figure sounds like a lot, but it's measured on what comes in, not what's left after expenses. Plenty of small business owners and landlords who think of themselves as modest earners could find they're in scope once they add up their qualifying income."

The penalty regime also tightens for those entering in 2027. During the 2026/27 tax year, HMRC is not applying penalty points for late quarterly updates. From April 2027 that changes: each missed quarterly deadline accumulates a penalty point, and a £200 financial penalty is triggered once four points have been reached.

Compliance costs and software options

Taxpayers entering MTD are required to keep digital records and submit quarterly updates via HMRC-compatible software, followed by a final annual submission. Ridgefield Consulting stresses that full-cost accounting packages are not mandatory: spreadsheet-based record-keeping remains permitted provided it meets HMRC's technical requirements, and bridging software can be used to transmit data. A number of third-party providers also offer free MTD-compatible tools.

The broader MTD rollout has been subject to repeated delays since it was first announced in 2015, with implementation for income tax pushed back several times before the current phased schedule was confirmed. That history has left a segment of affected taxpayers and their advisers sceptical about the finality of any given deadline, which may partly explain the low initial compliance rate. HMRC has given no indication that further deferrals are planned.

For accountancy practices and software vendors targeting the SME and sole-trader market, the next six months represent both a commercial opportunity and a service-capacity test. The approximately 1.9 million taxpayers expected to be in scope by 2027, rising further with the 2028 threshold cut, represent a structural shift in the UK's tax-administration infrastructure toward real-time digital reporting, aligning HMRC's ambitions more closely with systems already in place in several European jurisdictions.