Designed to reduce the tax gap and simplify tax management for individuals and businesses, the Government’s Tax Administration Strategy is set to introduce Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) by 6 April 2026.

It will allow those who are self-employed, are landlords or are otherwise responsible for their own tax returns to keep digital records through the MTD system.

With a view to reducing tax lost to avoidable errors, MTD requires taxpayers to send digital records directly to HM Revenue & Customs (HMRC).

MTD taxpayers will be required to use compatible accounting software which, the Government hopes, will encourage wider efficiency and digitisation.

However, certain elements of the proposal have met with resistance due to confusion over new requirements.

As the scheme comes into force, the Government has now made a number of practical tweaks to the policy – seizing the opportunity presented by the Chancellor’s Autumn Statement

Tax and self-employment

MTD seeks to reduce the amount of tax lost by the Government due to errors made on an individual level.

A key element of the scheme is Income Tax Self-Assessment (ITSA), requiring self-employed individuals and landlords to use the MTD software to record their earnings and calculate tax liabilities.

Starting in April 2026, self-employed persons and landlords earning over £50,000 will need to maintain digital records and submit quarterly updates on their earnings and expenses to HMRC using software compatible with Making Tax Digital (MTD). For those earning between £30,000 and £50,000, this requirement will come into effect from April 2027.

Each quarter, these taxpayers will be required to submit financial records including earnings, profit and loss.

Under existing proposals for MTD ITSA, taxpayers would have been required to submit an End of Period Statement (EOPS) in two parts:

• EOPS reporting taxable profit/loss
• A Final Declaration containing EOPS data, other income, allowances and reliefs

However, the EOPS caused a stir among taxpayers as it would have separated the current year-end process into two steps, resulting in confusion and uncertainty for traders.

It may have also actively harmed the overall aim of the scheme by introducing a new potential source of error.

What has changed?

The Government has now announced that the EOPS will not be a separate requirement to the Final Declaration, instead being built into a single process.

The change should simplify the ITSA process and reduce the possibility of mistakes and inaccurate reporting.

Supporting the Final Declaration is another change to the proposed policy, making the required quarterly updates cumulative.

What will this mean for taxpayers?

Taxpayers will now face a more straightforward process for submitting year-end reports under MTD.

Taxpayers can easily access their financial reports throughout the year with quarterly updates, making end-of-year submissions easier.

You’ll also be able to correct past errors in the next quarter, rather than needing to resubmit in the same quarter.

Overall, these new measures will go a long way to achieving the scheme’s goal of streamlining finances for self-employed individuals and sole traders, encouraging operators to embrace digital solutions for efficiency more widely.

How can we help?

If you are self-employed or a landlord, you may benefit from seeking professional financial advice before MTD comes into law.

Making a mistake and paying less tax than you owe could result in a large bill later on, or even legal difficulties.

We can advise you on using the MTD system, integrating it with your current accounting software and complying with all the accompanying regulations.

To access bespoke support, please don’t hesitate to get in touch with our team today.

Chancellor Jeremy Hunt has announced a number of reforms to policies concerning businesses and innovation, in a bid to enhance growth in the economy.

A significant measure concerns various tax relief schemes for businesses in the Research and Development (R&D) sector.

Many operators in this sector are eligible for Corporation Tax relief on qualifying expenditure to ease the burden of investing in capital and encourage growth.

Recent changes have left many businesses, particularly small and medium-sized enterprises (SMEs), in a state of uncertainty around what future claims might look like.

What has changed?

Under previous legislation, businesses conducting R&D could claim tax relief under two separate schemes – the R&D Expenditure Credit (RDEC) and the SME relief.

Each scheme had separate criteria for businesses fitting the standard definition of R&D.

Under new regulations, the SME and RDEC schemes will now be merged in a bid to simplify the process.

Under the new scheme, all qualifying businesses, regardless of staff levels or turnover, will be able to claim against R&D spending at a rate of 20 per cent on all qualifying expenditure from 1 April 2024.

In addition, the notional tax rate for loss-making companies will be reduced from the main rate of 25 per cent to the ‘small profits’ rate of 19 per cent in April 2024.

The new scheme also encourages firms which lack the capital resources to carry out projects to outsource their R&D operations.

By adopting similar rules to the existing SME scheme, the merged relief will allow tax relief claims on almost all outsourced R&D contracts to UK firms.

For the benefit of SMEs, subsidised expenditure is not deducted by the new merged scheme, meaning companies which receive grant funding for part of their R&D costs will not face a reduced amount of relief.

Who’ll be affected?

All businesses who claim R&D tax relief under either of the previous schemes may be affected.

To qualify for this credit, businesses must meet the following criteria:

• Look for an advance in their field
• Try or succeed at overcoming a scientific or technical uncertainty
• Address an issue that cannot be easily worked by a professional in the field
• Claim relief on a project related to their trade

Aside from the merge, SMEs may now claim additional relief on R&D expenditure if they qualify as ‘R&D intensive’, meaning at least 30 per cent of their expenditure covers R&D, for accounting periods after 1 April 2024.

How will future claims be affected?

The aim of the measure is to simplify the process of claiming R&D tax relief with a single set of qualifying rules.

Its impact on future claims will depend on whether the individual firm is a principal or subcontractor in an R&D agreement.

For firms themselves, this simplified way of claiming capital allowances on R&D expenditure is likely to provide a major incentive to investing in R&D and raising the profile of its R&D programme.

The measure also removes the need for growing companies to transition between the SME and RDEC schemes, meaning that firms can scale their operations and turnover without impacting their eligibility to claim for R&D under the scheme.

However, it is likely that subcontractors, which are currently able to claim under the existing schemes, will see a significant incentive removed as they can no longer claim relief on R&D expenditure under the merger.

This may mean that the R&D sector faces a period of uncertainty and slow growth while operators adjust to new regulations. Outsourcing agreements may also need to be renegotiated to reflect the new tax relief arrangements.

With no transition period between the two schemes, R&D operators may need to seek professional support to quickly identify how these new measures will impact them.

For advice on how your firm will be affected by these new measures, please contact our expert team today.