Making Tax Digital for UK contractors

What contractors need to know right now

Making Tax Digital is the UK government’s long-running programme to modernise the tax system by requiring digital record keeping and software-based submissions. It aims to reduce errors, improve transparency and give taxpayers a clearer view of liabilities throughout the year. For contractors, the changes affect how income and expenses are recorded, how VAT is filed, and how Self Assessment information is reported. While the rules are phased, preparing early will reduce disruption and help improve financial visibility.

Scope, timelines and who must comply

MTD for VAT is already in force for all VAT-registered businesses in the UK. Since April 2022, every VAT-registered contractor - regardless of turnover - must keep digital records and file VAT returns via compatible software. The nine-box VAT return remains, but digital links are required between records and the final submission. Spreadsheet users may rely on bridging software, provided digital links are preserved without manual re-keying.

MTD for Income Tax Self Assessment is the next major step. From April 2026, self-employed individuals and landlords with total qualifying income above £50,000 must join. From April 2027, those between £30,000 and £50,000 will be mandated. HMRC has not set a date for those under £30,000, and general partnerships, LLPs and more complex partnerships also have no confirmed start date. The programme sits alongside basis period reform - now aligning most sole traders to the tax year basis - which simplifies how annual figures are finalised.

Limited company contractors are affected mainly through MTD for VAT today. MTD for Corporation Tax is planned but has no confirmed mandation date. HMRC has indicated it will not arrive before 2026 and further detail will follow after pilots. For now, corporation tax filings continue as normal through existing online services or agent software.

What changes in practice - records, updates and year-end

Under MTD, digital record keeping means capturing income and expenses in compatible software as close to the transaction date as possible. Acceptable systems include major cloud accounting platforms or compliant desktop software. Bank feeds, receipt capture and consistent coding help maintain accurate ledgers. HMRC requires end-to-end digital links, so copying and pasting figures between systems is not acceptable once data enters the digital chain.

For ITSA, contractors within scope will submit quarterly updates for each business or property income stream. These updates summarise income and expenses by category and do not replace the need to pay tax in-year under the existing payments on account timetable. After the tax year ends, an End of Period Statement is submitted for each business to make accounting adjustments such as capital allowances and disallowable expenses. A single Final Declaration then confirms total income across all sources and replaces the traditional annual Self Assessment return. The statutory deadline remains 31 January following the tax year for finalisation and balancing payments.

VAT-registered contractors must file VAT returns directly from compatible software. Records such as sales, purchases, VAT rates and adjustments must be kept digitally and preserved for the statutory period. Partial exemption and special schemes still apply, but workings must be digitally linked to the submitted figures. HMRC’s late submission penalty regime for VAT now uses a points-based system, with interest charged on late payments, and a similar approach will apply to ITSA when mandated.

Who is in scope - income levels and typical contractor scenarios

Sole traders with total qualifying income above £50,000 join from April 2026 and those between £30,000 and £50,000 from April 2027. Total qualifying income includes all self-employment and property income before expenses. A freelance IT consultant earning £60,000 as a sole trader will enter in 2026. A landlord-contractor combination - for example £22,000 from contracting and £20,000 from property - would be mandated from 2027. A limited company contractor paid mainly via salary and dividends will not enter ITSA MTD for those sources, but the company must comply with MTD for VAT if VAT-registered. Landlords with property income only will follow the same income thresholds and dates. Those under £30,000 are not currently mandated but may opt in voluntarily.

Digital exclusion exemptions exist for individuals who cannot use software for reasons such as disability, age, remoteness of location or religious grounds, and for those subject to insolvency procedures. Exemptions must be agreed with HMRC and are not automatic.

Penalties, misconceptions and how to prepare

Non-compliance can lead to points-based penalties for late submissions, interest for late payments and separate penalties for failure to keep required digital records. HMRC will expect a clear digital journey from source records through to returns, so manual transposition of figures risks compliance issues.

Common misconceptions should be addressed early. MTD does not change how much tax you owe - it changes how and when you report. Quarterly updates are not quarterly tax bills, and payments on account continue as normal. MTD does not alter IR35 status or off-payroll rules. While software costs may rise, better real-time data typically reduces errors and avoids surprises, potentially lowering administrative costs overall.

Contractors should act now by selecting compatible software, enabling bank feeds, standardising expense categories and digitising receipts. Those attached to spreadsheets can consider compliant bridging solutions, but moving to a full cloud ledger often delivers better audit trails and automation. Speak to your accountant about how quarterly updates and EOPS will fit into your year, agree who will review coding each quarter, and run a mock submission ahead of go-live. Early adoption for non-mandated groups can smooth the learning curve and improve cash flow forecasting.

Contractor News view

MTD is a significant operational shift for contractors, but its direction is clear and the timetable for many is now set. The key is to embed digital processes well before deadlines bite. Choosing robust software, maintaining clean records and coordinating with advisers will make quarterly reporting largely routine. We will continue to track HMRC guidance and any timetable refinements so contractors can plan with confidence.