Spring Statement: MTD extension ‘costly and confusing’

Sara White, Editor, Business & Accountancy Daily

The expansion of Making Tax Digital to millions more self employed individuals earning as little as £20,000 will be a challenge as HMRC withdraws free filing software used by over four million taxpayers

The Low Incomes Tax Reform Group (LITRG) is calling on HMRC to consider easements to help taxpayers who may initially struggle to meet the requirements using third party software, which will raise costs for the 4.5 million taxpayers who currently use HMRC free software.

Under the rules confirmed at the Spring Statement, HMRC will require tax returns to be supplied through third party software for everyone forced to file quarterly under Making Tax Digital for Income Tax.

There will no longer be free filing software supplied by HMRC, which was used by over a third of taxpayers in self assessment. In total, 4.5m taxpayers in 2023-24 tax season ending in January used the free software.

HMRC has confirmed taxpayers in Making Tax Digital will only be allowed to use commercial third party software to file their tax return, as well as for keeping their business records and sending updates to HMRC every quarter.

And MTD is being extended rapidly meaning that there will be limited time to acclimatise to this huge change.

The government is also looking at how it could make MTD mandatory for all non PAYE taxpayers with minimal income below £20,000, effectively sounding the death knell for self assessment tax returns for landlords and self employed in the longer term.

Sharron West, technical officer at LITRG, said: ‘The announcement is yet another burden on low income taxpayers that will make it harder for them to meet their tax obligations.

‘Since Making Tax Digital was first announced, we have been clear that HMRC should provide free software, like they do for self assessment, rather than rely on third party companies to help people comply with the new record keeping and reporting rules.

‘Many of the small businesses who will be in scope for Making Tax Digital from April 2026 make very modest profits, and there will be some that aren’t even making enough money to pay tax or national insurance.

‘This has the potential to be costly, confusing and distracting from their day-to-day businesses, and even unfair when those who are not within MTD will be able to continue using HMRC’s free online tax return service.

‘We were already concerned that these businesses were going to struggle to get to grips with choosing and using the accounting software they will need to keep their records up to date.

‘It also means HMRC are unlikely to be able to directly support taxpayers with their self assessment filing, pushing them towards third party software companies to get the help they need. This is unsatisfactory and does not align with HMRC’s charter commitment to support people to meet their tax obligations.

‘HMRC should consider granting more MTD exemptions and delaying the imposition of penalties for late filing or inaccurate tax returns until the system beds in to help those who struggle with the new requirements.’

HMRC say there will be free software available to meet the needs of smaller businesses, but there are currently a very limited number of free packages on the market, with Sage one of the few software companies providing a pared back, very basic free filing software option for MTD.

It is also not guaranteed that the software will remain free ad infinitum as the Sage deal was negotiated by the current government and the company has not confirmed whether it is a limited time deal.

LITRG warned: ‘It is also not yet clear what functionality the free products will have, what limitations there might be, and what kind of support will be offered (if any) to users who run into difficulties.’

HMRC’s free online tax return filing system was used by 4.5m unrepresented taxpayers to submit 2023-24 returns due by 31 January 2025.

It is a popular tool for ‘many reasons’, LITRG stressed, adding the fact it is an official HMRC product gives taxpayers unable to afford professional tax advice some confidence and reassurance that they are doing things right.

As set out in the Spring Statement sole traders and landlords earning more than £20,000 a year gross will have to file quarterly from 2028 with the additional fifth filing equivalent to today’s self assessment tax returns, with very few exemptions.

Tranche one for those with gross income of £50,000 or more will have to start MTD in April 2026, and the £30,000 plus bracket from 2027.