Advice on Preparing for Making Tax Digital From Our Team of Accountants for Contractors

As most contractors will be aware, Making Tax Digital (MTD) has been a phased introduction of mandatory changes to the way businesses and self-employed professionals submit reports to HMRC. This started with declarations for VAT-registered companies and will become obligatory for many self-assessment income tax returns next April. 

While contractors who are VAT registered may already be familiar with the system, for a large proportion, April 2026 will be the first time they have been required to comply with the reforms, with MTD for income tax taking effect from 6th April 2026.

The scheme aims to improve tax compliance, boost efficiency and minimise errors on tax and VAT returns. However, we also know that for busy contractors who already deal with complex accounting tasks and cash flow management, it is essential to be prepared.

What Are the Next Set of Mandatory Making Tax Digital Reporting Requirements?

For those less familiar with MTD, the scheme was announced in 2018 as a shake-up of how taxes are reported and administered. 

There has been a transition period where self-employed taxpayers could voluntarily choose to enrol themselves from April 2025. However, there are no official figures to indicate how many have decided to do so. The roll-out schedule is as follows:

• April 2019: MTD for VAT returns became required for all VAT-registered entities with taxable incomes over the £85,000 VAT registration threshold at the time.
• April 2022: All VAT-registered businesses were enrolled, regardless of their incomes.
• April 2025: MTD for income tax became available for self-employed professionals and sole traders.
• April 2026: Self-employed taxpayers with an income of £50,000 or more must comply.
• April 2027: The threshold for MTD for income tax will drop to £30,000.
• April 2028: All self-employed professionals and anyone who needs to submit a self-assessment tax return with incomes of £20,000 or over must enrol – bringing all self-employed small businesses into the scheme.

The government has noted that the later phases, where income thresholds will be lowered, will be ‘kept under review’, but for the time being, we expect that, gradually, all other contractors will be required to submit returns according to the new MTD systems and rules.

What Are the Rules Associated With MTD for Income Tax?

These reforms will have a significant impact on tax planning, with an estimated 7 million sole traders and self-employed people in the UK, of whom 42% will at some point be required to join the MTD for income tax scheme

That includes 864,000 with incomes over £50,000 who must enrol by the start of the next tax year and may require contractor accountancy services to get their tax affairs in good order.

Although the main focus is on filing returns via the HMRC online portal and investing in MTD-compatible cloud-based accounting software, the bigger ramification for contractors, especially those without their own dedicated accountant, is that they will be expected to submit HMRC reports every three months. 

This will work similarly to quarterly VAT returns, but for those who aren’t already preparing regular management accounts, this could mean quadrupling the time they spend on accounting and reporting. We’d always suggest that contractors should have continual oversight over project costings and margins, but there is no doubt that for many of our clients, this will create additional work.

Throughout each tax year, contractors will need to provide an income and expenses summary, submitted electronically, by:

• 7th August for the period from 6th April to 5th July
• 7th November for the next quarter, up to 5th October
• 7th February for the quarter from 6th October until 5th January
• 7th May for the period from 6th January to 5th April

Alongside these reports, contractors will need to prepare a final declaration after the end of the tax year, with a deadline of 31st January as per the current self-assessment statutory deadlines. That final report will need to include any tax adjustments.

Are There Scenarios Where Contractors Can Claim Exemption From MTD for Income Tax?

Unfortunately, there are few situations where a contractor with an income over the £50,000 threshold will be exempt. Exclusions are only available if there is a clear and justifiable reason, such as where contractors cannot submit digital returns because they work in very remote locations with no accessible internet connection.

Non-compliance is inadvisable, because four penalty points will be levied for every quarterly report that is late or missed, with an additional two points for late or missing annual accounts submissions. Contractors will be subject to a fine starting from £200 once they reach a certain number of points.

How Do MTD Rules Impact Contractor Accountancy?

The most meaningful outcome will be that contractors must ensure they are using MTD-compatible accounting software, have up-to-date records to be able to produce quarterly returns, and have the necessary resources to file all reporting on time.

MTD is strongly focused on compliance, which means any other form of record-keeping, such as using spreadsheets or manual documentation, must be updated, and any data relevant to the reporting period that is stored outside of a compatible software system will need to be transferred over.

While we’d encourage contractors to maintain current records to ensure they have ongoing oversight of their finances, cash flow and the health of their businesses, it now won’t be sufficient to have a ‘rough’ idea of incoming and outgoing payments, or to leave data entry tasks until the end of the tax year.

Support With Preparing Accounting and Reporting Functions for Making Tax Digital From Our Expert Team of Accountants for Contractors

As we’ve seen, MTD for income tax can be seen as a positive step to implementing best practice bookkeeping and record-keeping for contractors around the UK. Still, it’s also incredibly likely to cause an administrative headache for those reliant on traditional forms of accounting, who aren’t using a compliant software system.

Our specialist contractor accountants are available to provide further information, whether you’d like independent recommendations about the best software upgrades or need ongoing support with preparing reports and returns to stay compliant with MTD.

We at James Todd & Co offer a free consultation service for new enquiries and welcome you to get in touch to learn more about how a dedicated team of accountants for contractors can assist, with an easy software switching service to ensure you’re ready for the fast-approaching deadline.