Adam explains why flooring contractors should get ready for making tax digital for income tax.

A NEW tax regime from 2026 will significantly change how the self-employed report their income. And given that, according to data from the Office for National Statistics, between October and December 2024 there were some 773,000 involved in the construction trades (flooring wasn’t singled out in the data), the new regime is likely to affect a significant number of people in the trade.

The background to the change goes back to something called the ‘tax gap’ – the difference between how much tax should be paid and how much is actually collected. A 2024 report estimated it at almost £40bn, with around half that shortfall being due to taxpayers either making mistakes or failing to take reasonable care with their tax affairs; small businesses are one of the biggest risk areas.

Making Tax Digital for Income Tax (MTD) is part of the government’s strategy to reduce the gap. It introduces requirements for small businesses to keep digital records and submit information to HMRC in closer to real-time.

Who MTD will affect
According to David Wright, a technical officer at the ATT, MTD applies to unincorporated businesses – sole traders and the self-employed – and landlords and will be introduced in phases.
Wright explains that the date from which a taxpayer might have to join MTD will depend on their combined level of income from trading and property, before expenses. HMRC call this ‘qualifying income’

He says ‘from April 2026, taxpayers with qualifying gross income of more than £50,000 will need to comply with MTD. From April 2027 that will drop to income over £30,000. While we’re only referring to businesses here, if the owner is also a landlord, they’ll need to look at their total income (before expenses) from both sources’.

Wright gives an example – someone who is a self-employed fitter whose business has an annual turnover of £48,000 will have to comply with MTD from April 2027. He notes that if they also have a rental property generating gross rent of £15,000 per year, ‘both sources of business income would need to be combined, meaning they’d be in scope of MTD from April 2026, a year earlier, as the combined qualifying income is over £50,000’.

For now, Wright says taxpayers with qualifying income under £30,000 can continue without change, but ‘government plans to extend MTD to those with qualifying income above £20,000 at some point during the current parliament’.

The intention is to also extend MTD to cover partnerships and limited companies at some point too.

What MTD will involve
Wright explains that MTD has three key components: digital records, quarterly updates, and a year-end declaration.

Under digital records, Wright says taxpayers will have to use software to keep digital records of the amount, category and date of income and expenses relating to their business.

Then there are quarterly updates where, as he tells, ‘a summary will have to be submitted to HMRC of the income and expenses of the business every quarter, based on the digital records kept’.

He continues: ‘The quarterly updates won’t be as detailed as the annual tax return, but a separate quarterly update will be needed for each trade or property business.’ He warns here that if a person also rents out a property, they will have eight quarterly submissions to make each year.

Next comes the year-end declaration. As Wright details, after the fourth quarterly update has been submitted, the taxpayer will need to file a ‘digital tax return’. He says that it’s similar to the current Self-Assessment return and ‘will pre-populate income and expenses from the quarterly updates already filed; the entries will need to be adjusted for accounting and tax purposes.’
He adds that any non-business income sources – bank interest, salaries or pensions – will need to be reported too while also claiming relevant tax reliefs.

Lastly are digital links. ‘This,’ as Wright says, means that ‘all transfers of data will have to be sent digitally. This includes submitting quarterly updates, making any corrections, and filing the year-end declaration.’ It also includes transfers of business records, for instance between the taxpayer and their bookkeeper or accountant.

The due dates for paying tax won’t change – tax will still be due by 31 January after the end of the tax year, and most will still need to make ‘payments on account’ by 31 January and 31 July.

Getting ready for the change
The exact date from which taxpayers have to comply with MTD will depend on the qualifying income reported on their most recent tax return.

For instance, tax returns for the year ended 5 April 2025 will be due for submission by 31 January 2026. If that tax return reports gross qualifying income of more than £50,000, that individual will have to join MTD from April 2026.

Here Wright warns that ‘if business owners don’t plan in advance, they could only have two months to prepare for MTD after filing their 2024/25 tax return.’

And if someone has set up in business since April 2024, Wright says they’ll need to scale their income: ‘Take a business that started on 1 January 2025 and has earned gross income of £10,000 per month. The 2024/25 tax return will show £30,000 of income, which is below the MTD threshold for April 2026. But they’ll need to adjust that to estimate a full year’s worth of income – £120,000.’ Therefore, they’ll need to comply with MTD from April 2026.

Helpfully though, HMRC has an online tool which may help to check when to start using MTD1.
Another issue for Wright is recordkeeping. Here he says that ‘if a taxpayer keeps paper receipts and tends to work out the accounts and tax position after the end of the year, they’ll need to start using software and keep records on a timelier basis.’

For small, straightforward businesses, a spreadsheet will help. ‘Bridging software’ is already available to feed the data from spreadsheets into other software products which can support MTD filing obligations. HMRC’s software choices webpage shows what compatible software is available2.

Even so, the demands of record keeping and administration will increase for the majority of businesses affected by MTD. This is why Wright reckons that ‘those that don’t already have an adviser may find it worthwhile seeking recommendations and finding qualified professionals who can support the business with MTD’.

Finally, while HMRC will be writing to taxpayers it believes needs to comply with MTD, anyone in scope of MTD will need to register; HMRC won’t do it for them automatically.

Summary
Whether taxpayers like it or not, change is coming. It makes sense, therefore, to seek advice sooner rather than later on how to comply.

HMRC’s guidance about MTD – Making Tax Digital for Income Tax is available on GOV.UK, along with Benefits of Making Tax Digital. And the Association of Tax Technicians has published a Frequently Asked Questions page with further information about MTD3.
Adam Bernstein is an independent columnist