Draft legislation for MTD for income tax was published on Legislation Day on 21 July 2025. While the new draft legislation provides a measure of certainty and reaffirms the direction of MTD policy, it also reignites ICAEW’s concerns. These include the burdens associated with quarterly reporting, the lack of an HMRC service to file a tax return once in MTD income tax and the lowering of the mandation threshold before the system has been tested. 

In addition, the legislation confirms:

• exemptions and deferrals for certain groups of taxpayers;
• simplification of the rules for those that choose calendar rather than tax year quarters, who will now have a start date of 1 April rather than 6 April; and
• HMRC’s power to cancel or reset late submission penalty points and cancel financial penalties.

To make the legislation easier to read and understand, the government has chosen to have a new consolidated set of regulations and not to update the existing MTD income tax regulations.

Reduction in threshold to £20,000

The draft legislation confirms the announcement made at the Spring Statement 2025 to extend the MTD income tax requirements to individuals with annual turnover exceeding £20,000 in the 2026/27 tax year from April 2028. 

This is a significant reduction from the original threshold of £50,000 (reduced to £30,000 from April 2027) and marks a major policy shift that will directly affect an estimated one million additional taxpayers. Among those newly impacted will be a substantial number of property landlords, including many individuals with just a single let property.

ICAEW warns that this reduction comes just two months after the first mandatory annual tax returns under MTD income tax are due, leaving little time for policymakers to evaluate the real-world effects of the initial implementation before it is rolled out more widely.

Compliance burden and software requirements

A core component of the digital approach is the requirement that affected taxpayers use commercial software to fulfil all aspects of their tax obligations – not just quarterly reporting. The new legislation confirms that MTD-compatible software will be required to submit the end-of-year return (ie, HMRC will not be providing any software for the process). This means that taxpayers will be responsible for selecting a suitable product with all the necessary functionality, including submitting the end-of-year return.

This creates a host of new challenges. Many individuals, particularly those new to digital record-keeping, may struggle to understand the differences between available software products or even know what questions to ask when choosing a solution. This is especially true for landlords and small businesses with relatively simple tax affairs, for whom the new requirements could represent a disproportionate compliance burden. 

Earlier this year, ahead of confirmation that HMRC would not be providing an online service for taxpayers in scope of MTD income tax to file their year-end tax return, ICAEW wrote to the Exchequer Secretary to the Treasury (XST), James Murray MP, setting out its concerns. 

Quarterly updates: value versus cost

ICAEW has consistently supported the overall aim of digitalising the tax system and improving accuracy through digital record-keeping. However, ICAEW remains firmly opposed to the mandated quarterly update element of the MTD income tax requirements. In its view, quarterly updates add complexity and cost with little  tangible benefit to taxpayers or HMRC.

Instead, ICAEW has advocated for keeping the familiar annual reporting cycle, augmented by the digital record-keeping requirements of MTD income tax. It has suggested that quarterly updates should be optional rather than mandatory, allowing businesses and landlords to decide what works best for their circumstances. 

Despite these recommendations, quarterly reporting will be introduced. This represents a significant change in workflows and deadlines, increasing the urgency for taxpayers and their agents to prepare.

Readiness of systems and stakeholders

With less than a year before the new requirements take effect, there is considerable work to be done by both HMRC and software developers to ensure that systems and products are robust, user-friendly and capable of meeting the diverse needs of taxpayers. ICAEW underscores the importance of comprehensive preparation, not only by those directly impacted but also by the accountants and agents who will be tasked with supporting their clients through the transition.

Taxpayers and agents are urged to begin the process of digitalisation as soon as possible, to allow time for selecting appropriate software, training and adapting internal processes to meet the new requirements. Professional agents will play a critical role in offering guidance, especially for those who may find the transition to digital record-keeping daunting.

Background to MTD income tax

MTD income tax represents a fundamental overhaul of the way income tax is reported for millions of sole traders and landlords. Its ambition is to modernise the tax system, driving the digitalisation of accounting records and the filing process. Under the new requirements, those in scope must maintain digital accounting records and use compatible commercial software to submit quarterly updates and annual tax returns to HMRC.

Find out more at icaew.com/mtd