Rob Rees, Divisional Director at Markel Direct
With the 2026 self-assessment tax return deadline now passed, the transition to Making Tax Digital for Income Self-Assessment (MTD for ITSA) is underway.
From April 2026, as part of the government’s plans to modernise the tax system, self-employed business owners with a qualifying income exceeding £50,000 will transition from submitting an annual tax return to providing quarterly updates. The aim of moving to an online tax system is to help reduce errors, improve record-keeping and help businesses stay compliant.
Rob Rees, Divisional Director at Markel Direct, the business insurance specialist, breaks down what HMRC’s Making Tax Digital for Income Tax Self-Assessment is, gives guidance on who will be impacted by the switch and how to best prepare.
What is Making Tax Digital for Income Tax Self-Assessment, and who does it affect?
HMRC is moving towards quarterly tax reporting to improve the accuracy and efficiency of tax for income tax self-assessments. The initiative is currently mandatory for all VAT-registered businesses. However, the proposed changes will see the initiative expand to income tax for self-employed individuals and landlords with qualifying incomes over £50,000 from April 2026, and over £30,000 from April 2027.
MTD for ITSA will require freelancers, sole traders and landlords to:
- Keep digital records of income and expenses.
- Use HMRC-compatible software for submissions. Spreadsheets and manual uploads will no longer be acceptable.
According to the government’s projections, about 780,000 people will be affected by this threshold based on their income reported in the 2024/25 tax return. The rules for those earning under £30,000 are still being reviewed, but they can choose to sign up voluntarily.
What does this change mean for small businesses?
In addition to moving from one tax return per year to one every quarter, which is followed by a final end of year declaration, the initiative will also impact how freelancers, sole traders and landlords manage risk.
Common issues with tax returns include poor record keeping, late submissions and inaccurate figures, and under MTD for ITSA they could still persist if systems aren’t set up correctly.
Simple things, such as a missed update, broken software link or incomplete data feed could create problems that snowball over time if not addressed. For small businesses where owners often handle finances themselves, this can increase exposure to:
- Late filing penalties
- Incorrect tax payments
- Cash-flow surprises caused by inaccurate reporting
- Admin stress during audits or HMRC checks
Making Tax Digital risk considerations for small businesses
As the move to MTD for ITSA requires more dependency on technology, data and ongoing processes, rather than annual paperwork and receipts, the type of risks that small businesses encounter are also changing.
Greater reliance on software and data
Digital processes are replacing paper records and manual submissions, with small businesses expected to use compatible software to report their figures. However, if systems fail, links break between platforms, or data is corrupted, businesses may struggle to submit accurate information on time.
These potential issues highlight the importance of making regular back-ups and taking the time to understand both the accounting software and reporting requirements, reducing the likelihood of issues being caused by human error.
Cyber and data security exposure
Tax return records contain sensitive financial and personal information, and with the shift to a digital landscape where data will now be transferred between systems, the risk of cyber incidents, accidental data loss or ransomware increases.
Due to the tax submissions changing to quarterly (from the current once a year), there is potential for disruptions to have a greater impact. For example, if tax return self-assessment submissions were delayed due to a cyber incident, system outage or lost records, businesses could potentially face penalties or unexpected tax adjustments. For smaller businesses, this could have a drastic impact on cash flow and day-to-day operations.
Not being prepared for the change
The most immediate risk to small businesses is not being prepared for the change to MTD for ITSA, as late submissions will ultimately lead to financial penalties.
HMRC is applying a points-based approach to penalties; each missed quarterly update will result in 1 penalty point, with 4 points triggering a £200 fine. After this threshold, each missed update will result in another £200 fine.
As there will be five submissions in total per year (quarterly, plus one annual declaration), and points only reset after 24 months of compliance, the cost of missing submissions could result in costly fines for small business owners.
The digital pivot: how to prepare for the switch
Tax returns can be daunting for any business, especially for sole traders, freelancers and landlords who might manage their tax affairs without the help of an accountant. Here are five key takeaways to consider ahead of the transition.
1. Check software compatibility
Not all accounting tools are compatible with MTD for ITSA. Freelancers, sole traders and landlords should ensure that their bookkeeping or accounting software is HMRC-compatible and capable of submitting data directly. If not, it should be changed promptly. Small business owners who manage their own taxes should also ensure they are familiar with the software and the reporting requirements.
2. Build tax into routine operations
Due to the quarterly submissions, it is recommended that businesses view the tax process as ongoing. Monthly reviews of figures help reduce errors, improve visibility and support better cash-flow forecasting.
3. Review how records are kept
If income and expenses are still tracked manually, these should be moved into a digital system. HMRC requires records to be kept digitally and transferred via ‘digital links’, rather than copied and pasted between systems. Doing this now will help streamline submissions.
4. Assign responsibility
Whether it is the business owner, or an external accountant, someone must own responsibility for submissions and software maintenance. This will reduce the likelihood of errors caused by confusion or duplication.
5. Upgrade cyber defences
As tax reporting becomes digital, exposure to cyber incidents increases. Small businesses should review whether basic cyber security protections and procedures are in place, such as anti-virus software, strong passwords, regular software updates and secure backups, to reduce the risk of disruption, data loss and delayed submissions.
With the transition to Making Tax Digital fast approaching, it is essential for freelancers, sole traders, and landlords to prepare accordingly. Becoming proficient with accounting software compatible with Making Tax Digital, ensuring thorough expense documentation, and clearly understanding reporting requirements are all critical measures to prevent unforeseen penalties.
Please note: This article provides guidance for information purposes only. It should not be relied upon wholly when making or taking important business decisions – always seek the services of an appropriately qualified professional.
