HMRC’s new rule change ‘confusing’ as 100,000 in UK ‘need to sign up’

More than 100,000 people have yet to sign up for Making Tax Digital (MTD), a policy branded as “ill-thought-out”, as small business owners and accountants warn that “it feels like an unnecessary hurdle”. The scheme represents a significant overhaul of how individuals managing their own taxes complete their returns and carries the force of law.

The principal change requires workers and businesses who file self-assessment returns to submit figures on a quarterly basis, rather than completing a single annual tax return. An analysis of HMRC figures by the Low Incomes Tax Reform Group (LITRG) indicates that just over half of the 216,000 unrepresented taxpayers obliged to participate in MTD from April 2026 have yet to register, more than two months after its launch.

HMRC maintains that the new system will simplify the tax process, offering individuals greater insight into their business performance while helping them estimate their tax liability. From April 2026, taxpayers with gross income exceeding £50,000 from self-employment or rental income are legally obliged to use MTD. The threshold will fall to £30,000 from April 2027 and further to £20,000 from April 2028.

Of the 216,000 unrepresented taxpayers HMRC anticipates will fall within scope this year, approximately 111,000 have yet to register, according to LITRG. This figure accounts for roughly 52% of the unrepresented taxpayer population.

HMRC Making Tax Digital quarterly updates

Taxpayers are required to maintain digital records, submitting quarterly updates of their income and expenditure alongside an annual tax return. However, small business owners and accountants have warned that many have yet to register for MTD, either due to the bewildering sign-up process or simply a lack of awareness.

Harvey Dhillon, founder and CEO at accountants Zmartly, said he was not surprised the message hadn’t reached many small business owners.

He added: “The 100,000 who still haven’t signed up are the unrepresented taxpayers, the people with no accountant to nudge them, so it is little wonder the message hasn’t reached them. It is worth being clear that Making Tax Digital is an administrative change, not a new tax.

“The reporting itself is lighter than many fear, the real hurdle is getting compatible software in place and building the habit. HMRC has sensibly said it won’t charge late-update penalties in the first year and that reassurance deserves to be front and centre.

“Digital records should reduce careless errors over time, but rushing the least-equipped risks more mistakes, not fewer. If you are over the line, get set up before the early-August update, not in the scramble the night before.”

System is ‘confusing’

Dr Marianne Trent, clinical psychologist at Coventry-based Good Thinking Psychology, said the system was too confusing.

She added: “Honestly, as a business owner who is registered for MTD, I’d say it’s all been pretty confusing. I have an accountant and so even though I received a letter from the HMRC telling me about it, I wrongly assumed my registration would be handled by my accountant. It could well be that other businesses have also assumed the same.

“Thankfully I did manage to register before the sign-up deadline, but exactly what lies in store for my first regular return next month I’m not quite sure. It feels a little bit like at this stage I am just hoping and keeping my fingers crossed that Xero does it all for me.

“I personally and professionally find it a bit disheartening that this extra step has been added as I was already reporting and paying my tax correctly, so it feels a little bit of an unnecessary hurdle for already law-abiding companies.”

Matthew Knight, chief freelance officer at Freelancing.Support, warned that the changes had not received sufficient publicity.

He added: “New policies need to come with better communication, education and support. This is the biggest change in over 20 years in how tax is reported, yet awareness, action and readiness is painfully low for those who don’t have accountants.”

Making Tax Digital effect on landlords

Bob Singh, founder of Uxbridge-based Chess Mortgages, warned that landlords were set to be severely impacted by the policy.

He continued: “MTD is yet another ill-thought-out policy designed to put off small businesses from expanding to higher levels of turnover because they will be forced to spend more time filing returns. The inclusion of rents in this £50,000 per annum limit makes no sense. Anyone with two or three properties will now have to file their returns four times a year.

“On one hand HMRC doesn’t see Buy To Let as a business and yet they want it to be included in your turnover. While the idea may be to drive everyone to trading as limited companies, HMRC haven’t really thought about how to make it easier for portfolio landlords to transfer legal titles into a limited company without a convoluted route. The accountants will be overworked and HMRC, who are already under-resourced, will have to spend millions enforcing this.”

Colette Mason, AI ethics consultant at London-based Clever Clogs AI, suggested the Government was targeting smaller enterprises rather than larger corporations.

She continued: “What gets measured gets managed and quarterly reporting should at least stop the annual panic and nasty tax shock a few of my fellow business owners seem to end up with. If only the same pathological pursuit from HMRC were applied to bigger companies and their forensic approach to minimising tax and covering their financial tracks. I suspect that might be more lucrative and rather more electorate-friendly than picking at the soft underbelly of people grossing £50,000.”

Outlining the new system, HMRC said: “With Making Tax Digital for Income Tax, you’ll use your digital records to send quarterly updates to HMRC. Sending quarterly updates will give you a better view of the health of your business and help you estimate your tax bill. Every time you send a quarterly update, you’ll be able to see an updated in-year estimate.”