Which Sole Traders Must Use Making Tax Digital?
Making Tax Digital (MTD) is a government initiative aimed at modernising the tax system by requiring certain taxpayers to keep digital records and submit their tax information to HM Revenue and Customs (HMRC) using compatible software.
For sole traders in the United Kingdom, MTD for Income Tax Self Assessment (ITSA) currently applies if your business’s annual turnover exceeds £85,000, which is the VAT registration threshold for the 2023/24 tax year.
Who Must Use MTD for ITSA?
- Sole traders with business income over £85,000 per year: If your self-employed turnover exceeds this threshold, you must keep digital records and send income tax updates to HMRC quarterly using MTD-compatible software.
- VAT-registered sole traders: If you are registered for VAT, you are already required to use MTD for VAT, which is a separate but related obligation.
Who Is Exempt or Not Required to Use MTD?
- Sole traders with turnover below £85,000: If your annual turnover is below the VAT threshold, you are not currently required to use MTD for ITSA and can continue to file your Self Assessment tax return in the usual way, either online or on paper.
- Certain taxpayers with specific circumstances: HMRC may grant exemptions or special arrangements in limited cases, such as those with disabilities or religious objections. These exemptions are not automatic and require an application to HMRC.
Practical Example
Jane runs a small catering business with a turnover of £60,000 per year. She completes a Self Assessment tax return but is not required to use MTD for ITSA. She can keep her records as usual and submit her annual return online or on paper.
Tom operates a plumbing business with a turnover of £120,000. Because his turnover exceeds the VAT threshold, Tom must use MTD for ITSA. This means keeping digital records and submitting quarterly updates to HMRC through software compatible with MTD.
Record Keeping
Regardless of whether you must use MTD, you need to keep accurate records of your income and expenses to complete your Self Assessment tax return correctly. If you are required to use MTD, those records must be digital and submitted via compatible software.
Further Confirmation
Because rules can change and individual circumstances vary, it is advisable to check the latest guidance from HMRC or consult a tax professional if you are unsure whether you must comply with Making Tax Digital for your sole trader business.
Official reference: https://www.gov.uk/self-assessment-tax-returns. Always check the latest official guidance. Related forms: Browse our form category.
Important: This article provides general information. Government rules, forms and procedures can change, and this article may not reflect the latest updates. Check current GOV.UK guidance or the relevant authority before relying on it. ITG & Co. is independent and is not affiliated with a government department.