LITRG: HMRC to require tax returns through third party software for all those in Making Tax Digital

Following today’s announcement – which comes in addition to other digital requirements that taxpayers in MTD will have to follow from April 2026 when the scheme begins to be rolled out¹ – LITRG is calling on HMRC to consider easements to help taxpayers who may initially struggle to meet the requirements using third party software.

HMRC’s current free online tax return filing system helps most taxpayers to complete and submit their self assessment tax return if they choose to use it.²

It is a popular tool among unrepresented taxpayers for many reasons³, and as an official HMRC product, gives taxpayers unable to afford professional tax advice some confidence and reassurance that they are doing things right.

However, HMRC have now decided taxpayers in Making Tax Digital will instead have to use third party software to file their tax return, as well as for keeping their business records and sending updates to HMRC every quarter. HMRC say there will be free software available to meet the needs of smaller businesses, but there are currently a very limited number of free packages on the market.⁴

It is also not yet clear what functionality the free products will have, what limitations there might be, and what kind of support will be offered (if any) to users who run into difficulties.

Sharron West, technical officer at LITRG, said:         

“Today’s announcement is yet another burden on low-income taxpayers that will make it harder for them to meet their tax obligations.

“Since Making Tax Digital was first announced, we have been clear that HMRC should provide free software, like they do for self assessment, rather than rely on third party companies to help people comply with the new record keeping and reporting rules.

“Many of the small businesses who will be in scope for Making Tax Digital from April 2026 make very modest profits⁵, and there will be some that aren’t even making enough money to pay tax or national insurance.

“This has the potential to be costly, confusing and distracting from their day-to-day businesses, and even unfair when those who are not within MTD will be able to continue using HMRC’s free online tax return service.

“We were already concerned that these businesses were going to struggle to get to grips with choosing and using the accounting software they will need to keep their records up to date.

“It also means HMRC are unlikely to be able to directly support taxpayers with their self assessment filing, pushing them towards third party software companies to get the help they need. This is unsatisfactory and does not align with HMRC’s charter commitment to support people to meet their tax obligations.

“HMRC should consider granting more MTD exemptions and delaying the imposition of penalties for late filing or inaccurate tax returns until the system beds in to help those who struggle with the new requirements.”

ENDS

^{Notes for editors}

^{1. For today’s announcement see GOV.UK – under the previous design, MTD users could choose to use HMRC’s online filing service to submit their final tax return. HMRC will now require MTD customers to file their tax return through their MTD software. For background information on Making Tax Digital for income tax, including details of the MTD thresholds see Making tax digital for income tax | Low Incomes Tax Reform Group}

^{2. According to HMRC statistics, 4.5 million unrepresented taxpayers (97% of all unrepresented taxpayers) filed their 2023/24 tax returns by 31 January 2025 using HMRC’s online service (see: Self assessment stats flag digital tax challenges ahead (Accounting Web, 14 March 2025)).}

^{3. HMRC’s online filing service includes a series of structured questions about various sources of income, tailors the questions to individual circumstances, often pre-populates information such as employment income and contains lots of help and guidance, all of which helps steer a taxpayer through the year end tax return process.}

^{4. See the software choices page on GOV.UK: Find software that works with Making Tax Digital for Income Tax - GOV.UK.}

^{5. The MTD thresholds of £50,000 and £30,000 respectively relate to gross income. The business profit is after business expenses have been deducted from this, therefore some businesses in the scope of MTD are likely to have relatively low or at best, modest profits.}

^{6. The CIOT (including LITRG) and ATT recently wrote to the Exchequer Secretary to the Treasury to express concern over moving to a requirement for tax returns to be completed in third party software for those in MTD. The letter is available on the CIOT website by clicking here.}