From 6 April 2027, around a million more sole traders and landlords will have to keep digital records and report to HMRC every quarter. The threshold that decides who is caught measures turnover rather than profit, and this piece argues that is the wrong yardstick.
This is an opinion piece. It reflects the views of the author, not an institutional position of London Loves Commerce.
What is actually changing, and when?
Making Tax Digital for Income Tax is being phased in by income band. According to GOV.UK guidance, the test is applied to qualifying income for an earlier tax year, in three steps:
| Qualifying income in tax year | Threshold | Must use MTD from |
|---|---|---|
| 2024 to 2025 | Over £50,000 | 6 April 2026 |
| 2025 to 2026 | Over £30,000 | 6 April 2027 |
| 2026 to 2027 | Over £20,000 | 6 April 2028 |
HMRC’s October 2026 announcement says the £30,000 stage will bring in about 1,077,000 additional sole traders and landlords, based on its analysis of 2024 to 2025 Self Assessment returns. The first stage is already running: HMRC reported in August 2026 that more than 570,000 customers had signed up and over 436,000 had sent a first quarterly update.
Those in scope must keep digital records in compatible software and send quarterly updates of income and expenses, then complete their tax return. The updates are summaries by category, not receipts and invoices, and they are still required in a period with no income or expenses.
Why is turnover the wrong measure?
Qualifying income is the total of gross self-employment and property income before expenses. That is turnover, not what the business keeps.
Illustrative arithmetic shows the problem. Take a hypothetical sole trader running a market stall or a small reselling business with £32,000 of turnover and £24,000 of costs. Profit is £8,000. The business is in scope because £32,000 exceeds £30,000. Next door, a consultant with £28,000 of turnover and almost no costs, so a profit near £27,000, is outside the rules entirely.
The first trader earns less than a third of what the second does, yet carries the compliance burden. Margins vary hugely between retail, hospitality, trades and professional services, and London’s high rents and wage costs widen the gap. A turnover line catches thin-margin, high-volume businesses hardest. Those are the shops, caterers and traders that this magazine’s coverage of London’s financial pressures on small firms describes as already stretched.
Does the penalty regime make the burden heavier?
There is a grace period. HMRC says no penalty points apply to late quarterly updates in 2026 to 2027 for those required to use the system from April 2026. From 6 April 2027, each missed quarterly deadline earns one point, and four points trigger a £200 fixed penalty.
The cadence is demanding. Standard-period updates are due by 7 August, 7 November and 7 February, with the final period’s update due by 7 May. Four deadlines a year can be met by anyone with decent software and tidy habits. The risk falls on the owner who handles the books in the evenings after a full shift, and for whom a missed date is more likely to be an oversight than an evasion.
The strongest case for the policy
The government’s case deserves a fair hearing. Digital records reduce the arithmetic errors that make HMRC’s job harder, and quarterly summaries mean owners see their position during the year rather than discovering it in January. Better visibility is exactly what any owner who wants to understand cash flow needs. Many sole traders already use accounting software, and for them the change is modest.
There is also a practical argument for turnover. It is simple, visible to HMRC from existing returns, and avoids the arguments that a profit test would invite about what counts as an allowable expense. A test that can be applied from returns already filed is administratively cheap. HMRC’s own guidance confirms that exemptions exist, with digital exclusion given as one example.
Where that argument falls short
Simplicity for HMRC is not simplicity for the taxpayer. The cost of compliance is largely fixed: software, learning time and four extra deadlines are roughly the same for a business with £8,000 of profit as for one with £80,000. A fixed cost is a heavier proportion of a smaller profit.
The better design would be a profit-based or blended test, or at minimum a lighter route for businesses whose turnover is high but profit is low. That could involve annual reporting with digital records, or a longer grace period. Neither is law today, and nothing in the published guidance suggests the turnover test is about to change, so owners should plan on the rules as they stand.
The £20,000 step planned for April 2028 sharpens the point. At that level, a part-time landlord with one flat or a person selling crafts alongside a job could be pulled in. As of October 2026, HMRC’s announcement says the threshold decreases to £20,000 from April 2028, though readers should check current GOV.UK pages as that stage is further away.
What London’s smallest operators should watch
Several practical points follow from the published rules, described here as information rather than advice:
- Qualifying income counts gross figures, so a business near £30,000 of turnover in 2025 to 2026 is the one to watch.
- HMRC has said it will write to those whose returns show income above the relevant threshold.
- Voluntary sign-up is possible before the mandatory date, and HMRC’s director of Making Tax Digital has said that signing up early lets people “prepare and familiarise yourself with the process”.
- Owners squeezed by rising costs may find the practical challenges facing new London businesses include record-keeping habits they have not yet built.
A fairer line is still possible
Making Tax Digital will probably improve the quality of small-business records over time. The objection here is narrower: a line drawn at turnover treats a business keeping £8,000 as if it were a business keeping £27,000. With more than a million additional people about to be brought in, there is time to soften the edges before the compliance cost lands on those least able to carry it.
General information only, not tax, legal or financial advice. Rules and thresholds change, so check current official guidance.
Sources: HM Revenue and Customs; GOV.UK
