How to prepare for Making Tax Digital

Self-assessment is one of those tasks like MOTs or sweeping the chimney. It’s often neglected until the absolute last minute and, as a result, many people file their tax return late. In fact, an estimated 1.1 million people missed the deadline in 2025, resulting in penalties of at least £100 per person. Of those who filed in time, 31,000 returns were submitted in the final hour before the cut-off – midnight, 31 January.

However, the rules are set to change this year. On 6 April, the government is introducing Making Tax Digital (MTD) for Income Tax. For the first year, the scheme is aimed at sole traders (and landlords) if their combined annual income from self-employment and property is over £50,000.

According to HMRC, the changes have been introduced to make it easier for individuals and businesses to manage their tax affairs and reduce basic errors, as well as avoiding the scramble to file returns at the end of January.

These errors currently contribute to significant annual tax losses. MTD for VAT has already been rolled out, and HMRC believes it has improved accuracy and compliance.

“For plumbing and heating engineers, the big change will be ensuring they are set up early,” says Lee Murphy, managing director at The Accountancy Partnership.

Quarterly updates will be due on 7 August, 7 November, 7 February and 7 May. “You still finalise the year by the usual 31 January deadline; quarterly reporting doesn’t automatically mean quarterly tax payments,” says Murphy.

Businesses can do this by using compatible software that logs and records spending, captures receipts, syncs with bank feeds and logs mileage. “Then you can do quick monthly check-ins so nothing piles up,” adds Murphy.

He likens it to van maintenance: a little consistency beats a breakdown. “Get into a regular habit of uploading receipts, reconciling your bank, checking unpaid invoices and logging mileage. If your records are up to date, quarterly updates are quick, and year-end becomes a tidy-up rather than a rebuild.”

What installers need to know

HMRC estimates that 864,000 taxpayers will be affected by the changes in the introductory year, and this will include a large number of plumbing and heating engineers.

The quarterly reporting will mean an extra level of admin and, as a result, HMRC recommends using MTD-compliant software that automatically creates, stores and corrects digital records of income and expenses.

Mike Parkes, technical director at self-employed accounting software company Coconut, says that this means that for every transaction you should record the amount (income or expense), the date it was received or paid, the category (such as materials, travel or rent) and (if relevant) whether it relates to self-employment or property income.

“This will need to be done using cloud-based or approved accounting software, rather than paper invoices and manual record-keeping at the end of the year.”

Parkes advises plumbing and heating installers to check if their existing accounting software already supports MTD for Income Tax and, if not, whether it’s due to receive a relevant update. “It’s important to check this well ahead of April,” he says, “so you have enough time to sign up to other software if your current supplier is not compliant.”

MTD also overlaps with the Construction Industry Scheme (CIS), making reporting more complex. CIS already requires accurate monthly reporting on tax deductions, and this must be brought in line with MTD reporting.

Installers should be aware that certain accounting software is compatible with both, meaning that records can be digitised, maintained and submitted properly and without error, so when you are choosing software, ensure it is both MTD and CIS compliant.

Preparation is key

“Installers should start preparing as early as possible, particularly if they do not currently use accounting software,” says Parkes. “Choosing MTD-compliant software or a bridging solution early allows time to learn how it works and get used to updating records regularly.”

Even if your business is not eligible this year, it’s worth getting ahead, as by 2028, every sole trader will be required to report in this way. Those with a gross income between £30,000 and £50,000 will need to comply from 6 April 2027, and those with gross income between £20,000 and £30,000 will follow in April 2028.

Business expenses are a major part of being a sole trader, and many can be deducted from taxable profits to reduce your income tax bill.

“To be classed as allowable, an expense must be incurred wholly and exclusively for business purposes,” says Parkes. “Where an expense is partly personal, a reasonable business proportion must be calculated, or a flat-rate method used where permitted.”

For plumbing and heating engineers, allowable expenses may include property-related costs such as rent, mortgage interest, business rates, utilities and insurance if you have a business property. If you work from home, you may also be entitled to claim a fixed amount or actual expenses depending on your circumstances.

Other common expenses for installers include marketing and advertising, websites, professional fees, vehicle and travel costs, accommodation and specialist or protective work clothing.

“Tools and equipment are an area people forget, and bigger items may need claiming via capital allowances rather than as day-to-day expenses,” says Murphy. “The key is keeping receipts and notes on what each purchase was for.”

Accounting software helps you track expenses by taking photos or uploading receipts. “MTD-compatible software with bank feeds and a receipt-capture app, plus a separate business account, will make engineers’ lives easier,” says Murphy. “If you don’t want admin eating into evenings and weekends, outsourcing bookkeeping or payroll can be cost-effective, as it turns MTD into a simple review and approve process.”

Being prepared and on top of your accounts will mean you’re less likely to get stung by fines for year-end non-compliance – at least for the first 12 months. “The Budget confirmed there will be no penalties for quarterly submissions in the first year,” explains Parkes. However, this announcement is a little confusing as penalties will apply in future.

“MTD for Income Tax uses a points-based penalty system for late submissions, failing to keep digital records or not using digital links where required. People could face penalties of at least £200 based on points accrued.”

Feeling the effects

So how will this change in tax reporting help plumbing and heating installers? Parkes says that one of the main benefits of MTD is improved visibility of tax liabilities. “Based on figures submitted, installers can see an estimate of how much tax they may owe, helping them plan and budget more effectively. This reduces the risk of unexpected tax bills and removes the need to gather all records at the end of the year to complete a single annual return.”

Keeping personal and business spending separate will also help when it comes to maintaining organised records, advises Benjamin Dyer, founder and CEO of job management software Powered Now. “Setting aside a regular time for check-in will enable installers to understand where their business stands and avoid the panic that often comes just before tax deadlines. It also makes it easier to spot cash-flow issues early and plan for tax payments.”

Finally, Murphy offers some sage advice ahead of the first deadline. “Put the deadlines in your diary, aim to be ready a week early and keep a ‘tax pot’ so money is set aside as you earn it. And don’t wait until you’re forced into MTD to start improving your process; even a couple of small habits now can save hours later.”

That way, you’ll be ahead of the new rules, and 31 January will no longer induce a Pavlovian cold sweat as you frantically file your return alongside your MOT and chimney sweeping.

Software designed for MTD

The main financial impact from the MTD changes is the cost of software, but in return you typically get better visibility of profits through the year and reduced last-minute corrections. Here are three apps that can help you track your finances and ensure you’re fully prepped for MTD:

Powered Now

HMRC-approved and designed specifically for trades including plumbing and heating engineers, it includes the ability to generate and send quotes, invoice, schedule, HR, create reports and submit VAT returns

Price: From £280 a year

Coconut

Coconut automatically syncs with bank feeds, is CIS subcontractor-friendly, is fully geared up for MTD and is HMRC-recognised and compliant. The app and desktop access means you can see your cash instantly so you’ll always know your profit in real time.

Price: £129.99 a year

TaxNav

Made for construction workers including plumbers and heating engineers, TaxNav tracks CIS deductions, records income and expenses, and is designed to be compatible with MTD.

Price: From £5 per month (exc VAT), but there’s a free version for simple tax affairs.