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The UK's tax system is in for an overhaul with an important August deadline. Making Tax Digital (MTD) for income tax began on April 6. It requires businesses and individuals to maintain digital records and submit quarterly updates, instead of annual ones, to HMRC, using compatible software.

A final tax return must also be submitted by January 31 of each year. As regards VAT, it is mandatory, while MTD for income tax applies to self-employed people and landlords with qualifying income over £50,000. This drops to £30,000 in 2027. The Government reaffirmed in March that this would decrease further to £20,000 in 2028.

Officials say the policy aims to improve the accuracy of tax reporting, reduce avoidable errors, provide a simpler, more modern digital tax system and support long term tax administration reformterm tax administration reform. If Brits did not submit their quarterly reports to HMRC in the 2026/27 tax year, they would not receive penalty points or £200 fines in what has been referred to as a "soft landing".

But penalties for late final declarations and late tax payments would still apply, taxzap highlights.

Then, from 2027/28 onwards, the full penalty system applies to quarterly updates.

The Q1 deadline is August 7.

The fine system is points based, with people falling foul of the new rules subjected to a £200 fine if enough are accumulated.

Missing a final declaration will speed up the process of reaching the threshold.

making-tax-digital.com outlines the new system:

Potential challenges posed by the new system have been highlighted by LandlordZONE, including "digital exclusion".

The site said that "currently not all taxpayers have access to digital tools or the skills they need to use them".

This is a "critical hurdle to be overcome if MTD is to be successfully implemented is fair to all".

In addition, software costs must be forked out for.

"It is important that software costs are manageable, particularly for small businesses and lower-income individuals, but some software will have the dual function of managing accounts as well as tenancies," the specialist website added.

Moreover, "the transition to digital record-keeping and reporting to HMRC will take some getting used to for most people".

"Support and clear guidance from HMRC will be a crucial feature of the change to facilitate a smooth transition", a piece on the site said.

Initial costs for SMEs have also been highlighted by The Gazette, as well as an "increased reliance on accountants".

Digital exclusion was mentioned, too.