HMRC MTD [Making Tax Difficult] chaos: low earners ‘stuck’ in digital tax net for years

A row is brewing over HM Revenue and Customs after reports that a former tradesman earning just £4,000 is being forced to comply with Making Tax Digital rules designed for far higher earners. The case, highlighted by The Telegraph, exposes a growing concern that the system is catching people it was never really built for. While the policy aims to modernise tax reporting and reduce errors, its rigid rules risk trapping low-income landlords and former sole traders in costly, complex filing requirements long after their earnings have dropped. With thresholds set to fall further in the coming years, critics warn this could become a widespread issue — turning a reform meant to simplify tax into an expensive burden for thousands.

The Telegraph has reported that HMRC is forcing a tradesman earning just £4,000 to comply with Making Tax Digital (MTD). Garry Piccolo was a glass installer and changed from being a sole trader to an employee last year. However, the rules say that he has to carry on reporting 5 times a year under the MTD scheme for another three years even though his sel-employed income is now under the current threshold for reporting digitally.

Garry earns less than £4,000 now in rental income from a property and the rest of his income is covered for tax under the Pay As You Earn scheme through his employer.

Landlords, businesses and the self-employed with a turnover of at least £50,000 must submit tax information quarterly, plus submit an end-of-year self-assessment since April 6. But the new rules also mean many taxpayers who no longer earn as much as the £50,000 income threshold may be trapped in the scheme for another three years.

Garry Piccolo is reported to estimate that the extra tax filings could cost him £2,500 a year in accountancy fees over that time and is seriously fed up as he’s over retirement age and doesn’t want the hassle. He’s not alone in that as others in similar positions are taking steps to make sure their earnings don’t reach £50,000 so that they aren’t caught in MTD reporting. However next year the threshold falls to £30,000 and again to £20,00 in 2028.

Under HMRC’s MTD rules, taxpayers can only exit MTD once their income falls below the qualifying threshold for three consecutive years, unless the income source stops permanently.

Gary Piccolo still receives some profit from properties, so the income source hasn’t stopped permanently and he’s caught having to continue to submit reports for that income.

HMRC has been accused of not explaining the new rules clearly enough to taxpayers. Accountant Alex Falcon-Heurta FCCA Founder of Soaring Falcon says: “There doesn’t seem to be any real ‘get out’ clause here and HMRC has made things unnecessarily challenging, especially in situations like this. There are more cost-effective ways to approach it, but the wider understanding just isn’t there yet and MTD hasn’t been rolled out in a properly phased way.”

MTD was introduced to modernise the tax system and reduce the billions of pounds a year lost to evasion, avoidance and accidental errors. It was launched for larger VAT-registered businesses in 2019 and expanded in 2022. From April 6 this year, the scheme was expanded to include 864,000 landlords and self-employed workers with an annual turnover of at least £50,000. The MTD team at HMRC has said that, where a self‑employment or property income source has permanently stopped, customers can notify us and won’t be required to submit quarterly updates for that source of income.”

Eriona Bajrakurtaj FCCA CEO, Major’s Accounts & Co Ltd says: “I would challenge this. HMRC allows the taxpayer to contact them to let them know that they no longer qualify and the reasons why, with evidence. In this case, HMRC may accept that he shouldn’t fall under the scheme and no longer need to report income under MTD.”