The latest House of Lords debate on Making Tax Digital for Income Tax (MTD IT) has raised serious concerns about the burden being placed on small businesses and the readiness of HMRC to support taxpayers.
From April 2026, self-employed individuals and landlords with qualifying income over £50,000 will be required to comply with MTD IT, with quarterly reporting through HMRC-approved software. Around 900,000 taxpayers are expected to be affected in the first phase.
While HMRC maintains that digitisation will modernise the tax system and close the tax gap, several peers have warned that the scheme risks shifting the administrative burden of tax collection away from HMRC and onto taxpayers, significantly increasing the cost of compliance and risks of being scammed.
Baroness Kramer highlighted her concerns about HMRC's helpline performance, asking:
“Making Tax Digital is not targeted at upskilling self-employed people and landlords; it is about cutting costs at HMRC. The requirements have led to a surge in calls to HMRC for guidance, but over half a million calls went unhandled in January, and the same in February, the last months for which I have numbers.
How is this being handled, given that people who fail to comply face steep fines and penalties, and that when they rely on the internet they are at risk of being scammed?”
The Earl of Kinnoull, declaring his interest as a small business owner, reinforced the point:
“I declare my interest as a small farmer with a small business that wants to do things online—the helpline is not working at the moment, and we heard the numbers that show that it is not working.”
Lord Forsyth of Drumlean, drew on evidence from previous inquiries, warning:
“Surely at a time when the economy is, shall we say, not exactly performing as he might hope, might it not be better to look at this again, with a view to the levels of fines and the speed with which it is being implemented?
There was considerable evidence then that HMRC was simply contracting out its job of collecting taxes to people who were trying to run businesses in difficult times. Surely that is not acceptable.”
Baroness Neville-Rolfe raised concerns on the cumulative administration costs for businesses, stating:
“In a Written Answer last week to the noble Baroness, Lady Maclean of Redditch, the Government revealed that they have no idea of the level of cumulative administrative costs of regulation for small business.
Does the Minister agree that before his Government impose yet more onerous regulations on small businesses, such as through the Employment Rights Bill, they should find out the existing costs of their regulatory onslaughts and do something about them?”
These concerns go to the heart of the debate: whether MTD IT is truly a tool to improve efficiency and accuracy, or whether it represents a transfer of cost and responsibility onto already stretched business owners.
Government's defence
A decade after then-Chancellor George Osborne vowed to eliminate tax returns through a sweeping digital overhaul, the UK government is defending its plans to roll out MTD IT. Lord Livermore, the Financial Secretary to the Treasury, stated that the greater adoption of new digital technologies would unlock the significant productivity benefits associated with digitalisation.
He acknowledged that businesses will face recurring annual costs averaging £110, though insisted this must be weighed against long-term productivity benefits. He emphasised that HMRC had taken a range of steps to ensure that the adoption costs of MTD IT are kept to a minimum.
He also underlined the Government's expectation that Making Tax Digital will reduce the tax gap by nearly £6 billion across VAT and income tax, largely by reducing errors.
Concerns from industry leaders
Earlier this year, research conducted by IRIS Software found that almost half of UK sole traders feel unprepared for the upcoming changes. The study found that almost one in three sole traders have never heard of MTD IT.
Following the publication of draft MTD IT legislation in July 2025, Frank Haskew, ICAEW Head of Taxation Strategy, said:
“MTD income tax represents the most significant change in decades for sole traders and landlords, requiring digital record-keeping and filing quarterly updates and year-end tax returns via commercial software that meets HMRC's requirements. HMRC will not provide software, so taxpayers must carefully choose from available products, many of which vary significantly and may not meet their needs. More preparation is needed from both HMRC and software developers.
While we support digitalisation of accounting records, we don't agree with mandatory quarterly updates which add cost without benefit. Instead, we'd like to see the retention of annual reporting with optional quarterly updates instead. As requirements begin in less than a year, agents and taxpayers must prepare.”
How Hodge Bakshi can help
The Lords' comments echo the concerns already raised by industry leaders and taxpayers. The debate underlines that MTD IT will place additional administrative burdens and costs on taxpayers.
If you have qualifying income, you will be required to submit at least five updates using HMRC compatible software each year per trade. The message is clear: you cannot afford to leave preparation until the last minute. Proactive planning, with the right professional advice, can turn MTD IT from a compliance burden into a manageable change.
At Hodge Bakshi, we recognise the practical challenges taxpayers will be facing. If you are unsure how MTD IT will affect you or your business, we strongly recommend speaking to a qualified adviser well ahead of April 2026. We have a dedicated team in place for Making Tax Digital for Income Tax and can provide advice on the best software to use to meet your needs and provide expert support throughout the process, helping to ensure that you remain compliant.
If you need help and advice on Making Tax Digital for Income Tax, or to enquire about taking part in the HMRC MTD IT pilot scheme, contact us today.
Author
Melanie O'Connor | ATT | CTA
Director
How can we help?
Based in Cardiff, Hodge Bakshi is a leading firm of Chartered Accountants and Chartered Tax Advisers with over 40 years' experience serving businesses and individuals across South Wales and the UK.
Navigating the complexities of switching from the current self-assessment process to Making Tax Digital for Income Tax will be challenging. As Chartered Tax Advisers, our experienced tax specialists are on hand to provide tailored advice and support you through the switch to digital, ensuring you are compliant with the new digitised tax system.