Making Tax Digital for Professional Services

Making Tax Digital for Income Tax (MTD for ITSA) moves self-employed reporting online. It applies from 6 April 2026 to sole traders and landlords with qualifying income over £50,000, from April 2027 at £30,000, and from April 2028 at £20,000. Qualifying income means the gross fees you invoice for your work before you take off any expenses — not your profit. That catches a lot of people out: a trade turning over £60,000 and taking home £28,000 is in scope from April 2026, not 2028.

Here is the part that works differently for you than for a trade. A builder turning over £70,000 might take home £20,000, so the threshold feels harsh. A consultant turning over £55,000 with £4,000 of software and insurance behind it takes home most of it — and is over the line on far less activity. The absence of a cost of sale, which feels like a simplification, is exactly what pulls you into scope early.

In practice MTD means keeping digital records of your income and expenses, sending HMRC four quarterly updates, and making a final declaration after the tax year that replaces the Self Assessment return you file now. Work your start date out from what you invoice, not from what is left after you have paid yourself.

For a service business VAT is usually the first big tax event, and it tends to arrive quietly. The registration threshold is measured on a rolling 12-month basis, not per tax year, so you can cross it in, say, September without anything obvious happening. A consultant on £500 a day, working four days a week, invoices roughly £96,000 a year — comfortably past the threshold on what feels like an ordinary schedule.

The trap is registering and then discovering your margin has quietly dropped by a fifth, because your clients are members of the public who cannot reclaim the VAT you now have to add. Where your clients are VAT-registered businesses it is largely neutral to them, so the sting depends entirely on who you sell to. The Flat Rate Scheme can simplify the sums and suit a low-cost business, though it is not automatically cheaper. We model both before you register.

If you invoice clients outside the UK, the place-of-supply rules can put that income outside UK VAT altogether — which changes the calculation again, and is covered on the pages for the trades where it bites hardest.

The company-or-sole-trader question is a genuine one for professional services, and the honest answer is that it depends on your numbers and your clients. A limited company can be more tax-efficient once profits are steady, and it reassures larger clients. It also adds payroll, corporation tax, annual accounts and a Confirmation Statement, which is real work and real cost.

The point that changes the maths for many contractors is the off-payroll working rules, still widely called IR35. If you work through your own company but in practice function like an employee of one client, HMRC can treat the engagement as employment for tax. Since April 2021, where that client is a medium or large business, the client makes the status decision, not you — and an inside-IR35 determination can strip out much of the tax advantage of the company. It is a genuinely grey area worth a conversation rather than a guess, ideally before you sign the contract.

For all that they share a low cost of sale, the trades in this section are not taxed identically, because they charge in different shapes. A consultant or an IT contractor on day rates lives with the off-payroll question and reaches VAT quickly. A coach selling a programme paid upfront has an income-timing question instead: money in January for coaching delivered through the spring is not simply January income.

A marketing consultant often runs client advertising spend through their own account, which can inflate turnover dramatically and drag them over thresholds on money that was never really theirs. A photographer or videographer, unusually for this group, carries real kit — cameras, lenses, lighting — that is claimed through capital allowances rather than as a running cost. A copywriter or translator may have almost no costs at all and work largely for clients abroad, which turns VAT into a place-of-supply question.

The pages below take each of these in turn. What every one of them shares is that MTD scope is set by the gross fee, before any of this is applied.

The change people fear is four tax returns a year. It is not that. A quarterly update is a short summary of your income and expenses for the period, sent from your software — no tax calculation, no declaration, and nothing to pay on the strength of it.

The tax is still settled once, after the year end, through a final declaration that replaces your Self Assessment return, and the payment dates do not move. For a service business the quarterly rhythm has a quiet benefit: it forces you to reconcile your retainers and project invoices four times a year rather than reconstructing them each January, which is exactly when timing errors on upfront fees tend to surface.

With a bank feed connected and a simple habit for logging the handful of costs you do have, most of our professional-service clients spend well under an hour per quarter reviewing what the software has already categorised.