Making Tax Digital owes its smaller joiners a practice year

Harvey Dhillon, Founder and CEO of Zmartly, explains why the Making Tax Digital initiative allows its smaller joiners an additional year for practice

Picture a self-employed childminder who files a tax return every year, cares for children in her own home and took £32,000 in fees in the 2025 to 2026 tax year. As the rules stand, from 6th April 2027 she must keep digital records and report to HM Revenue & Customs (HMRC) every quarter. She will join a system that gave its first users a year in which late quarterly updates earned no penalty points. She will not get one.

What the policy does

Making Tax Digital for Income Tax has been compulsory since the 6th April 2026 for sole traders and landlords with more than £50,000 of qualifying income in 2024 to 2025. HMRC’s published timetable adds a £30,000 line from 6th April 2027, tested on 2025 to 2026, and a £20,000 line from 6th April 2028, tested on 2026 to 2027. Everyone inside sends four updates a year through software, due on 7th August, November, February and May, and still files a tax return.

The threshold measures turnover. Qualifying income adds up takings from self-employment and property before any expenses come off, so the childminder’s £32,000 counts in full, whatever remains once food, toys and the running costs of her home are paid.

The notice is short, too. Qualifying income is read from the previous year’s return, and for the April 2027 wave that is the 2025 to 2026 return, due by the 31st January 2027. Anyone who files in January has about nine weeks between the return that decides it and the start date. HMRC writes to those over the line, but its guidance is clear: a letter that never arrives does not change the obligation.

A practice year for one wave only

For the 2026 to 2027 tax year, HMRC won’t apply penalty points for late quarterly updates. That first-year easement belongs to the tax year, not the taxpayer. Under HMRC’s penalty rules, every late quarterly update after that year adds a point. Reach four and a £200 penalty follows, then another £200 for each further deadline missed. The second wave’s first update, due on the 7th August 2027, carries points from the start.

HMRC already accepts the principle of a first year inside the same regime. Under the new late payment penalties, a payment 16 to 30 days late carries no penalty “if it’s your first year”, whenever that first year falls. Quarterly updates get no equivalent.

A 40-year-old simplification, withdrawn at the door

Childminders give up something else on the way in. HMRC’s childminder methods grew out of a 1986 agreement between the then Inland Revenue and the National Childminding Association. Under them, a childminder can deduct 10% of her income from childminding at home for wear and tear on furniture and household items, claim a set share of household bills based on her hours, and estimate the cost of the children’s food. A cashbook and an attendance register serve as the records, and receipts are needed only for purchases of £10 or more, with none for the children’s food.

HMRC’s guidance for childminders, published in March 2026, sets out separate rules for those inside Making Tax Digital, and its internal manual says the alternative methods do not apply to them. They follow the rules for every other business: actual costs, a reasonable business share of household bills, and digital records. HMRC notes that actual costs may give a more accurate deduction, and for some they will. But the change lands at the same moment as the software, the deadlines and the points. There is a fuller account of how the childminder rules change inside Making Tax Digital.

Each wave reaches smaller businesses than the last. Between £20,000 and £50,000 of turnover sit the childminder, the mobile hairdresser and the landlord with a single flat, people for whom the tax return has been a once-a-year job. They are the most likely to need a rehearsal, and the policy as written gives it to someone else.

Three changes that would help

First, give every wave the same first year. Waive points on late quarterly updates during each taxpayer’s first year in the system, mirroring the first-year allowance already in the late payment rules.

Second, keep the childminder methods in digital form. A flat 10% for wear and tear can be recorded in software as easily as in a cashbook. Simplicity and digital records are not opposites, and an arrangement rooted in a 1986 agreement deserves a digital successor rather than an end date.

Third, tell people sooner. The third wave is decided by income in 2026 to 2027, the tax year now under way. HMRC already holds earlier returns. It could write this winter to everyone whose last return showed turnover near £20,000, rather than after the January return that settles it.

Much of Making Tax Digital’s design is sensible. A practice year does not change the tax anyone owes. It decides whether the smallest businesses meet the system as learners or as defaulters.