Entity Setup
Entity Setup Strategy: Using Digital Record-keeping as UK MTD Expands
As Making Tax Digital (MTD) for UK Income Tax expands in 2025-2028, businesses and landlords should take action now: what you need in place to be ready—and how proper setup avoids costly errors.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## The Expansion of MTD in the UK: What’s New
- HMRC plans to extend **Making Tax Digital (MTD) for Income Tax** to sole traders and landlords whose income exceeds £20,000, starting **April 2028**. ([gov.uk](https://www.gov.uk/government/publications/hmrc-transformation-roadmap/hmrcs-transformation-roadmap?utm_source=openai))
- The MTD system already applies for VAT and smaller income levels; this expansion means more frequent reporting (quarterly summaries), and digital record-keeping. ([gov.uk](https://www.gov.uk/government/publications/hmrc-transformation-roadmap/hmrcs-transformation-roadmap?utm_source=openai))
## Entity Setup: How to Align Your Structures Now
- **Business form**: Sole traders and limited companies will both need digital records under MTD; limited companies already face stricter rules, but sole traders used to simpler bookkeeping will need to upgrade now.
- **Choose suitable accounting software**: Digital platforms that interface with HMRC’s systems, allow quarterly reporting, expenses categorization, and alert you when thresholds are met.
- **Consider property income separately**: Landlords with rental income will need to include that data in MTD submissions, even if income is small, if they exceed the £20,000 gross threshold total.
## Setup Tips for Smooth Transition
1. **Audit your current record-keeping systems**: Do you capture income, expenses, mileage, and other deductions digitally? If you’re still using spreadsheets or paper, migrate early.
2. **Train staff or contractors**: If outsourcing bookkeeping, ensure your team knows MTD requirements. Mistakes in categorization could lead to incorrect tax calculations.
3. **Forecast income thresholds**: If you anticipate crossing the £20,000 gross mark, plan cash flow and perhaps reconsider legal form of business to optimize tax burden.
4. **Keep all digital invoices**: E-invoices, receipts, proof of expenditure—all part of compliance. Being able to provide them upon request or audit matters.
5. **Check for agent representation rules**: If you use an agent, ensure they are MTD-compliant and authorised to file digital returns and summaries.
## Case Examples
- **Solo landlord**: Jane receives £22,000/year rental income. From April 2028, she must report every quarter via MTD; if she sets up her accounting system now, she'll avoid backlog and errors.
- **Small business sole trader**: Sam also rents out a spare room and does consulting, totaling £25,000 income. He needs digital recordkeeping now and use MTD-compatible software, even though consulting income was previously separate.
## Risk Areas & Mitigation
| Risk | Mitigation |
|---|---|
| Missing deadlines and incurring penalties for late submission | Set reminders and prepare ahead; even early enrolment in pilot programs if available. |
| Poor expense tracking leading to lost deductions | Use expense apps; filter receipts; reconcile monthly. |
| Non-compliance due to technical errors (software mismatch or lack of integration) | Work with reputable vendors; periodic testing; keep backups. |
## Key Takeaways
- MTD extension is not optional—businesses and landlords above the threshold must comply.
- Starting early gives you time to adapt and avoid penalties or rush costs.
- Proper entity setup, good software, and strong digital records lower risk.
- For those slightly below thresholds, still worthwhile to adopt best practices now for easier scaling later.