MTD ITSA Is Coming. Here's What Changes for Your Agency.
If you run a marketing agency, digital agency, or creative agency as a sole trader or partnership, and your total income from self-employment and property is over £50,000 per year, you need to prepare digital records MTD ITSA agency style before April 2026. That is not a suggestion. It is a legal requirement.
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) replaces the old annual tax return system with quarterly digital updates to HMRC. You submit four quarterly summaries during the year, plus one final declaration after year end. No more paper records. No more spreadsheet-only bookkeeping. No more dropping everything in April to scramble through shoeboxes of receipts.
HMRC consulted on this for years. They delayed it twice. It is happening now. If your agency's gross self-employment income exceeds £50,000 in a tax year, you are in scope from April 2026. If it exceeds £30,000, you are in scope from April 2027. Below £30,000, you can volunteer but are not mandated.
This article walks you through exactly what you need to do, what software you need, and how to avoid the common mistakes agency founders make when transitioning from manual records to fully digital compliance.
Who Exactly Is in Scope for MTD ITSA?
HMRC defines the trigger as "qualifying income" from self-employment and property. For agency founders, that means the gross income your agency generates before deducting expenses. Not your profit. Not your personal drawings. The top-line revenue.
Here is the timeline:
- April 2026: Mandatory for sole traders and partnerships with total qualifying income over £50,000 per year.
- April 2027: Mandatory for those with qualifying income over £30,000 per year.
- April 2028 (tentative): Expected extension to those over £10,000.
If you are a sole trader web designer turning over £65,000, you are in scope from April 2026. If you run a 12-person digital agency billing £800k per year as a limited company, you are not in scope for MTD ITSA at all, limited companies already use MTD for VAT and will eventually use MTD for Corporation Tax (separate timeline, not yet confirmed).
But many agency founders operate as sole traders or partnerships in their early years. If that describes you, read carefully. If you are incorporated, this article still matters, your subcontractors and freelancers may be sole traders who need your help to understand the rules.
What Digital Records Must You Keep?
HMRC is specific about this. You must maintain digital records of all income and expenses in compatible software. You cannot use paper records or unstructured spreadsheets as your primary record-keeping method. You can use spreadsheets, but they must be linked to MTD-compatible software through an API bridge.
The records you must keep digitally include:
- All income received, by date and source. For agencies, that means each client payment, retainer invoice, and project fee.
- All business expenses, by date and category. That includes software subscriptions like Xero or QuickBooks, freelancer payments, travel costs, office rent, equipment purchases, and professional fees.
- Personal drawings or amounts taken for personal use if you run a sole trader agency.
- Any adjustments or corrections to previous submissions.
You must also keep the original source documents, invoices, receipts, bank statements, but those can be digital copies. HMRC accepts scanned receipts and digital invoices. You do not need to keep paper originals, though many accountants recommend keeping them for six years as a backup.
Our specialist team recommends using Dext or AutoEntry for receipt capture. Both integrate with the main accounting platforms and let you photograph receipts on your phone. The software extracts the key data and categorises it. No more lost receipts from that client lunch in Shoreditch.
Which Software Is MTD ITSA Compatible?
Not all accounting software is MTD ITSA compatible. HMRC maintains a list of recognised software providers. As of early 2025, the major platforms that have confirmed MTD ITSA compatibility include:
- Xero, already MTD VAT compatible. Their MTD ITSA module is in testing. Most agency founders we work with use Xero already.
- QuickBooks, similar timeline. Full MTD ITSA functionality expected by late 2025.
- FreeAgent, popular with sole traders and small agencies. MTD ITSA ready.
- Sage, available for both desktop and cloud versions.
- IRIS, used by many accountancy firms for practice-side compliance.
If you currently use spreadsheets only, you have two options. Option one: migrate to cloud accounting software now. Option two: keep using spreadsheets but bridge them to HMRC via MTD-compatible spreadsheet software. Most agency founders find option one simpler because it automates the quarterly submissions and reduces admin time.
We do not recommend waiting until March 2026 to choose your software. Migrating your historical records takes time. Testing the quarterly submission process takes time. And if you get it wrong in the first quarter, you face late submission penalties from day one.
How the Quarterly Submission Process Works
Under MTD ITSA, your tax year still runs 6 April to 5 April. But instead of filing one return by 31 January, you submit four quarterly updates and one final declaration.
The quarterly submission deadlines are:
- Quarter 1 (6 April to 5 July): Submit by 5 August.
- Quarter 2 (6 July to 5 October): Submit by 5 November.
- Quarter 3 (6 October to 5 January): Submit by 5 February.
- Quarter 4 (6 January to 5 April): Submit by 5 May.
After the fourth quarter, you submit a final declaration by 31 January the following year. That declaration confirms your total income and expenses for the year, accounts for any adjustments, and calculates your final tax bill.
Here is the practical reality for agency founders. If you bill clients monthly on retainer, your income is predictable. The quarterly update takes 15 minutes. If you run a project-based agency with irregular cash flow, you need to reconcile invoices and payments more carefully each quarter. But the process is still faster than an annual return because you are working with current data, not trying to reconstruct 12 months of transactions from memory.
A 12-person digital agency billing £800k per year as a sole trader would submit four quarterly summaries showing roughly £200k of income each quarter. HMRC uses those updates to calculate a provisional tax position. You can choose to pay tax quarterly based on those updates, or stick with the existing twice-yearly payments on account. Your choice.
Penalties for Late or Incorrect Submissions
HMRC is introducing a new points-based penalty system for MTD ITSA. You receive one penalty point for each late submission. Accumulate enough points, and you face a financial penalty. The points reset after a period of compliant submissions.
For quarterly updates, the penalty threshold is typically 2 points for annual filers. For the final declaration, it is 1 point. Each point carries a £200 penalty. So two late quarterly updates could cost you £400 before you even file the final return.
Incorrect submissions also carry risk. If HMRC finds you deliberately understated income or overstated expenses, the penalties are higher. But honest mistakes caught early through quarterly updates are less likely to trigger penalties than errors buried in an annual return filed 10 months after year end.
The key takeaway: do not treat quarterly updates as rough estimates. They must be accurate to the best of your knowledge based on the digital records you hold. If you discover an error in a later quarter, you can correct it in the next update or in the final declaration.