HMRC introduces digital-exclusion exemption for MTD

HMRC has released new guidance for eligible businesses to apply for an exemption from Making Tax Digital (MTD) on the grounds of being “digitally excluded.”

For many sole traders and micro-companies, complying with new and impending MTD regulations has added yet another layer of stress to running a business.

Now, those who genuinely can’t go digital may be allowed to continue filing self-assessment tax returns in the traditional way.

But what exactly does it mean to be “digitally excluded”? And more importantly, how can taxpayers make a successful case for exemption?

What is Making Tax Digital?

Making Tax Digital (MTD) for Income Tax is HMRC’s new digital system for reporting income from self-employed work or property. It’s being introduced in stages, affecting:

• Those earning over £50,000 from self-employment or property from April 2026
• Those earning between £30,000 and £50,000 from April 2027
• Those earning between £20,000 and £30,000 from April 2028

Even if you’re not legally required to join yet, you can opt in voluntarily. MTD is designed to help taxpayers minimise errors and make returns more accurate. But while there are long-term benefits, for many, its adoption is also creating new challenges in the short-term.

MTD requires taxpayers to adopt compatible accounting software, keep digital records, and submit quarterly updates to HMRC, which can be a steep learning curve for smaller businesses that may not already be working with software.

While the introduction is phased, failing to comply once you’re required to do so could lead to penalties, interest charges, and additional administrative headaches.

What are the new digital-exclusion exemption rules?

HMRC recognises that not everyone can realistically make the move to digital reporting. Therefore, its new “digital-exclusion” exemption is designed for taxpayers who genuinely cannot use digital tools to report their income.

According to guidance from the ICAEW’s Tax Faculty, those who believe they’ll qualify should apply well before April 2026 if they fall under the first MTD rollout group, to give HMRC enough time to assess their case.

While HMRC continues to encourage all taxpayers to prepare for MTD, the ICAEW advises that even those applying for exemption should keep their paper accounting records up to date, just in case they eventually do need to switch to a digital format.

If initially successful, exemptions can still be reviewed or withdrawn if circumstances change, for instance, if a taxpayer gains reliable internet access or support using digital tools.

Are you eligible for MTD exemption?

You may qualify for exemption on the grounds of being “digitally excluded” if:

• You belong to a religious group whose beliefs prevent the use of electronic communications or digital record-keeping; or
• It’s not reasonably practical for you to use digital tools due to reasons such as age, disability, or location (for example, poor internet access from a remote area).

The deadline for exemption depends on when MTD becomes mandatory for your income:

• MTD starts April 2026: Apply now to allow enough time for review
• MTD starts April 2027: Apply from summer 2026
• MTD starts April 2028: Apply from summer 2027

How to apply for MTD exemption

To apply, you’ll need:

• Your National Insurance number, name, and address
• Details of how you currently file your tax return (and whether anyone helps you)
• Your reasons for digital exclusion, with supporting evidence if possible
• Details of any agent or accountant you use
• Information about any additional needs so HMRC can offer the right support

If you think you qualify, you can apply by calling or writing to HMRC. HMRC aims to process applications within 28 days, so make sure to do so well in advance of your start date in order to receive a timely decision.

Be aware that HMRC can challenge applications, especially in borderline situations. If your exemption is refused, you can appeal the decision, seek help from a tax adviser, or gradually transition to digital tools to become MTD-compliant.