Making Tax Digital (MTD) for Income Tax has applied since April 2026 to sole traders and landlords with qualifying income above £50,000. From 6 April 2027, the threshold falls to £30,000, bringing an estimated 1,077,000 more people into quarterly digital reporting. 

Since September, HMRC has also been signing up people in the first wave who had not acted themselves. The Budget on 28 October eased penalties for this group but did not change who is in scope or when.

Key takeaways

• From 6 April 2027, MTD applies to sole traders and landlords with qualifying income above £30,000.
• The test uses gross income on your 2025/26 tax return, not profit.
• There are no penalty points for late quarterly updates in 2027/28, but late returns and late payments are still penalised.
• Non-resident landlords exempt for 2026/27 join in this wave if their income is above the threshold.

Who is caught by the £30,000 threshold?

You are in scope if you are registered for Self Assessment, receive income from self-employment, property or both, and your qualifying income is above £30,000. Qualifying income is your gross income from both sources combined, before expenses. It tests turnover, not profit: £18,000 from a sole trade plus £15,000 in rent gives £33,000, even though neither source alone would qualify.

A tradesperson with £34,000 of sales and £20,000 of costs is therefore in scope despite a modest profit, and a landlord whose rent barely covers the mortgage can cross the line too.

Employment, pension, dividend and savings income are excluded, and if you jointly own a property, only your share of the rent counts.

Why does your 2025/26 tax return matter so much?

The April 2027 test is based on your 2025/26 figures, which go on the return due by 31 January 2027. HMRC reviews those returns and writes to people above the threshold, so the gross figures and any joint ownership need to be right.

Once you are in, you stay in unless your income remains below the threshold for three consecutive years. With the threshold due to fall to £20,000 from April 2028, few people joining next April are likely to leave.

What will actually change?

You will file your 2026/27 return in the usual way by 31 January 2028, but from 6 April 2027, you will need:

• Digital records. Income and expenses go in MTD-compatible software, or in spreadsheets linked to HMRC through bridging software.
• Quarterly updates. A summary goes to HMRC every three months, due on 7 August 2027, 7 November 2027, 7 February 2028 and 7 May 2028. Each sole trade has its own update, while UK rental properties share one and foreign property is reported separately.
• A year-end tax return. For 2027/28, this is due by 31 January 2029.

How much tax you pay, and when, does not change. Quarterly updates are not payments, although the Budget confirmed that Payments on Account will move to smaller, more frequent instalments from April 2029.

Is there a grace period for late quarterly updates?

Yes. The Budget confirmed that the April 2027 group will not receive penalty points for late submission of their first four quarterly updates in 2027/28. All four must still be sent before the year-end return can be filed, so a missed update can make the return late. Late returns and late payments are penalised in full. From 2028/29, each missed deadline earns a point, and four points trigger a £200 penalty, with every late submission after that costing another £200.

The Chartered Institute of Taxation welcomed the easement but warned that a delay to penalties should not delay preparation.

Could a different business structure take you out of MTD?

Some sole traders and landlords are asking whether changing structure would avoid quarterly reporting. Broadly, there are three options:

• Incorporate. Limited companies sit outside MTD for Income Tax, but a company brings Corporation Tax, annual accounts and the cost of extracting profits. Moving property into a company can also trigger Capital Gains Tax and Stamp Duty Land Tax.
• Form a partnership or LLP. Partnerships are not yet in scope, but GOV.UK says they will be brought in at a later date, and partners’ own sole trade or rental income can still be caught.
• Stay as you are. For most people, MTD alone is not a good enough reason to restructure.

With income tax on property income in England, Wales and Northern Ireland rising to 24%, 44% and 49% from April 2027, up from 20%, 40% and 45% today, landlords may still want a wider review. Our comparison of LLPs and limited companies sets out the differences.

Are non-resident landlords affected?

Yes. Landlords who completed the SA109 residence pages on their 2024/25 return were exempt for 2026/27. That exemption ends in April 2027, so they must join if their 2025/26 qualifying income was above £30,000. For non-residents, only UK self-employment and property income counts, and anyone without a UK National Insurance number is exempt. 

Our article on the Parker residence case covers the wider residence rules. With residence status, foreign income and MTD now closely linked, it is worth reviewing your position before you file your 2025/26 return.

Who is exempt?

You can apply for an exemption if age, disability, location or religious belief makes digital record-keeping impractical. Trustees and personal representatives are exempt automatically, and the Budget deferred MTD until further notice for several specialised groups, including those eligible for qualifying care relief and those who use averaging adjustments.

What does this mean for you?

If you are a sole trader or landlord with income close to or above £30,000, there are four practical steps to take now:

• Check your 2025/26 figures before you file.
• Choose your software and agree who will prepare each quarterly update.
• Sign up yourself or through your agent rather than waiting to be signed up. HMRC says those who act first keep control of their details.
• Use 2027/28 to build the routine before penalties apply in full.

MTD is part of HMRC’s wider move to a digital tax system, which we covered in HMRC Digital by Default and first wrote about in The Making Tax Digital revolution has begun.

Frequently asked questions

Does Making Tax Digital mean I pay more tax?

No. It changes how you keep records and report your income, not how much tax you owe or when you pay it.

Can I use spreadsheets for MTD?

Yes, as long as they are linked to HMRC through MTD-compatible bridging software. You can’t simply retype figures from one place to another.

How can we help?

Every business and property portfolio is different, so the right MTD approach depends on your circumstances: the figures on your 2025/26 return, how you keep your records, and whether your current structure still suits you.

Wherever you are based, in the UK or overseas, Wilkins Southworth can confirm whether you are in scope, review your figures before you file, sign you up for MTD on your behalf and prepare your quarterly updates and year-end return. If MTD will apply to you from April 2027, speak to the team to make sure you are ready before the first deadline.

Running a business through a limited company has become noticeably more expensive. Employer’s National Insurance rose to 15% in April 2025, with the threshold cut to £5,000. From 6 April 2026, dividend tax rose by another two percentage points to 10.75% for basic rate taxpayers and 35.75% for higher rate taxpayers. For owner-managers who pay themselves through salary and dividends, each change has chipped away at the arrangement that made a company the default choice. With the Budget on 28 October expected to bring further changes, many are taking a fresh look at a structure professional firms have relied on for 25 years: the limited liability partnership. So what does an LLP offer, and is it time to rethink your structure?

What exactly is an LLP?

An LLP is a separate legal entity created under the Limited Liability Partnerships Act 2000. Like a company, it is registered at Companies House, can own property and sign contracts in its own name, and carries on regardless of who joins or leaves. Like a traditional partnership, its members run it under a private agreement, and it is taxed as a partnership rather than a company. That combination gives it most of its advantages. For a fuller introduction, our earlier article on LLPs covers the basics, and LLP v Ltd sets the two structures side by side.

How does an LLP protect your personal assets?

The LLP model was introduced to solve a specific problem. In a traditional partnership, each partner is jointly and severally liable for the firm’s debts, including those caused by another partner’s mistakes. A single negligence claim could put every partner’s home at risk. In an LLP, the business owns its own debts. A member’s exposure is generally limited to the capital they have put in and anything they have agreed to contribute. This is particularly reassuring for members not involved in day-to-day management. The protection has sensible limits: lenders may still ask for personal guarantees, and members who trade wrongfully or dishonestly can still be held personally liable.

What are the benefits of flexible profit sharing?

In a limited company, profits generally follow shareholdings. Paying owners differently usually means creating separate share classes, and changing the arrangement involves formal steps that leave a public record. An LLP works differently. Members share profits however they agree, and the agreement can reward capital, workload, seniority, or results in whatever mix suits the business. The split can be revisited each year, so a member who steps back can take a smaller share without anyone buying or selling shares. For example, take three members who built a consultancy together. When one moves to two days a week ahead of retirement, the members simply agree a smaller profit share for that year, while the member winning the most new work takes a larger one. In a company, the same change would usually mean reorganising shares or relying on salaries and bonuses, with the extra National Insurance that brings. The LLP agreement is private and is not filed at Companies House, so the commercial arrangements between members stay between members.

How are LLP profits taxed, and is an LLP really less tax efficient?

An LLP is tax transparent: it pays no Corporation Tax. Instead, each member is taxed on their share of the profits through Self Assessment, paying Income Tax and Class 4 National Insurance as a self-employed individual. In a limited company, by contrast, profits pass through two layers of tax before they reach the owner: Corporation Tax of up to 25% in the company, then dividend tax on the shareholder at the higher rates that apply from April 2026. Taking salary instead avoids dividend tax but brings employer’s National Insurance. For members, the tax advantages of an LLP come down to four points:

• One layer of tax: profits are taxed once, in the members’ hands, rather than in the company and again as dividends
• No employer’s National Insurance: the LLP pays nothing on members’ profit shares, compared with 15% on salaries above £5,000
• Lower National Insurance rates: Class 4 contributions are 6% on profits between £12,570 and £50,270 and 2% above that, against 8% and 2% for employees
• Better cash flow: tax is settled through Self Assessment rather than deducted monthly through payroll, so there is usually a lag between earning profits and paying the tax on them

Comparison guides often list tax as a drawback of LLPs because members are taxed on all profits as they arise, whether or not they are drawn. That holds if you plan to leave substantial profits in the business. For owner-managers who draw most of what the business earns, a single layer of tax can make an LLP the more efficient choice, as the example below shows.

What does this look like in practice?

To see the difference, take a business owner who wants to receive £159,000 after tax in 2026/27. For simplicity, we assume all of their income is taxed at the top rates:

Description	Bonus	Dividend	LLP
Pre-tax payment	£352,941	£349,547	£300,000
Employer’s National Insurance @ 15%	£52,941
Corporation tax @ 25%		£87,387
Received by the individual	£300,000	£262,160	£300,000
Tax @ 45%	£135,000		£135,000
National Insurance @ 2%	£6,000		£6,000
Dividend tax @ 39.35%		£103,160
Net cash received	£159,000	£159,000	£159,000
Effective tax rate	55.0%	54.5%	47.0%

Figures are based on 2026/27 rates and rounded to the nearest pound. For simplicity, all income is taxed at the top rates: 45% Income Tax, 2% National Insurance for employees and LLP members, and 39.35% dividend tax. In practice, lower rates apply to the first part of a person’s income.  The difference comes from how many layers of tax sit between the profit and the individual. A bonus attracts the employer’s National Insurance before Income Tax is paid, while a dividend is paid from profits that have already borne Corporation Tax. An LLP has neither, so the profit is taxed only once, in the member’s hands. That is between £49,500 and £53,000 less profit needed each year for the same income, and an effective tax rate of 47% against 54.5% or more through a company. The figures are simplified to illustrate the principle, and the right structure will always depend on your own profits, plans and circumstances.

Who benefits most from an LLP?

An LLP tends to suit:

• Professional practices such as accountants, solicitors, architects and consultants, where members work in the business and expect to share in what they bring in
• Owner-managed businesses where the owners draw most of the profit each year
• Joint ventures, where several parties want limited liability without negotiating share capital

Family businesses deserve particular mention. Because profit shares can follow contribution, the next generation can join as members on a modest share and take on more as their role grows, without the founders handing over equity in one step. Founders can step back gradually in the same way, and the LLP agreement can set out in advance how a member’s capital is repaid when they retire. For wider family wealth planning, a Family Investment Company can sit alongside the LLP.

What does this mean for you?

For many owner-managers, the last two years of tax changes have eroded much of the advantage a limited company once had. An LLP offers limited liability and flexibility in how profits are shared, and it taxes those profits once, not twice. However, an LLP won’t suit everyone. A company may still be the better fit if you plan to retain large profits, raise equity or offer share options. Some members can be taxed as employees under the salaried member rules, and property arrangements need particular care following HMRC’s Spotlight 63A. The benefits depend on getting the structure and the LLP agreement right at the outset. If you already trade through a company, our guide to converting a limited company to an LLP explains how the move works in practice. Choosing or changing your business structure has long-term tax consequences, and the right answer depends on your profits, your plans and the people involved. Generic online comparisons cannot model that. Wilkins Southworth can review your figures, compare structures side by side, and, if an LLP is right for you, ensure it is set up properly from the start. Contact one of the team to discuss your circumstances and find out how we can help.

With the Budget on 28 October, July’s Supreme Court ruling on LLP members, and another rise in dividend tax this year, many owners are reviewing their business structure. One question we hear increasingly often is whether you can simply change a limited company to an LLP. The short answer is no. You set up a new LLP and transfer the business, but that transfer can trigger tax costs that outweigh years of savings.

Key takeaways

• There is no legal conversion route: the business must move from the company to a new LLP, which needs at least two members.
• The move is treated as a transfer at market value, which can trigger corporation tax and, where property moves, Stamp Duty Land Tax.
• Extracting what is left in the company is costly, and anti-avoidance rules can tax a liquidation as income if the trade continues in an LLP.
• After the Supreme Court’s BlueCrest ruling, the LLP agreement largely decides whether members are taxed as self-employed.
• Model the full cost now, but avoid irreversible steps until the Budget announcements are known.

Why are business owners asking about switching to an LLP?

The main attraction is the tax treatment of profits. A company pays corporation tax of up to 25% on its profits, and shareholders then pay dividend tax when those profits are paid out. The basic and higher dividend rates rose by two percentage points in April 2026, to 10.75% and 35.75%.

An LLP pays no tax itself. Members pay income tax and Class 4 National Insurance on their share of profits, with no second layer of tax on exit. In our comparison of LLPs and limited companies, a higher earner taking profits through an LLP faced an effective rate of around 47%, against roughly 54% through a bonus or dividend, on the rates then in force.

Last year’s speculation about an employer-style National Insurance charge on LLP members also came to nothing, as we covered in what the Autumn Budget could have meant for LLPs.

Can you simply convert a limited company into an LLP?

No. A traditional partnership can move into an LLP largely tax-neutrally, but a company has no equivalent route. Because the company and the LLP are separate legal entities, the business must move from one to the other.

In practice, that usually means three steps:

1. Set up a new LLP. It needs at least two members, so a sole owner will need a second member, such as a spouse, a colleague or the company itself. Our guide on how to set up an LLP covers the formalities.
2. Transfer the company’s trade and assets to the LLP: goodwill, equipment, contracts, staff and, in some cases, property.
3. Deal with the company afterwards, either by winding it up and distributing what is left to shareholders, or by keeping it for another purpose.

There are practical points to plan for too:

• Approvals. Because the directors usually become LLP members, the transfer may be a substantial property transaction that requires shareholder approval. A formal solvent liquidation afterwards requires a special resolution (75% of votes).
• The business name. The company can change its own name first, freeing up the existing name for the new LLP.
• Registrations and contracts. The LLP is a new entity with its own registration number. VAT, PAYE, bank accounts, leases, finance agreements, and licences must be transferred, re-registered, or renewed, and staff move across under TUPE.
• Timing. A transfer at the company’s year-end usually keeps the final accounts simpler.

What are the tax costs of moving out of a company?

Because the company and the new LLP are connected, HMRC generally treats the assets as passing at market value, whatever is actually paid. That can trigger:

• Corporation tax in the company. Gains on property and goodwill built up over the years can be taxed as if the company sold the assets. For an established business, goodwill is often the largest single value.
• Tax on extracting what is left. Once the trade has gone, value still sits in the company. Paying it out as dividends attracts dividend tax. A liquidation is normally taxed as capital, but an anti-avoidance rule can treat it as income if the owners carry on a similar trade within two years. HMRC’s own guidance gives moving the trade into a partnership as an example. Even where capital treatment survives, Business Asset Disposal Relief is now charged at 18% for disposals from 6 April 2026.
• Stamp Duty Land Tax. Where property moves across, special partnership rules decide the charge. Depending on who is connected to whom, they can reduce it significantly or leave a substantial bill.
• VAT and losses. A transfer of a going concern can usually avoid VAT if the conditions are met, but trading losses built up in the company generally stay behind.

Disincorporation relief, which once eased this for small businesses, expired on 31 March 2018 and has not been replaced. Some reliefs still help at the margins, such as electing to transfer plant and machinery at its tax written-down value, but the overall bill needs modelling before anything moves.

Can you keep the company as a member of the LLP?

Some owners consider a middle route: the company stays in place and becomes a corporate member of the new LLP, alongside the individuals. This can avoid winding up the company and allow some profit to be retained at corporation tax rates.

It can work where it reflects how the business genuinely operates, but mixed-membership rules allow HMRC to reallocate profits from a corporate member back to the individuals where the arrangement is mainly tax-driven. Property businesses face extra scrutiny: HMRC’s Spotlight 63A sets out why it believes hybrid landlord LLPs with corporate members fail.

Will every member be taxed as self-employed?

Not automatically. Under the salaried member rules, an LLP member who looks more like an employee can be taxed as one, with the LLP paying employer National Insurance at 15% on their drawings.

The Supreme Court’s judgment in HMRC v BlueCrest on 1 July 2026 tightened the position. It confirmed that a fixed or performance-based reward that does not genuinely track the LLP’s overall profits can count as disguised salary. It also held that courts assess whether a member has significant influence largely by their enforceable rights under the LLP agreement, not their day-to-day role.

For owners leaving a company, this matters most when the LLP includes people other than the current owners, such as senior staff or family members brought in to meet the two-member requirement. Design the LLP agreement and profit-sharing terms with these rules in mind from day one.

What does this mean for you?

A switch is more likely to make sense where:

• the business has modest goodwill and few valuable assets, so the exit charges are small;
• the owners draw most of the profits each year rather than retaining them;
• several people share ownership and value the flexibility of an LLP agreement;
• the expected annual saving is large enough to repay the one-off costs within a sensible period.

It is less likely to work where there is significant goodwill or property, or where profits are usually reinvested, because LLP members are taxed on their full profit share whether they draw it or not.

Timing matters as well. With the Budget on 28 October, model the options now but hold off on irreversible steps until the announcements are known. If you are weighing up the structures from scratch, our articles on the benefits of a Limited Liability Partnership and the tax benefits of an LLP are a useful starting point.

Frequently asked questions

How long does it take to move from a company to an LLP? 

Registering the LLP itself can take as little as a day. The full process, including valuations, consents, the transfer and winding up the company, often takes several months.

What happens to profits left in the company? 

They stay in the company until paid out, either as dividends or on a liquidation. If the trade continues in an LLP, HMRC can tax a liquidation as income rather than capital, so this is often the highest cost of switching.

How can we help?

The team at Wilkins Southworth have advised on company and LLP structures for over 30 years. We model the full picture, from the one-off exit costs to the ongoing tax position, so you can see whether a switch pays for itself. If it does, we can plan and manage the transfer. If not, we can look at what could be improved within your existing company. With the Budget approaching, get in touch to review your structure before you commit.

Is tax uncertainty keeping you awake at night?

With the Budget taking place on 28 October 2026, speculation about possible tax changes is gathering pace. Pensions, inheritance, property, investments and business taxation can all become subjects of pre-Budget predictions.

For individuals and business owners, this creates a difficult question: should you act now in case the rules change, or wait until you know what the Chancellor has actually announced?

Good tax planning before the Budget is not about correctly guessing what will happen. It is about understanding where you stand today, what decisions you are considering and what the consequences could be if your assumptions turn out to be wrong.

There is a recent example of why that distinction matters.

The problem with pre-Budget uncertainty

A confirmed tax change gives you something concrete to work with. You know what is changing, when it takes effect and, eventually, the detailed rules surrounding it. You can then consider whether action is appropriate.

Pre-Budget speculation is very different; a newspaper report or prediction may concern a genuine policy the government is considering. Equally, it may never make it into the Budget.

This can produce two very different reactions. Some taxpayers put decisions on hold because they are worried about what may happen next. Others feel they need to act immediately in case a valuable allowance or tax treatment disappears.

Before doing either, there is one useful question to ask:

Would I still make this decision if the expected Budget change did not happen?

The experience of some pension savers in 2024 shows why that question matters.

What pension tax-free cash can teach us about Budget speculation

In the run-up to the October 2024 Budget, there was considerable speculation about possible changes to pension tax-free cash.

Under current rules, most people can normally take up to 25% of their pension as tax-free cash, subject to a standard lump sum allowance of £268,275, although some people have protected higher allowances.

Amid concern that this favourable treatment might be restricted, some pension holders accessed their tax-free cash before the Budget. Ultimately, the 2024 Budget did not introduce the widely speculated restriction on tax-free cash from pensions.

For some who acted early, the obvious response was to ask whether they could simply put the money back, but it wasn’t that straightforward.

HMRC subsequently confirmed that pension schemes had received requests from members wanting to return lump sums they had taken because of speculation about the Autumn Budget. It also made clear that a tax-free lump sum payment could not simply be undone for tax purposes and that returning the money would not restore the lump sum allowance that had been used.

That doesn’t mean everybody who took pension cash before the Budget made the wrong decision. Someone may already have had a perfectly sound reason for accessing their pension.

The problem arises when a significant financial decision is made mainly because of a tax change that hasn’t actually happened.

Tax is only one part of the decision

The same principle applies well beyond pensions.

Imagine you are considering selling an investment or property and there is speculation about changes to Capital Gains Tax. Bringing forward the sale might look attractive if you believe tax rates are about to rise.

But what if they don’t?

Perhaps you weren’t otherwise ready to sell. Maybe the asset was providing useful income or formed part of a longer-term plan.

Inheritance Tax creates similar questions. 

Concern about future changes could encourage someone to make substantial gifts earlier than intended. Yet once assets have been given away, the donor may lose access to money or property they later need.

Business owners can face equally important decisions around investment, company structure, succession and taking money from their businesses.

There may be legitimate tax reasons to act before a Budget. However, you should weigh the tax saving against the wider financial, commercial and personal consequences.

Saving tax on a transaction doesn’t automatically make the transaction a good decision.

What tax planning should you do before the Budget?

Preparing for the Budget and trying to predict it are not the same thing. There are useful steps you can take without gambling on what may or may not be announced.

Before making a significant tax or financial decision, consider:

• Review what you are already planning. Are you approaching retirement, selling an asset, transferring wealth, restructuring a business or changing how you hold property or investments?
• Understand the position under today’s rules. Establish the tax and wider financial consequences of going ahead now, based on legislation that actually exists.
• Consider the cost of waiting. Would delaying the decision until after the Budget create a genuine disadvantage, or is the pressure to act mainly being created by speculation?
• Test the decision against the opposite outcome. If the rumoured tax change never happens, would you still be comfortable with what you have done?

That final point is particularly important. If the decision still makes financial sense regardless of what happens in the Budget, there may be sound reasons to proceed.

If the whole rationale depends upon correctly predicting an announcement on 28 October, considerably more caution may be appropriate.

Separate what we know from what we think might happen

Another useful part of tax planning before the Budget is separating three very different things.

There are the tax rules already in force 

There are future changes that have already been announced or legislated but have not yet taken effect. And then there is speculation about what the Budget might announce.

Those categories should not be treated in the same way

Confirmed future changes can form part of genuine long-term tax planning. You can use current legislation to assess your position today.

Rumours may justify considering different scenarios, but they shouldn’t automatically dictate what you do with your pension, property, investments or business. This distinction matters most in the days immediately before a Budget, when speculation tends to peak.

Good tax advice isn’t about having a crystal ball

The value of professional tax advice before a Budget isn’t that your accountant knows what will be announced. Until the Budget is delivered, speculation remains speculation.

However, good advice instead helps answer a different set of questions:

• Where are you now? 
• What are you trying to achieve? 
• What options are available under the current rules? 
• What happens if you act? 
• What happens if you wait?

And perhaps most importantly:

What happens if our assumption about the Budget is wrong?

That question could have been valuable to some of the pension holders who acted before the 2024 Budget.

An adviser can also help identify the difference between a genuine deadline and an artificial sense of urgency created by speculation.

Reviewing your affairs before the Budget has another advantage. If a relevant change is announced, you already have a clearer picture of your tax position and can assess what the new rules mean for you rather than starting from scratch.

Don’t let uncertainty make the decision for you

The lesson from 2024 isn’t that you should never make financial or tax decisions before a Budget. It is that those decisions should still make sense if the Budget doesn’t turn out as expected.

Speculation will always run in the weeks before a major fiscal announcement. Some predictions will prove accurate; many others won’t.

You can’t control what the Chancellor announces on 28 October. However, you can make sure you understand your current position, the choices available to you and the consequences of acting or waiting.

If tax uncertainty is affecting decisions about your personal finances, property, investments or business, speak to the team. We can review your position and help you make decisions based on your circumstances and the rules as they stand, rather than trying to second-guess what might be announced.

HMRC is reviewing around 45 million PAYE accounts to check whether taxpayers paid the correct amount of tax for the last tax year. P800 letters are already being issued, with HMRC confirming that the reconciliation process will continue through to November 2026 and that overpayments have been prioritised.

For taxpayers who have overpaid PAYE, the review could result in a refund. According to a recent report by FT Adviser, around £620 million is due in HMRC refunds, with taxpayers warned they may need to take action to receive the money owed to them.

If a P800 arrives, it is worth checking it carefully rather than assuming HMRC will handle everything automatically. You should make sure the information used in the calculation is correct and establish what, if anything, you need to do to receive your tax repayment.

Could you have overpaid tax without knowing?

PAYE is designed to collect Income Tax automatically from wages and pensions, which can lead to the understandable assumption that the amount deducted must be correct. However, the amount collected during the year will not always match a taxpayer’s final liability.

Tax deductions are based on the information available to HMRC and your employer or pension provider at the time. If your circumstances change, or the information being used is incomplete or out of date, you could end up paying more tax than was actually due.

HMRC lists several circumstances that can lead to a P800 calculation. These include:

• Being placed on the wrong tax code
• Finishing one job and starting another while receiving pay from both in the same month
• Starting to receive a workplace pension 

Overpayments can also arise when someone has multiple sources of income or when their circumstances change during the tax year.

People with more than one source of income should pay particular attention. Each source of income may appear to be taxed correctly in isolation, while the taxpayer’s overall position still results in an overpayment once all of their income and allowances are taken into account.

What is a P800 tax calculation?

After the end of a tax year, HMRC reconciles PAYE records to establish whether the correct amount of tax has been collected. Where its figures show that an employed taxpayer or pension recipient has paid too much or too little, HMRC may issue a P800 tax calculation.

The P800 sets out HMRC’s calculation of the income on which you should have paid tax, the tax it believes was due and the amount that has actually been paid. If the calculation shows that you have paid too much, it should also tell you what happens with the resulting tax repayment.

Receiving a P800 showing an overpayment is good news, but the figures should still be checked. Compare the income and tax deducted with your own records and make sure the sources of income shown by HMRC are correct. If something does not look right, it is better to resolve the discrepancy before assuming the repayment figure is accurate.

HMRC says you’re due a tax repayment – what happens next?

The next step depends on what your P800 tells you, so taxpayers should not assume that every HMRC tax repayment is dealt with in exactly the same way.

If your letter says that you can claim the repayment online, you will need to make the claim. This can be done using HMRC’s online service and, for taxpayers with a UK bank account, through a Personal Tax Account or the HMRC app. HMRC currently states that an online repayment should normally be received within five working days.

In other circumstances, the P800 may say that HMRC will send you a cheque. Where this applies, HMRC says the cheque should arrive automatically within 14 days of the date shown on the letter.

The safest approach is to follow the instructions on your own P800 rather than relying on what happened with a previous repayment or somebody else’s experience. Being told that you have overpaid tax does not necessarily mean the next step will be the same in every case.

Before claiming, check that HMRC has got it right

Discovering that you are due money may make it tempting to go straight to the repayment process, but the calculation should be reviewed first. The repayment shown on your P800 is only as reliable as the information HMRC has used to calculate it.

Check the employment and pension income shown against your own records, together with the tax deducted and the tax codes used during the year. You should also consider whether all relevant income has been included and whether anything appears to have been duplicated.

There is another reason to understand the cause of the overpayment. Receiving the money may solve the immediate problem, but it does not necessarily correct the underlying cause. If an incorrect tax code or inaccurate information remains on HMRC’s records, the same issue could affect deductions in a later year.

For some taxpayers, the more important question is therefore not simply, “How do I claim my tax repayment?” but “Why did I overpay tax in the first place, and could the same problem happen again?”

How far back can you claim overpaid tax?

Receiving a repayment for the latest year may also provide a reason to look at your position in earlier years. If the overpayment arose from an issue that persisted for some time, the same problem may have affected more than one tax year.

Claims for repayment of overpaid Income Tax are normally subject to a four-year time limit from the end of the relevant tax year. Someone who discovers a recurring error should therefore consider whether earlier years also need to be reviewed rather than assuming the latest P800 tells the whole story.

This can be particularly relevant where the cause of the overpayment was not a one-off event, but an ongoing issue with the information used to calculate your tax.

Do you need a tax repayment company?

Tax repayment companies offer to submit claims to HMRC on behalf of taxpayers, usually in return for a fee or a proportion of the repayment received. However, eligible repayment claims can be made directly to HMRC without paying a third party simply to process the claim.

Professional tax advice serves a different purpose. If your affairs involve several sources of income, earlier tax years or a calculation that does not appear correct, the issue may be establishing how much tax you should have paid rather than simply submitting a claim for the figure HMRC has provided.

Watch out for HMRC tax refund scams

A message saying that you are owed a tax repayment can seem more convincing when you already know that HMRC is reviewing millions of PAYE records. That makes it particularly important to be cautious about unexpected emails or text messages asking you to follow a link to receive a refund.

Rather than using links in unexpected messages, check your position independently through GOV.UK, your Personal Tax Account or the official HMRC app. Be especially wary of communications that ask for personal, banking, or card information, or suggest that you must act immediately to avoid losing a refund.

When might professional tax advice help?

For many taxpayers, checking a P800 and claiming a repayment will be relatively straightforward. Advice may become more useful where there are several sources of income, employment and pension income are received together, or property and investment income are also involved. Repeated tax code problems, or evidence that earlier years may be affected, can also justify a review of the wider position.

In these circumstances, the question is no longer simply how to claim a repayment. Reviewing the wider tax position can establish whether HMRC has used the correct information, whether the offered repayment is accurate, and whether the cause of the overpayment needs to be corrected to prevent the problem from recurring.

Don’t leave a tax repayment unclaimed

With around 45 million PAYE accounts being reviewed and taxpayers reportedly due hundreds of millions of pounds in repayments, HMRC’s current reconciliation exercise is worth paying attention to. If you receive a P800 showing that you have overpaid tax, check the figures carefully and establish what action you need to take to receive the money.

Claiming a tax repayment may only be part of the issue. Understanding why too much tax was paid can help identify incorrect information, recurring tax code problems or earlier years that also need attention.

If you have received a P800, believe you may have overpaid tax or are concerned that HMRC’s calculation does not reflect your circumstances, Wilkins Southworth can review the calculation, consider why the overpayment arose and establish whether any further action may be required.

Contact one of the team to discuss your circumstances and find out how our personal tax advisory services can help.

For years, Companies House has been criticised as a toothless beast. Companies could be formed quickly and cheaply, information was largely accepted at face value, and there were limited powers to challenge suspicious filings.

Making it easy to start a company has obvious benefits for the UK economy. Unfortunately, a system designed around speed and trust also creates opportunities for those with less legitimate intentions.

New research provides a striking illustration of the problem. An analysis of Companies House records by anti-money laundering software provider SmartSearch identified more than 3,000 dissolved companies that apparently operated as hairdressers, beauty salons, mini-marts and convenience stores and displayed remarkably similar characteristics. SmartSearch estimates that between £310 million and £464 million may have moved through the companies it identified.

With Companies House now operating under stronger legislation, mandatory identity checks and greater powers to challenge corporate information, perhaps the tide is finally turning.

What did the research uncover?

SmartSearch analysed Companies House records between 2016 and 2026, focusing specifically on businesses registered in the beauty and convenience store sectors. It identified 3,097 dissolved companies with average lifespans of just 170 to 194 days, with unusual similarities in where and when these businesses appeared.

According to the research, companies were heavily concentrated around the same postcodes and registered addresses. Some 83% of the suspect hairdressing companies and 92% of the suspect convenience stores were incorporated during the first two quarters of the year, while more than half were subsequently dissolved in the fourth quarter. The pattern then repeated in subsequent years.

One area of Cardiff alone reportedly contained 119 suspected companies across the two sectors. Of course, a short-lived company, a shared registered address, or a particular incorporation date is not evidence of criminality. However, when thousands of apparently unrelated companies start displaying the same characteristics, it is reasonable to ask why.

How did Companies House become a weak link?

The UK has traditionally made it relatively straightforward to establish a company. For genuine entrepreneurs, that is a good thing; nobody wants to spend weeks navigating bureaucracy before they can start trading. The problem was what happened after incorporation.

Historically, Companies House was primarily responsible for receiving and publishing information. Its ability to question whether that information was accurate was much more limited. Consequently, appearing on the Companies House register was never the same as having a company’s directors, address, and activities independently verified.

Recent evidence to the House of Commons Treasury Committee highlights why this matters. Paul Monaghan, chief executive of the Fair Tax Foundation, told MPs that the Insolvency Service had recently closed five illegal company service providers which, between them, had established 12,000 illegal UK companies.

His criticism went to the heart of the problem. If the overriding objective is to make companies extremely cheap and quick to establish, what safeguards are needed to prevent that convenience from being exploited? The answer isn’t to make life unnecessarily difficult for legitimate businesses, but to make it considerably more difficult to abuse the system.

The problem could extend far beyond a few high street shops

The headline estimate of up to £464 million is significant, but perhaps the most concerning aspect of the SmartSearch research is its relatively narrow scope: it only examined two sectors.

SmartSearch’s modelling suggests that between £310 million and £464 million may have moved through the identified companies. The paper argues that if similar patterns exist across other sectors identified as high risk in the 2025 national risk assessment, the figure over the past decade could exceed £1 billion.

The research also comes amid wider government attention on supposedly “dodgy” retail businesses. Earlier this year, the government announced a specialist unit targeting outlets such as vape and sweet shops suspected of being used to process criminal cash.

This should not cast suspicion on the thousands of perfectly legitimate businesses operating in these sectors. The issue is that an ordinary-looking business can potentially provide a useful front for activity that has little connection with what appears to be happening behind the counter.

Companies House now has powers to ask questions

This is where the position has changed considerably. The Economic Crime and Corporate Transparency Act 2023 expanded the role of the Registrar of Companies, meaning Companies House is no longer expected simply to accept information that has been correctly submitted and add it to the register.

It now has greater powers to query information and request supporting evidence. It can reject new filings where there are reasonable grounds to question whether the information complies with legal requirements, while its powers to remove material already on the register have also been expanded.

There are stronger controls over registered office addresses, greater scope to analyse information for suspicious behaviour and wider powers to share information with other public authorities.

Identity verification is another significant area of change. Since 18 November 2025, identity verification has been a legal requirement, phased in for company directors and people with significant control (PSCs). New directors need to verify their identity when incorporating a company or being appointed, while existing directors are being brought into the system through their confirmation statements.

Taken together, these aren’t cosmetic changes. They move Companies House closer to being an active gatekeeper rather than a passive filing cabinet.

Are we beginning to see the teeth?

There is evidence that Companies House is starting to use its expanded role. In June 2026, Companies House reported that misleading information was being removed from the register at scale and highlighted the need for closer collaboration with HMRC, the Insolvency Service and other partners.

SmartSearch chief executive Phil Cotter also acknowledged that Companies House had made “real progress” since the Economic Crime and Corporate Transparency Act came into force, although the question is whether it can move quickly enough.

Perhaps the most striking feature of the SmartSearch research isn’t one questionable company but the repetition: similar businesses, similar locations, similar lifespans and similar incorporation and dissolution cycles. The information was there; the challenge is spotting the pattern, investigating it and intervening before another generation of companies appears.

New legislation and identity verification make that more achievable, but powers written into legislation only make a difference when sufficient resources, technology, and people are available to use them.

What does this mean for legitimate businesses?

Legitimate businesses arguably have more to gain than lose from a Companies House register that people can actually trust. Banks, suppliers, customers, investors and professional advisers regularly use Companies House information when assessing businesses. Unfortunately, a register containing false addresses, fabricated appointments and companies established for unlawful purposes undermines confidence in everyone who uses it.

However, a more active Companies House also means directors need to take their own responsibilities seriously. Registered office details, directors, PSC information and confirmation statements should accurately reflect the current position of the business, with errors corrected rather than left sitting on the register for years.

Identity verification also means directors and PSCs need to understand when they must provide their Companies House personal code, the unique 11-character code issued after their identity has been successfully verified. Existing directors are generally required to provide it through their company’s next confirmation statement, while the requirements for PSCs depend on their circumstances.

None of this should trouble a properly managed company. In fact, stronger checks should make it harder for fraudulent businesses to hide among legitimate ones. However, the days when Companies House filings could be treated as little more than an annual administrative exercise appear to be disappearing.

Is change finally happening at Companies House?

There will always be a balance between making the UK an attractive place to establish a business and ensuring the system cannot easily be exploited. For too long, critics have argued that the balance was weighted heavily towards speed and convenience, with Companies House collecting enormous amounts of information but having limited ability to challenge what it was told.

That is now beginning to change. Companies House can question filings, request evidence, remove information, share data, and require directors and PSCs to verify their identities. Those are meaningful powers, although the SmartSearch findings demonstrate both why they are needed and the scale of the task ahead.

Perhaps the real test isn’t whether Companies House has finally grown teeth, but whether it can bite quickly enough when the warning signs appear.

At Wilkins Southworth, we help businesses ensure their accounting, tax and corporate affairs are properly managed and compliant. If you’re unsure whether your Companies House records accurately reflect your current business structure, need assistance with correcting historical information, or are dealing with an HMRC enquiry, please contact our team to discuss your situation.

If you’ve recently seen headlines questioning Business Relief investment funds, you’re not alone.

Recent national media coverage has shone a spotlight on how some private Business Relief investments are valued, raising questions about transparency, governance and the wider role these investments now play in inheritance tax planning.

While the headlines have focused on individual providers, the underlying issues are much broader. As more investors consider Business Relief as part of their estate planning, it is worth understanding why private investments are valued differently from listed shares and what questions to ask before making any investment decision.

The recent debate also serves as a useful reminder that tax planning and investment decisions should never be viewed in isolation. While the potential inheritance tax advantages often attract the initial interest, investors should also understand what they are investing in, how those businesses are expected to generate returns and how the investment fits within their wider financial objectives. 

In many respects, the recent headlines have highlighted the importance of due diligence rather than raising entirely new questions.

Why Business Relief is back in the spotlight

Business Relief has been part of the UK’s inheritance tax system for many years. Originally introduced to help ensure that trading businesses did not have to be broken up simply to meet an inheritance tax liability, it remains an important relief for many business owners and investors.

Over time, however, the market has evolved. Alongside family businesses, a growing number of professionally managed investment structures now seek to qualify for Business Relief, giving investors another option to consider as part of their inheritance tax planning.

Recent changes to the inheritance tax landscape have only increased interest in these investments. The growth reflects wider developments in both estate planning and investment markets. 

While AIM-listed companies were once the most familiar route for many investors, private Business Relief investments have become increasingly prominent, offering exposure to established trading businesses operating across sectors such as:

• Renewable energy
• Healthcare
• Telecommunications
• Infrastructure

As these investments have become more popular, it is perhaps inevitable that commentators, regulators and investors have started asking more detailed questions about how they operate. That scrutiny should not necessarily be viewed negatively, because understanding how private investments work is simply part of making informed financial decisions.

One question in particular has attracted significant attention: how do you value a company that is not listed on the stock market?

Why private companies are valued differently

When you buy shares in a listed company, the price is visible every day. Buyers and sellers collectively determine what the market believes those shares are worth, with prices continually responding to new information and changing market sentiment.

Private companies work very differently. Because their shares are not traded on a public exchange, there is no continuously quoted market price and no active market establishing a value every day.

That does not mean there is no realistic value. It simply means that the value has to be assessed rather than observed.

Professional valuers use a range of recognised methodologies to estimate a business’s value at a particular point in time. Depending on the nature of the company, they may consider profitability, future cash generation, the value of the underlying assets, comparable businesses and wider economic conditions. In practice, several recognised valuation methods are often considered before reaching an overall conclusion.

Just as importantly, valuations are not fixed, with many factors influencing how a company is valued over time, such as:

• Economic conditions
• Interest rates
• Sector performance
• Trading results

Regular reviews, therefore, form an important part of managing many private investment structures.

Valuation is judgement as well as mathematics

Many people assume there is a single “correct” valuation for a business. In reality, valuation is as much about professional judgement as it is about calculation.

A mature trading company with predictable profits may be valued quite differently from a business investing heavily today in infrastructure, and expected to generate rising income over many years. Different assumptions about growth, borrowing costs or future profitability can all influence the final outcome.

It is therefore entirely possible for experienced professionals, applying accepted valuation principles, to arrive at different conclusions. That does not necessarily mean one valuation is right and another is wrong. Rather, it reflects the fact that valuing private businesses is fundamentally different from pricing listed shares, where thousands of market participants collectively determine the price every day.

The bigger questions for investors

Recent headlines have naturally focused on valuation, but that is only one part of the picture.

Anyone considering a private Business Relief investment should also understand how frequently valuations are reviewed, whether independent specialists are involved, how the underlying businesses are managed and what options exist if they wish to realise their investment in the future.

It is also important to recognise that these are generally intended as long-term investments. Unlike listed shares, they may not always be able to be bought or sold at short notice, and liquidity arrangements can vary across different investment structures. Understanding those arrangements is just as important as understanding how the investment itself is valued.

Equally important is understanding what sits behind the valuation. What businesses does the investment own? How do those businesses generate income? Are they established trading companies producing reliable cash flows, or businesses investing for longer-term growth?

These are commercial questions rather than tax questions, but they matter just as much.

Looking beyond the inheritance tax benefit

One risk with any tax-efficient investment is focusing on the tax relief before considering the investment itself.

Business Relief investments are intended to support trading businesses and should be assessed accordingly. The potential inheritance tax advantages may be attractive, but they should never be the sole reason for investing.

Before committing capital, investors should understand how the investment is valued, who oversees the valuation process, the level of investment risk involved, and how the investment fits within their broader financial objectives. Those discussions should involve both a tax adviser and, where appropriate, an FCA-authorised independent financial adviser.

The most successful inheritance tax planning is rarely driven by a single product or investment. Instead, it starts with a clear understanding of what you are trying to achieve, before identifying the most appropriate combination of tax planning and investment strategies.

Business Relief is rarely the whole answer

For some families, Business Relief investments can form part of an effective inheritance tax strategy. For others, different approaches may be more appropriate.

Lifetime gifting, pension planning, trusts, Family Investment Companies and succession planning can all play an important role, depending on an individual’s objectives and personal circumstances. In many cases, the most effective plans combine several complementary strategies rather than relying on one solution.

The right approach will always depend on personal circumstances, family objectives and an individual’s attitude to investment risk. That is why tailored advice remains so important.

Conclusion

The recent media attention surrounding Business Relief investments has prompted some worthwhile questions. Investors should understand how private companies are valued, but they should also recognise that valuation is only one aspect of a much wider decision.

The more important question is not whether a particular investment carries inheritance tax advantages, but whether it is the right investment in the first place. Tax relief should support good financial planning, not drive it.

At Wilkins Southworth, we work with individuals, families and business owners to develop inheritance tax strategies that align with their broader financial objectives. If you are considering Business Relief investments as part of your estate planning, we can help you understand how they fit alongside your broader tax strategy and work with your financial adviser to ensure your plans are aligned.

If you made a mistake on your tax return ten years ago, there was always a chance it would never be spotted.

That wasn’t necessarily because HMRC lacked the information. More often than not, it simply didn’t have the time, technology or resources to compare everything it already held.

A property sale here, dividend income there, or company accounts filed separately from a personal tax return. Unless something obvious caught an inspector’s attention, many assumed those pieces of the puzzle would remain exactly that, separate pieces.

Today, that assumption is becoming increasingly risky.

HMRC recently revealed that its use of digital analytics and artificial intelligence (AI) helped recover or protect around £10 billion in tax during the last financial year. At the same time, the tax authority continues to target the UK’s estimated £59.2 billion tax gap – the difference between the amount of tax that should have been collected and what actually reached the Treasury.

Those figures are significant for one simple reason. They demonstrate that HMRC’s investment in technology is no longer a future ambition or an experimental project. It is delivering measurable results today.

The proof, as the saying goes, really is in the pudding. The conversation has moved on. The question is no longer whether HMRC can use AI effectively; it’s how much more effective it will become.

This doesn’t mean AI is replacing tax inspectors or that every taxpayer is suddenly under suspicion. Far from it. However, it does represent a significant shift in how HMRC identifies potential errors, inconsistencies and non-compliance. For businesses, company directors, landlords and individuals alike, understanding this change has never been more important.

From legacy systems to leading analytics

It might seem surprising that HMRC is now being talked about as a leader in data analytics.

After all, it wasn’t that long ago that the department was making headlines for ageing computer systems, lengthy telephone queues and delays in processing correspondence. We’ve previously written about HMRC’s legacy IT infrastructure and the challenges it created for both taxpayers and advisers.

Those systems haven’t disappeared overnight. However, while many taxpayers still experience frustration with HMRC’s customer service, something very different has been happening behind the scenes.

Rather than replacing every legacy system at once, HMRC has invested heavily in sophisticated analytical technology designed specifically to support compliance work. The result is an organisation that may still face operational challenges but has become significantly more capable of analysing data and identifying potential tax risks.

The irony is difficult to ignore. While taxpayers may still spend time waiting to speak to someone on the telephone, HMRC’s computers are becoming increasingly effective at spotting inconsistencies in the information they already hold.

Slow customer service and sophisticated analytics aren’t contradictory. They simply reflect two very different parts of the same organisation.

AI isn’t replacing tax inspectors

Artificial intelligence often attracts dramatic headlines, creating the impression that computers are making decisions about taxpayers without any human involvement. That isn’t what’s happening.

Instead, AI is best thought of as an exceptionally efficient research assistant. It doesn’t make decisions or accuse taxpayers of wrongdoing; it simply helps experienced investigators identify the cases that deserve a closer look.

Rather than determining whether someone has underpaid tax, these systems analyse vast quantities of information. This allows them to identify unusual patterns and highlight cases that may warrant further investigation. Experienced HMRC officers still make the decisions, but they are now supported by technology capable of reviewing millions of pieces of information far more quickly than any individual could.

One of the best-known examples is HMRC’s Connect system, which has been developed over many years to compare information from a wide range of legitimate sources. According to published figures, Connect supported around 540,000 tax enquiries during the 2024/25 tax year, demonstrating the central role data analysis plays in HMRC’s compliance activity.

AI isn’t looking for guilt; it’s looking for anomalies, and those anomalies help HMRC decide where questions should be asked.

Joining the dots like never before

Most people think about their financial affairs in separate compartments:

• Their accountant prepares the company accounts.
• Their solicitor handles a property purchase.
• Their investment manager issues annual tax certificates.
• Their bank manages their accounts.

Each organisation only sees part of the picture, while increasingly, HMRC can compare much more.

Information from Self Assessment tax returns, Corporation Tax returns, Companies House filings and Land Registry records. This also extends to investment income, overseas reporting agreements, online marketplaces, and, where appropriate, information obtained using HMRC’s legal powers, all of which can contribute to building a broader picture.

Viewed individually, none of this information is remarkable. The real power lies in comparing it.

Imagine a company director receives dividends from their business, sells an investment property and repays a director’s loan in the same tax year. None of those events is unusual individually. But if one source of information doesn’t align with another, modern analytics can identify the discrepancy far more quickly than was possible only a few years ago.

Individually, each piece of information tells a small part of the story. Together, they paint a much broader picture, and that’s exactly where AI excels.

It’s the inconsistencies that trigger questions

One of the biggest misconceptions about HMRC’s use of AI is that everyone is constantly being monitored. The reality is far more reassuring.

Most enquiries don’t begin because HMRC knows something is wrong. They begin because something doesn’t quite look right.

Technology helps identify unusual patterns that may deserve further investigation. These might include discrepancies between company filings and personal tax returns, unexplained director loan balances, undeclared rental income or financial activity that appears inconsistent with other information HMRC already holds.

Importantly, an enquiry does not automatically imply wrongdoing. There are many legitimate reasons why transactions may appear unusual at first glance, and genuine mistakes happen.

However, as HMRC’s analytical capabilities continue to improve, the likelihood of inconsistencies remaining unnoticed is steadily reducing.

Technology is only part of the picture

Artificial intelligence is just one element of HMRC’s wider compliance strategy.

The department is also making greater use of information-sharing agreements, expanding its legal powers to obtain financial information and strengthening incentives for whistleblowers to report serious tax evasion.

Under HMRC’s enhanced reward scheme, eligible informants whose information leads to the recovery of more than £1.5 million can receive between 15% and 30% of the additional tax recovered.

Alongside this, HMRC’s Fraud Investigation Service secured 260 criminal convictions during the 2025/26 tax year, underlining its continued focus on tackling serious tax fraud.

Taken together, these developments paint a clear picture. AI is not replacing traditional compliance activity, but it is making it more targeted, more efficient and increasingly data-driven.

Good records have never been more important

For taxpayers who keep accurate records and seek professional advice, these developments should not be a cause for concern. In many ways, they reinforce principles that have always represented good practice.

Business owners should ensure that director loan accounts are properly maintained, dividend decisions are fully documented, and company records accurately reflect transactions throughout the year. Landlords should retain comprehensive records of rental income and allowable expenses, while individuals should ensure tax returns are prepared using complete and accurate information.

A sensible compliance health check

As HMRC’s analytical capabilities continue to evolve, it’s worth asking yourself a few simple questions:

• Are your company records accurate and up to date?
• Do director loan accounts reconcile correctly?
• Are dividend payments properly documented?
• Have all property income sources been declared?
• Could significant transactions be easily explained if HMRC asked questions?

If the answer to any of these is “I’m not sure”, now is the time to review them – not after an enquiry arrives.

Good bookkeeping has always mattered. Today, it matters even more because technology makes inconsistencies easier to identify. Well-maintained records don’t just help you comply with your obligations; they make responding to any HMRC enquiry significantly quicker and less stressful.

Looking Ahead

Artificial intelligence is transforming almost every industry, and tax administration is no exception. 

For years, many assumed HMRC simply lacked the technology to connect every piece of financial information it already held. Recent evidence suggests that assumption is becoming outdated.

The proof is no longer theoretical. HMRC’s own figures show that investment in AI and digital analytics is delivering tangible results, helping recover billions of pounds in tax while allowing compliance teams to focus their efforts more effectively.

For most taxpayers, this isn’t a reason to panic. It is, however, a timely reminder that accurate records, consistent reporting and proactive tax advice have never been more valuable.

The best tax strategy has never been trying to stay below the radar. It’s making sure there’s nothing for the radar to find.

As HMRC continues to expand its use of AI and data analytics, ensuring your tax affairs are accurate, consistent and well-documented has never been more important. Whether you’re a business owner, company director, landlord or individual taxpayer, the team at Wilkins Southworth can help you review your tax affairs and ensure they’re prepared for an increasingly data-driven compliance environment. 

If you’d like to discuss your circumstances, we’d be delighted to help.

For many businesses, paying HMRC is a straightforward part of the monthly routine. Calculate the liability, make the payment before the deadline and move on to running the business.

That process, however, could soon look rather different.

HMRC is consulting on proposals that would require most VAT and PAYE payments to be made by direct debit, replacing the wide range of payment methods currently used by businesses. 

If implemented, the changes would affect around 2.4 million businesses, sole traders and employers. More significantly, HMRC is also considering penalties for businesses that fail to pay by the required method, even where the correct amount of tax has been paid on time.

While the consultation focuses on VAT and PAYE, it also offers another indication of the direction HMRC is taking as it continues to digitise the UK’s tax system. 

Why HMRC Direct Debit could become mandatory

The proposed HMRC Direct Debit rules form part of a wider consultation published by HMRC in June 2026. At present, businesses can settle VAT and PAYE liabilities using various payment methods, including bank transfers, debit cards, standing orders and, in some cases, cheques. Despite HMRC encouraging direct debit as its preferred payment option, relatively few businesses have adopted it.

According to HMRC, only around 330,000 of the 2.73 million businesses registered for VAT or PAYE currently pay by direct debit. The remaining 2.4 million continue to use alternative methods.

HMRC believes mandatory direct debit would:

• reduce administrative work for businesses and HMRC
• minimise payment reference errors
• reduce incorrectly allocated payments
• lower the number of late payments
• improve overall compliance.

From HMRC’s perspective, the proposal represents a logical extension of the digital systems already introduced through initiatives such as Making Tax Digital.

A wider move towards digital tax administration

Viewed in isolation, changing the way businesses pay VAT and PAYE may appear relatively minor. In reality, it forms part of a much broader programme of digital reform.

Over the past decade, HMRC has steadily moved towards a more automated tax system:

• digital record keeping
• online taxpayer accounts
• Making Tax Digital 

Together with expanded information-gathering powers, they all demonstrate a clear direction of travel. 

The proposal also sits alongside HMRC’s plans to replace certain paper-based VAT processes with online services, reinforcing the department’s wider move towards digital tax administration. 

Rather than relying on businesses to initiate each VAT or PAYE payment manually, HMRC would collect amounts automatically through an authorised Direct Debit once the relevant return has been submitted. HMRC believes this will reduce manual intervention and help minimise incorrectly allocated payments. 

For businesses already paying by direct debit, little is likely to change. For many others, however, it would require adjustments to existing payment processes and internal controls.

What would the new rules mean in practice?

Under the proposals, businesses would authorise HMRC to collect VAT and PAYE liabilities directly from their bank account. 

Once a VAT return has been submitted, HMRC would notify the business of the amount due and collect payment three working days after the normal payment deadline. The consultation recognises that some businesses will still require alternative arrangements.

For example:

• businesses making payments exceeding the £20 million Bacs direct debit limit would continue using other electronic payment methods
• overseas businesses without UK bank accounts would remain outside the proposed rules
• certain other limited exceptions may apply following consultation

For the vast majority of businesses, however, direct debit would become the default method of payment.

The proposal that has attracted the most attention

Perhaps the most surprising aspect of the consultation is not the move towards direct debit itself, but the potential consequences of failing to use it.

HMRC is seeking views on whether businesses should face penalties if they fail to pay by direct debit, even where the correct amount of VAT or PAYE has been paid in full and by the due date.

The consultation also considers whether certain payment deadline extensions should only remain available to businesses paying by direct debit.

At this stage, these are proposals rather than confirmed policy. Nevertheless, they illustrate how the payment method could become an increasingly important aspect of tax compliance rather than simply an administrative choice.

Businesses should remember that the consultation is seeking views on these changes. No decisions have yet been made regarding the introduction of mandatory direct debit or any associated penalties.

There could be benefits for businesses

While some businesses may view mandatory direct debit as reducing flexibility, there are potential advantages. 

Automated payments may reduce the risk of:

• missed payment deadlines
• incorrectly entered payment references
• payments allocated to the wrong tax period
• avoidable late payment penalties.

For businesses with established accounting systems and predictable cash flow, automation may actually simplify routine tax compliance.

As with many digital reforms, much will depend on how the final rules are implemented and whether sufficient flexibility remains for businesses with more complex payment arrangements.

Other VAT changes are also on the way

The consultation is not limited to payment methods. HMRC also plans to replace paper-based VAT forms with new online submission tools by the end of 2026.  

While less high-profile than the direct debit proposals, these changes reinforce HMRC’s wider objective of replacing paper-based administration with fully digital services wherever possible.

Taken together, the proposals suggest that businesses should expect further digital changes over the coming years rather than viewing this consultation as a one-off initiative.

What should businesses do now?

There is no immediate need for businesses to change how they pay HMRC. The consultation remains open until 16 August 2026, and the proposals may evolve before any legislation is introduced.

However, businesses that currently pay VAT or PAYE by bank transfer or other manual methods may wish to consider how mandatory HMRC Direct Debit payments could affect their existing financial procedures, cash flow management and internal approval processes.

Speaking to your accountant before any changes are introduced can help ensure you understand both the practical implications and any opportunities to simplify your tax administration.

Conclusion

The proposal to mandate HMRC Direct Debit for VAT and PAYE payments may appear to be a relatively small administrative change. In reality, it reflects a much broader shift in the way HMRC interacts with businesses.

Whether or not the changes proceed in their current form, the direction of travel is becoming increasingly clear. HMRC continues to automate more aspects of tax administration, from record keeping and reporting through to the way taxes are ultimately collected.

With almost 87% of VAT and PAYE-registered businesses currently using payment methods other than direct debit, this would represent one of the biggest administrative changes to business tax payments in recent years.

For businesses, understanding these developments early will make any future transition far easier. If you’d like to discuss how these proposals could affect your business or your wider tax compliance procedures, the team at Wilkins Southworth would be pleased to help.