Making Tax Digital (MTD) for Car Dealers: What You Need to Know in 2026

Picture this: it’s a crisp January morning in 2026, and your car dealership lot is gleaming with vehicles, from family saloons to high-end sports cars. The showroom hums with potential buyers, and the smell of new leather and polished metal fills the air. Amid the handshakes, test drives, and finalising deals, one thought nags at the back of your mind – how do you stay on top of the latest tax rules without letting them disrupt the flow of business? Making Tax Digital, or MTD as it’s commonly called, has been quietly reshaping how UK businesses handle VAT for years. Now, it’s stepping into income tax reporting, bringing big changes for motor traders starting this tax year.

Running a car dealership comes with its unique rhythm. Whether you’re a sole trader flipping a handful of cars or managing a larger operation with multiple salespeople and workshops, keeping your books tidy can make all the difference between a smooth quarter and a frantic scramble at tax time. MTD isn’t just another regulatory box to tick. With the right approach, it can help you track profits, spot cash flow issues early, and even make claiming deductions simpler. By understanding what applies to your dealership, you can focus on selling cars and growing your business rather than stressing over paperwork.

Why MTD Matters More Than Ever for Your Dealership

Making Tax Digital may have been a buzzword since its VAT rollout in 2019, but it’s more than just digital bookkeeping. At its heart, MTD is HMRC’s effort to bring tax reporting into the modern era, replacing mountains of paperwork with software that keeps your records linked and sends updates straight to them. For car dealers, who juggle high-value sales, variable margins, and a wide range of expenses like vehicle repairs, advertising, and part exchanges, MTD isn’t just a regulation – it’s an opportunity to keep a real-time view of your financial health.

As of January 2026, most VAT-registered dealerships are already filing quarterly returns digitally. The real change now is the introduction of MTD for Income Tax Self Assessment (MTD for ITSA), starting from 6 April 2026. This applies to sole traders and landlords with over £50,000 in qualifying income from trading or property. Instead of submitting one large self-assessment at the end of the year, you’ll provide quarterly updates summarising income and expenses. This structured rhythm helps you see profitability per car sold and spot trends long before year-end, giving your dealership more control over cash flow and tax planning.

Car dealerships have specific quirks that make MTD particularly important. Take the VAT margin scheme for second-hand vehicles, for example – you only pay VAT on the profit, not the total sale price. Under MTD, the links between sales invoices and margin calculations must be clear and traceable. Mistakes can trigger penalties, but when handled properly, MTD-compliant processes can actually make reclaiming VAT on trade-ins, demo cars, fuel, and other business costs much easier. Understanding these nuances now gives you a head start before the new reporting requirements kick in.

Checking If Your Dealership Falls Under MTD Rules

Determining whether MTD applies to you is simpler than it seems. Start with your 2024-25 tax return or a summary of last year’s income. HMRC uses total gross income from self-employment, including car sales, repairs, or other motor trade activities, plus any property income, to decide if you must join MTD for ITSA. If that total exceeds £50,000 before expenses, you’ll need to start quarterly reporting from April 2026. These thresholds are set to decrease over time, falling to £30,000 in 2027 and £20,000 by 2028, gradually encompassing more small and independent dealerships.

For VAT, the rules are more straightforward. Every VAT-registered business has been under MTD since April 2022, and new dealers are automatically enrolled when they register. There are exemptions for those facing genuine barriers to using digital tools – for example, poor internet connectivity in remote areas or certain disabilities – though separate approval must be obtained from HMRC. Similarly, trusts, estates, and non-resident businesses often fall outside the requirement. Seasonal sales spikes in dealerships can also affect thresholds. For instance, selling 50 used cars at an average of £20,000 each totals £1 million turnover, easily surpassing the £50,000 qualifying income mark.

Being aware of these thresholds early is critical. By checking your numbers now, you can plan your bookkeeping, update software, and prepare your team for quarterly submissions, avoiding last-minute stress and penalties.

The Nuts and Bolts of MTD for VAT in Your Daily Deals

If you’ve already filed a VAT return using bridging software or digital records, you’ve experienced MTD for VAT firsthand. All VAT-registered dealers must maintain digital records for six years, including sales invoices, purchase receipts for parts, and even mileage logs for company vehicles. Every record must link seamlessly, showing how figures like part-exchange credits feed into your VAT calculations. A simple spreadsheet dumping numbers won’t meet HMRC standards – digital links are mandatory.

For dealerships using the VAT margin scheme, MTD changes the game. Suppose you purchase a used BMW for £15,000 and sell it for £18,000. Under the margin scheme, VAT is only due on the £3,000 profit, not the total sale price. Digital tools must capture the purchase price, apply the margin correctly, and file quarterly returns. Accurate submissions unlock reclaiming VAT on advertising, showroom utilities, diagnostics, and other business costs. Late or incorrect returns carry penalties, starting at £400 and increasing with repeated mistakes. Getting it right not only avoids fines but also simplifies expense tracking and tax planning.

Even dealers not yet VAT-registered should be aware of the benefits. Voluntary registration can allow reclaiming VAT on demo cars, trade-ins, and workshop materials before hitting the turnover threshold. Keeping records tidy from the start makes the eventual transition to mandatory MTD smoother and more profitable.

Preparing for MTD Income Tax: Quarterly Reporting for Dealers

From April 6, 2026, those in scope for MTD for ITSA will shift from annual self-assessments to quarterly updates. These submissions summarise income, including car sales, commissions, warranties, and part-exchange values, along with expenses such as fuel, repairs, valeting, auction fees, and even home office costs if you handle admin from your garage. Initially, the updates involve summaries rather than exact figures, but by 2027, more detailed reporting will be expected.

Digitising everything is essential. Scan receipts, link bank feeds, and ensure your software accurately categorises margin scheme sales. This structured approach provides real-time insights into profitability. For example, if repairs start eating 20% of your margins midway through the year, you can adjust pricing or defer non-essential expenses to protect profits. HMRC offers a grace period for first-time ITSA filers in 2026-27, but familiarising yourself with quarterly reporting now will make future compliance far less stressful.

Claiming Expenses and Deductions Without Missing a Beat

MTD makes tracking and claiming expenses clearer than ever. Every cost must be digitally recorded, but for dealers, this can translate into real savings. Vehicle purchases may qualify for capital allowances via the Annual Investment Allowance (AIA) up to £1 million per year for new vans or workshop tools. Repairs on traded cars count as business expenses, as do advertising at auto shows, staff training, and diagnostic equipment. The margin scheme adds a twist: input VAT cannot be claimed on second-hand car purchases, but overheads like rent, fuel, or utilities remain fully deductible.

Keeping records updated quarterly also highlights overspending early. For example, if your advertising budget is creeping too high, you can scale back before it affects profits. Digital tracking ensures nothing slips through the cracks, from warranties to part-exchange costs. A structured approach like this not only safeguards compliance but also helps make strategic decisions to grow your dealership.

Deadlines and Avoiding Costly Penalties

Staying on top of deadlines is crucial. VAT quarters end on 5th April, July, October, and January, with submissions due by the 7th (10th for agents). ITSA quarters follow a similar rhythm, and the end-of-year declaration is due by 31 January. Late filing triggers penalties ranging from £100-£300 initially, rising for repeated delays. Persistent failures can incur fines up to £10,000, though HMRC often offers first-time appeals based on behaviour.

The good news for 2026 is leniency for new ITSA participants, giving dealerships time to adjust. Automating submissions, setting calendar reminders, and planning quarterly reviews help avoid unnecessary costs. By embedding these practices into daily operations, you can prevent penalties and free your team to focus on sales rather than chasing paperwork.

Steering Your Dealership Through MTD Successfully

Making Tax Digital doesn’t have to be overwhelming. By understanding thresholds, digitising records, and adopting quarterly reporting routines, car dealers can stay compliant while maintaining clear insight into profits and expenses. Structured bookkeeping, especially when paired with margin scheme considerations and expense tracking, makes filing less stressful and gives you the tools to make smarter business decisions throughout the year.

Starting early, keeping detailed digital records, and checking compliance regularly ensures that your dealership avoids fines, captures all allowable deductions, and maintains smooth cash flow. MTD is less about compliance hurdles and more about building a system that protects your profits while freeing up time to focus on what matters most – running a thriving car dealership.