Making Tax Digital for Solicitors
Making Tax Digital (MTD) represents a major shift in how taxes are reported to HMRC, and it is set to affect many solicitors and legal professionals across the UK. Introduced to modernize the tax system, MTD replaces traditional paper records and annual tax returns with digital record-keeping and more frequent online submissions. While solicitors are already subject to strict regulatory and financial compliance requirements, MTD adds another layer of ongoing reporting that must be carefully managed.
Making Tax Digital for solicitors is not simply an administrative change. It affects how fee income and expenses are recorded, how often financial information is shared with HMRC, and what systems must be used to remain compliant. Sole practitioners, partners in unincorporated firms, and VAT-registered practices will all need to understand how MTD applies to their specific structure. In addition, solicitors must ensure that MTD processes align with existing obligations under the SRA Accounts Rules, particularly around client money and office accounts.
Although the changes may feel burdensome at first, MTD can be managed effectively with the right systems in place. When set up correctly, digital accounting can improve accuracy, reduce year-end pressure, and provide clearer financial oversight. This guide explains what Making Tax Digital means for solicitors, when it applies, and how to prepare in a practical and compliant way.
Who Making Tax Digital Applies to (and Who Is Not in Scope Yet)
Making Tax Digital does not apply to all solicitors at the same time. Whether a solicitor or a law firm is required to comply largely depends on the business structure and level of income, rather than the type of legal work carried out.
MTD for Income Tax applies to self-employed solicitors and sole practitioners, as well as partners in unincorporated law firms, whose gross qualifying income exceeds HMRC’s thresholds. From 6 April 2026, solicitors with a qualifying income of more than £50,000 will be required to comply with MTD for Income Tax. This threshold will reduce to £30,000 from April 2027, then to £20,000 from April 2028, bringing a growing number of smaller practices and individual solicitors within the scope of MTD over time.
Qualifying income is based on gross turnover, not profit. For solicitors, this is an important distinction, as fee income may appear high even where overheads such as staff costs, professional indemnity insurance, premises, and regulatory fees significantly reduce profits. Despite this, solicitors whose gross income exceeds the relevant threshold must still comply with MTD.
Solicitors and law firms that are VAT-registered are already required to comply with MTD for VAT, regardless of income level. This means VAT records must be kept digitally, and VAT returns must be submitted using MTD-compatible software. Many firms are therefore already partially operating under the MTD framework, even if MTD for Income Tax has not yet applied to them.
Some solicitors are currently out of scope. Those operating through a limited company fall outside MTD for Income Tax, as company profits are taxed under Corporation Tax rather than Self Assessment. However, directors may still have personal Self Assessment obligations. Additionally, some firms with income below the relevant thresholds remain outside MTD for now unless they voluntarily opt in.
Understanding whether you are currently in scope or likely to be brought into MTD in the near future is essential for planning. Given the staged reduction in thresholds, many solicitors who are unaffected today will still need to prepare for digital reporting in the coming years.
When Solicitors Need to Start Complying – Key MTD Dates
The introduction of Making Tax Digital for Income Tax is being phased in over several years, meaning solicitors will be required to comply at different times depending on their income level. Understanding these key dates is essential for planning and avoiding last-minute changes to systems and processes.
From 6 April 2026, self-employed solicitors, sole practitioners, and partners in unincorporated law firms with gross qualifying income above £50,000 will be required to comply with MTD for Income Tax. This marks the first major expansion of MTD beyond VAT and will require affected solicitors to keep digital records and submit quarterly updates to HMRC using MTD-compatible software.
The scope of MTD widens from 6 April 2027, when the income threshold reduces to £30,000. At this stage, many smaller practices and individual solicitors who previously fell outside the rules will be brought into the regime. Firms that have traditionally relied on annual account preparation and self-assessment submissions will need to adapt to more regular reporting throughout the year.
From 6 April 2028, the threshold is expected to fall further to £20,000, meaning that a significant proportion of self-employed solicitors will fall within MTD. This includes part-time practitioners and consultants who may not consider themselves to be running large practices but whose gross fee income exceeds the threshold.
Solicitors and firms that are VAT-registered should also remember that MTD for VAT already applies, regardless of income level. This means some practices may already be submitting digital VAT returns while still filing traditional self-assessment returns, at least until their MTD for income tax start date arrives.
Because thresholds reduce over time, solicitors whose income fluctuates should monitor their turnover carefully. A strong year of fee income could bring forward MTD obligations sooner than expected, making early preparation essential.
How Does Making Tax Digital for Solicitors Work?
1. Keeping Digital Records
Under Making Tax Digital, solicitors must keep digital records of their business income and expenses. This includes fee income, disbursements, office costs, staff expenses, professional indemnity insurance, regulatory fees, and other overheads. Records must be maintained in MTD-compatible accounting software, rather than paper files or standalone spreadsheets. Importantly for solicitors, office money and client money must continue to be recorded separately in line with the SRA Accounts Rules, and MTD does not remove or override these regulatory obligations.
2. Submitting Quarterly Updates
- Instead of submitting a single annual Self Assessment tax return, solicitors within MTD must submit quarterly updates summarising income and expenses to HMRC. These updates provide HMRC with a running picture of the practice’s financial position during the tax year. The standard reporting periods and deadlines are:
- Quarter 1: 6 April – 5 July → deadline 7 August
- Quarter 2: 6 July – 5 October → deadline 7 November
- Quarter 3: 6 October – 5 January → deadline 7 February
- Quarter 4: 6 January – 5 April → deadline 7 May
Quarterly updates are informational and do not finalise the tax position; however, late or missing submissions may still result in penalties.
3. End-of-Year Declaration
At the end of the tax year, solicitors must submit a final declaration on 31st January to HMRC. This replaces the traditional Self Assessment return and confirms the final taxable profit after allowable expenses, adjustments, and reliefs. Because most income and expenses have already been reported through quarterly updates, the end-of-year process is typically more streamlined and less error-prone.
4. Day-to-Day Impact on Solicitors
In practical terms, MTD encourages solicitors to maintain up-to-date bookkeeping throughout the year rather than relying on year-end catch-up. While this requires adjustments to working habits, it can also improve financial oversight, cash flow management, and tax planning. For many practices, especially sole practitioners, maintaining regular digital records can reduce year-end surprises and support better business decisions.
Common Mistakes Solicitors Make Under MTD and How to Avoid Them
1. Relying on Paper Files or Non-Compliant Spreadsheets
Many solicitors still rely heavily on paper records or spreadsheets that are not connected to MTD-compatible software. Under MTD, records must be kept digitally and submitted through approved software. Continuing with manual systems increases the risk of errors, missing data, and late submissions. Moving to compliant software early and maintaining records digitally throughout the year avoids these issues.
2. Confusing Client Money with Office Income
One of the most serious mistakes solicitors can make is failing to separate client money from office income clearly. While MTD focuses on tax reporting, it does not replace obligations under the SRA Accounts Rules. Only office income and allowable business expenses should be included in MTD submissions. Client money must continue to be recorded and reconciled separately to avoid regulatory breaches.
3. Missing Quarterly Submission Deadlines
Quarterly updates introduce new deadlines that many solicitors are not used to. Missing submission dates, such as the 7 August or 7 November deadlines, can lead to HMRC penalties. Setting up automated reminders, maintaining regular bookkeeping routines, and working with an accountant can help ensure timely submissions.
4. Incorrectly Reporting Disbursements
Disbursements can be particularly complex for solicitors. Some disbursements form part of taxable income, while others are treated differently for VAT and tax purposes. Incorrectly categorising disbursements in digital records can distort income figures and lead to inaccurate quarterly updates. Using software that allows clear categorisation and seeking professional advice where needed can reduce this risk.
5. Leaving Bookkeeping Until the End of the Quarter or Year
Delaying bookkeeping until the end of the reporting period often leads to rushed submissions and errors. Under MTD, regular record-keeping is essential. Updating records weekly or monthly makes quarterly updates far easier and reduces the likelihood of omissions or inaccuracies.
6. Assuming MTD Does Not Apply Because the Firm Is Small
Some solicitors assume that MTD only affects larger practices. With income thresholds reducing to £50,000 in 2026, £30,000 in 2027, and £20,000 in 2028, many sole practitioners and small firms will fall within scope. Failing to plan can lead to last-minute system changes and compliance issues.
Practical Tips for Solicitors to Stay Compliant with MTD
1. Adopt MTD-Compatible Accounting Software Early
Choose software that meets HMRC’s MTD requirements and suits the needs of your practice. Ensure the software can handle office income, disbursements, staff expenses, and VAT where applicable. Early adoption helps you become familiar with the system and reduces year-end stress.
2. Separate Client and Office Money Clearly
Maintain strict separation between client funds and office income. Only include office income and allowable business expenses in your MTD records. Following this practice prevents regulatory issues under the SRA Accounts Rules and ensures accurate tax reporting.
3. Update Records Regularly
Don’t leave bookkeeping to the end of the quarter. Logging income, expenses, and disbursements weekly or monthly keeps records accurate, simplifies quarterly updates, and helps identify errors or missing transactions promptly.
4. Set Reminders for Quarterly Deadlines
- Quarterly updates must be submitted on time:
- Q1: 6 April – 5 July → 7 August
- Q2: 6 July – 5 October → 7 November
- Q3: 6 October – 5 January → 7 February
- Q4: 6 January – 5 April → 7 May
Use calendar alerts or software notifications to avoid late submissions and potential HMRC penalties.
5. Review Disbursements Carefully
Ensure disbursements are correctly classified for tax purposes. Software that allows you to categorise transactions correctly is essential, and if there is any doubt, consult an accountant to avoid reporting errors.
6. Reconcile Bank Accounts Regularly
Regular reconciliation between bank statements and accounting records ensures all transactions are captured accurately. This prevents discrepancies and makes both quarterly and end-of-year submissions smoother.
7. Seek Professional Guidance Where Needed
If your practice handles complex client arrangements, multiple VAT obligations, or high-value disbursements, consulting an accountant experienced with MTD for solicitors can help prevent errors and save time. Even a short consultation can clarify procedures and improve compliance.
Conclusion – Staying Ahead with MTD for Solicitors
Making Tax Digital for solicitors may initially seem like a significant change, but with careful preparation, it is entirely manageable. The key is to maintain accurate digital records of office income, expenses, and disbursements, while keeping client money separate in accordance with the SRA Accounts Rules. By adopting MTD-compatible accounting software and updating records regularly, solicitors can streamline quarterly submissions, reduce year-end stress, and gain better visibility over the financial health of their practice. Early preparation also helps practices familiarize themselves with the system and avoid common pitfalls, such as missed deadlines, misclassified disbursements, or incomplete bookkeeping.
It is also important to plan for the future, as income thresholds will reduce to £50,000 in 2026, £30,000 in 2027, and £20,000 in 2028, bringing more sole practitioners and smaller firms within the scope of MTD. By following practical tips—regular updates, clear separation of client and office funds, careful expense classification, and seeking professional guidance when needed, solicitors can ensure compliance and improve financial oversight. With the right systems and habits in place, Making Tax Digital can become an effective tool for running a more organized, efficient, and compliant legal practice.
Sterling & Wells
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