If you've spent years worrying about IR35, Making Tax Digital can sound like yet another compliance headache stacked on top. For most contractors trading through their own limited company, it genuinely isn't. Here's exactly where MTD does and doesn't touch your contracting income.
Most contractors trade through a Personal Service Company, which pays Corporation Tax on its profits and reports separately from your personal Self Assessment. MTD for Income Tax only applies to individuals with self-employment or property income in their own name, not to companies, so your day-rate contract income sitting inside the company is simply outside its scope.
These two rules get confused because both involve HMRC scrutiny of contractor arrangements, but they're not related. IR35 decides whether a contract delivered through your limited company should really be taxed as if you were an employee of the client. MTD decides how self-employed and property income gets reported to HMRC. A contractor firmly inside IR35 on every contract may never have an MTD obligation at all, because none of that income is personal self-employment income.
| IR35 | MTD |
|---|---|
| Decides if your contract is really employment | Decides how self-employed/property income is reported |
| Applies to limited company contractors | Applies to individuals, not companies |
| Medium/large clients determine your status | HMRC determines it from your tax return figures |
If you invoice clients directly as a sole trader rather than through a company, IR35 doesn't apply to you at all, that's a company-specific rule. Your gross self-employment income is simply assessed against the MTD threshold like any other self-employed person.
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Not to your company's contract income, which is taxed through Corporation Tax and reported separately. MTD for Income Tax only applies to individuals with self-employment or property income in their own name, so it's only relevant if you also have separate personal income outside the company.
No. IR35 decides whether a contract you deliver through your limited company should be taxed like employment. MTD is a separate reporting system for self-employed and property income. A contractor can be affected by IR35 rules and never be affected by MTD at all, if all their income runs through the company.
Yes, in the normal way. If you invoice clients directly as a sole trader rather than through a company, your gross self-employment income is assessed against the MTD threshold like any other self-employed person, and IR35 doesn't apply to sole traders at all.
It depends on the client's size. Medium and large private sector companies, and all public sector bodies, must determine your IR35 status themselves. Small private sector clients leave the determination to your own limited company.
Yes, whether trading as a sole trader or through a limited company, though the mechanics differ slightly. A proportion of home running costs, your computer equipment, software licences, and business proportion of phone and broadband are normally allowable.