Making Tax Digital for Income Tax with Xero explained for sole traders and landlords

Gravita co-hosted a session in partnership with Xero on Making Tax Digital for Income Tax to explore what the changes mean in practice and how businesses and property owners can prepare. As HMRC moves towards quarterly digital reporting, the session focused on the practical realities of compliance, including thresholds, foreign income, partnerships, rental property, and how Xero can be used to meet the new requirements.

As well as demonstrating how to use Xero effectively, the discussion generated a wide range of thoughtful and detailed questions from attendees, which we share here.

Q: Is the £50,000 threshold net or gross income?

A: It is gross turnover, and if you have both rental property and a sole trade it is the combined total. It does not take into account any costs or expenses, and is not based on profit. You could have a turnover of £50,001 and expenses of £60,000 leading to a £9,999 loss – you would still need to submit quarterly as your turnover is over the threshold

Q: Is this the best system for a partnership of four family members that have one property and 4 invoices a year

A: If it is a formal partnership, with partnership returns being submitted, then you do not have to join MTD until at least April 2027. However, if you are interested in moving to software now, I would ask your usual contact at Gravita to speak to you about this.

Q: What if one property is shared between four people, my wife and another married couple?

A: When we’re looking at the threshold of income of that £50,000 from April 2026, £30,000 from April 2027, £20,000 from April 2028, we are looking at each person individually.
So actually, you are only looking at your quarter of the rent to decide if you are caught by MTD or not. If you have to make quarterly returns, there are some easements that might mean all four of you don’t have to submit the full details every quarter.

Q: How much of Xero’s tools are a mandatory part of the HMRC reporting process? e.g. is it mandatory that I raise sales invoices via the portal?

A: It isn’t mandatory that you raise sales invoices in Xero but it’s mandatory that records are kept digitally. Therefore, the recommended use it to connect the bank feed to ensure all transactions are captured and supporting documents where possible are attached to all transactions.

Q: Is the income from foreign properties is taxed by foreign tax authorities

A: If you are UK resident, you are usually taxable on your worldwide income – including foreign properties and so these needed to be reported. How exactly this interacts with tax in the other country will be subject to the Double Taxation Treaty that is in place

Q: How is income from foreign properties in foreign currencies accounted for?

A: When using Xero, the Multi-Currency feature automates this process by tracking real-time exchange rates and converting foreign transactions into your base currency (GBP) automatically. This ensures that the data pulled into your quarterly updates and Final Declaration is already compliant with HMRC’s requirement for reporting in Sterling.

Q: Should the same form be used for more than one property or should different forms be used for each property?

A: There would be one submission for all UK rental properties (however many you have), but if you have any rental properties outside the UK then a separate submission would be needed.

Q: For personal (non-ISA) accounts, is interest to be reported quarterly? If so how is it to be reconciled to my business account balance? Establishing the quantum will be difficult! For example Wise credit same daily!

A: Any non-self-employment income or property income falls outside of the quarterly reporting under Making Tax Digital, these will be included within the final declaration which is replacing the old-style tax return due by 31st January each year

Q: Presumably Xero will generate and submit VAT Returns too with the same data?

A: Yes, you will be able to submit VAT returns using the same data if you are VAT registered.

Q: Do I have to have an invoice to match each payment into my account? Some payments are sent to me without my issuing an invoice?

A: You do not necessarily need to create a sales invoice for every payment, but you must have a digital record for every business transaction, i.e record the amount, date, category of the income.

Q: Do I have to send my tenants an invoice for rent?

A: No, you don’t have to send it to them. You do need to record the rental income coming in, and you can do that by creating an invoice, but you don’t have to send the invoice to them.

Q: What about for the company director who is not self-employed? who gets salary from the company, earns rental income and dividend incomes

A: If your rental gross rental income is more than the £50,000, then from this April you are going to have to do a quarterly report for your rental income and your rental expenses. And then at the end of year submission replacing the current tax return, that’s where your salary and that’s where your dividends will be added in at that point.

Q: If a bank feed links the net rental figures from letting agent, do I have to enter payments taken by letting agent (fees, maintenance etc.) manually?

A: With those transactions in particular, they would need to be inputted into Xero. Essentially a replication of that letting statement. Therefore, you show the gross income and then deduct any fees from either the letting agent or any maintenance repairs.

Q: Is private pension recorded like income?

A: If you receive a private pension that goes on your end of year submission. It doesn’t go into the quarterly updates. This is the same for savings income, capital gains, pension payments, but also expenses. Pension contributions, gift aid, all those kinds of things that go on.

Your tax return now will go on the end of year submission. They do not form part of these quarterly submissions. All that goes into these quarterly submissions is self-employed income, self-employed expenses, property income, property expenses. Everything else just goes into the annual return at the end of the year.

Q: How do I account for foreign rental income paid in foreign currency into foreign accounts?

A: You can use the non-bank feed bank account, much like shown on the live Demo for the cash account if your foreign bank account doesn’t have a bank feed function available in Xero

Need help becoming MTD-compliant?

If you would like guidance on what Making Tax Digital for Income Tax means for you, and how to ensure you are compliant ahead of 6th April 2026, please get in touch with Gravita. Our team can help you understand your obligations, assess whether the thresholds apply to you, and put the right processes in place well before the deadline.