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MAKING TAX DIGITAL: The industry tax questions answered by HMRC for taxi and PHV drivers
Making Tax Digital (MTD) for Income Tax is changing how self-employed drivers report their earnings to HMRC.
Drivers will need to keep digital records and submit updates throughout the year ahead of their Self Assessment tax return. We’ve pulled together the questions drivers are asking most, with straightforward answers direct from HMRC to help you get ready.
How should app-based fares and commission be recorded?
“If an app collects the full fare and then deducts its commission before paying the driver, the gross fare should be recorded as income and the commission recorded separately as a business expense. Drivers should not record only the net amount received, as this would understate both income and expenses.
“In addition to fares, drivers should include tips, bonuses and incentives as income. They can also claim allowable business expenses such as app fees, fuel or charging costs, insurance, repairs, licensing fees and business mobile phone costs. For example, if a passenger pays £100 and the app retains £20 commission, the driver should record £100 income and £20 expenses, not £80 income.”
Which tax year determines when a driver must join Making Tax Digital?
“MTD for Income Tax is based on your qualifying income, which is your total gross income from self-employment and property in a tax year, before you take off any expenses. HMRC looks at your turnover, not your profit. For example, if you earn £25,000 from one app and £12,000 from another, your qualifying income is £37,000, the combined total, not each amount separately.
“If your income goes over the threshold, even just once in an unusually busy year, you’ll need to join MTD for that tax year. If your income then drops below the threshold in later years, you don’t get to leave straight away. You must stay in MTD for three consecutive years before you can apply to come out of it.”
What information does HMRC actually receive in a quarterly update?
“You won’t need to submit every single fare or receipt to HMRC. Instead, your quarterly update contains cumulative totals, meaning the total income and total allowable expenses for each business you have added up from the start of the tax year to the end of that update period.
“HMRC does not see your individual invoices or receipts, and it does not see a calculation of how much tax you owe. That final tax calculation only happens later, when you submit your tax return at the end of the tax year.”
Can drivers continue using ordinary spreadsheets without breaching the rules?
“Yes, you can keep using a spreadsheet but it cannot stand alone. A spreadsheet on its own is not compliant with MTD rules because it has no way of sending your figures to HMRC directly.
“To make it compliant, you need what’s called bridging software. This software reads the data straight from your spreadsheet and submits it to HMRC through an official digital link, known as an API. This means you can carry on working the way you’re used to, while still meeting the digital submission requirements. Just make sure the bridging software you choose is HMRC-recognised.”
What records must drivers retain after photographing or scanning receipts?
“Once you’ve photographed or scanned a receipt, you need to keep that digital copy, along with all your digital fare and expense records, for at least five years after the 31 January filing deadline for that tax year. You can throw away the paper original once you have a clear, legible digital copy that captures all the information. Just make sure the scan or photo is complete and easy to read, since this is what you’ll need to rely on if HMRC ever asks questions later.”
How should mistakes in quarterly updates be corrected?
“Mistakes happen, and MTD allows for this. Depending on the type of error and when you spot it, you can either amend the original update, correct the figures in your next quarterly update or wait and put it right in your tax return at the end of the year.
“Importantly, an honest mistake in a quarterly update will not result in a penalty, as long as your final figures are accurate by the time you submit your tax return.”
What penalties genuinely apply if a driver submits late or experiences a software failure?
“There are no penalties for late quarterly updates in the 2026 to 2027 tax year. After that, a points-based penalty system applies.
“Each missed quarterly update deadline attracts one penalty point. For quarterly updates, a £200 penalty applies once a driver reaches four points. For the annual tax return, the threshold is two points. Further missed deadlines after reaching the threshold can trigger additional £200 penalties.
“If a deadline is missed because of something outside the driver’s control, such as serious illness or bereavement, they may be able to appeal on the grounds of a reasonable excuse. Drivers should submit updates as soon as possible after any technical issue. Where HMRC system problems are widespread, appropriate action will be considered.”
Who can obtain exemption from digital reporting, and how difficult will that process be?
“Some drivers, including those who are older, disabled or digitally excluded, may be able to apply for an exemption from Making Tax Digital. You can find full details and the application process on GOV.UK.”
How should vehicle purchases and capital allowances be treated?
“Quarterly updates are designed to report income and expenses during the year, not calculate capital allowances. Capital allowances, including Annual Investment Allowance, first-year allowances and writing-down allowances, are claimed through the tax return rather than quarterly updates.
“If a vehicle is financed, drivers should keep records of deposits, finance payments and interest. Interest and other allowable running costs can be recorded as expenses during the year, while any claim for capital allowances should be made in the tax return. Where a vehicle is used for both business and private purposes, only the business proportion can be claimed.
“MTD does not change the underlying tax rules for capital allowances; it changes how and when income and expenses are reported.”
