Quarterly updates under Making Tax Digital for Income Tax are unadjusted totals taken from the digital records. Once the fourth update for the year has been sent, you adjust those totals in your software before filing the tax return: removing disallowable costs, adding accruals and prepayments if you use traditional accounting, aligning figures with your accounting period, claiming allowances and reliefs, and recording capital allowances. Most adjustments are made to the annual total for a category, not to individual transactions.

Why are adjustments left until after the fourth update?

HMRC says no accounting or tax adjustments are needed before sending a quarterly update; updates are summaries, not tax returns. The fourth update, covering the whole tax year and due by 7 May after it ends, gives HMRC the year’s income and expenses for every business. Its guidance then lists five kinds of adjustment that may follow: claiming reliefs or allowances, tax adjustments such as removing disallowable expenses, accounting adjustments such as prepayments and accruals, adjustments for your chosen accounting period, and capital allowance claims.

HMRC says most adjustments are made by updating the annual total for an expense category, so if many records fall in one category there is no need to change each one. The order of work is important. If the underlying records are wrong or incomplete, HMRC says to resend the fourth update before making tax adjustments. Regulation 17(3) of the Income Tax (Digital Obligations) Regulations 2026 requires corrections to the fourth update to be given no later than the date the return is due. Our page on correcting quarterly update errors explains the difference between an error and an adjustment.

Which tax adjustments are made at the year end?

Disallowable expenses. These are removed by reducing the category total. HMRC’s example is a phone used for both business and personal calls: the total for phone, fax, stationery and other office costs is reduced so that only the business element is claimed. This is the step that completes the choice made during the year to record the full bill and adjust later.

Simplified expenses. If you use flat rate simplified expenses, HMRC says an adjustment is needed for them before the Income Tax position is finalised.

Items that are part capital and part revenue. Where the full value was recorded, such as a whole mortgage payment, it is adjusted down to the revenue element before the return. For residential lettings, finance costs such as mortgage interest are restricted rather than deducted, which is why the record keeping direction requires them to be recorded separately even under the simplest categories. Our page on landlord mortgage interest relief explains the restriction.

What accounting adjustments apply, and when?

Cash basis is the default for self employment and property income, and HMRC says accounting adjustments are not needed if you use it. With traditional accounting, the software lets you adjust the annual totals for accruals and prepayments. HMRC gives two examples:

  • Prepayment. A £1,200 twelve month insurance policy is paid in January. One quarter of the cost belongs to the first tax year and three quarters to the next, so the total for rent, rates, power and insurance costs is reduced to £300 in the first year and increased by £900 in the next.
  • Accrual. A consultant provides services in March 2026 but has not invoiced by the year end. An accrued expense is added to 2025 to 2026 so the cost is matched to the year in which it was incurred.

Our page on cash basis and accruals accounting covers the choice of basis.

What if my accounting period does not match the tax year?

If the accounting period ends on 5 April, no adjustment is needed and the software defaults to that period. Otherwise HMRC’s guidance distinguishes several cases:

  • 31 March year end, calendar update periods selected from 2026 to 2027. No adjustment is needed after the year end. If calendar periods were not selected, adjustments will be needed and HMRC says further guidance will follow. Those who joined in 2025 to 2026 on calendar periods had to add income and expenses for 1 to 5 April 2025 to that year’s totals.
  • Year end of 1, 2, 3 or 4 April. Special late accounting date rules apply automatically, and the totals must be adjusted to match the accounting period. HMRC’s example is an accounting period of 3 April 2026 to 2 April 2027 recorded on calendar update periods: income and expenses for 1 and 2 April 2026 are removed and those for 1 and 2 April 2027 are added.
  • Any other date, such as 31 December. Additional adjustments will be needed after the end of 2026 to 2027, and HMRC says it will publish guidance on how to make them.

The calendar periods choice has to be made in the software before the first update of the year, as explained on our page on MTD quarterly periods. For the tax year basis that now applies to sole traders, see basis period reform explained.

How are capital allowances claimed under MTD?

HMRC says the capital allowance claim must be recorded in the software before the return is submitted. Some software lets you record it during the year, but HMRC will not process the claim until the return has been submitted. The usual rules then apply. The annual investment allowance is £1 million and covers most plant and machinery, but not business cars, items you owned before using them in the business, or gifts. A sole trader must reduce the claim for private use: HMRC’s example is a £600 laptop used outside the business half the time, where the allowance is cut by 50%. No annual investment allowance is available for items bought in the final period of a business; a balancing charge or allowance arises instead. See capital allowances explained.

Which allowances and reliefs are claimed at the year end?

The trading income allowance and the property income allowance are claimed when the return is submitted, even though the income has been recorded in full during the year. Rent a Room relief allows up to £7,500 a year of tax free income from furnished accommodation in your home, halved if the income is shared. If you decide to claim it only after the year has ended, HMRC says to resend the fourth update with the Rent a Room income included. After the adjustments, losses are reported and other income and gains are added, as described on our page on the MTD final declaration.

How might the adjustments look for a sole trader?

Illustration only. Ravi is a sole trader using traditional accounting with a 5 April year end. His fourth update for 2026 to 2027 shows phone costs of £600, an insurance payment of £1,200 made in January 2027 for twelve months, and £4,000 for a new machine recorded as an expense. He makes four changes in his software:

  1. reduces phone costs by £240 for 40% personal use;
  2. reduces insurance costs to £300 and carries £900 forward;
  3. adds a £500 accrual for March work invoiced in April;
  4. removes the £4,000 machine from expenses and claims it through capital allowances.

He then checks the tax calculation and submits the return by 31 January 2028.

What mistakes come up most often?

  • Adjusting quarterly updates during the year when HMRC does not require it.
  • Changing a category total to fix what is really an error in the records.
  • Making tax adjustments before resending a corrected fourth update.
  • Forgetting to select calendar update periods for a 31 March year end.
  • Claiming capital allowances on an item that is still in expenses.
  • Assuming a capital allowance claim recorded during the year has already been processed.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.