HMRC clarifies treatment of averaging relief under MTD IT

HMRC has updated its guidance to explain how averaging relief claims will operate under Making Tax Digital for Income Tax (MTD IT). The clarification addresses concerns about how farmers and creators will claim relief once quarterly reporting becomes mandatory. What has changed?

Averaging relief is available to farmers, market gardeners and certain creative artists whose profits fluctuate significantly from year to year.

The relief works by averaging profits over two or five years, helping to smooth income and reduce the impact of higher tax rates in particularly profitable years. Under MTD IT, taxpayers are required to submit quarterly updates throughout the year. This led to uncertainty over how averaging relief would fit into the new reporting framework, as entitlement to relief can only be determined once profits for multiple years are known.

HMRC’s updated guidance confirms that averaging relief will not be reflected in quarterly updates. Instead, claims will be made as part of the end-of-year process, once the final profit figures for the relevant years are available. Quarterly submissions will therefore continue to report profits before any averaging adjustment is taken into account. The clarification should provide reassurance to taxpayers who rely on averaging relief.

It means that the introduction of quarterly reporting does not alter the underlying entitlement to relief or require complex calculations during the tax year. For those affected, the key point is that averaging relief remains available under MTD IT, but the claim will be made through the year-end process rather than through quarterly updates. Accurate record keeping throughout the year will remain essential to support the final calculation.

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