MTD Update: Partners must apply for averaging relief exemption

HMRC has clarified an important point in its Making Tax Digital (MTD) for Income Tax guidance, confirming that partners who claim averaging relief will not automatically be treated as exempt from the new reporting rules due to take effect from the 2026/27 tax year.

The update is particularly relevant for partnerships, where earlier expectations suggested that claiming averaging relief could, in some cases, result in an automatic exemption from MTD requirements.

HMRC has now made clear that this is not the case for partners.

What has changed?

Averaging relief is a tax provision designed to help smooth taxable profits where income fluctuates significantly between years. It is most commonly used in sectors such as farming and certain creative or professional activities.

Under MTD for Income Tax, some taxpayers who claim averaging relief may be exempt from the digital reporting requirements. However, HMRC’s latest position distinguishes more clearly between different types of tax payer.

Sole traders who claimed averaging relief in their 2024/25 self-assessment return will generally receive an automatic exemption from MTD for 2026/27.

The key point for partners

For partners, the position has changed.

Where averaging relief has been claimed through partnership tax return reporting, this will not trigger an automatic exemption from MTD. Instead, partners who wish to rely on averaging relief as a basis for exemption will need to make a separate application to HMRC.

This effectively removes the assumption that a claim made within a partnership return is sufficient on its own to secure exemption.

Who may be affected?

Although MTD for Income Tax applies to individuals rather than partnerships as entities, partners can still fall within scope where their combined qualifying income (for example from self-employment and property) exceeds the relevant thresholds.

Where this applies, affected individuals may be required to:

• Maintain digital records
• Submit quarterly updates to HMRC
• Use compatible software for year-end reporting

Future claims

HMRC has also indicated that taxpayers who expect to claim averaging relief in future tax years will not automatically fall outside MTD requirements. In those cases, an exemption application will generally still be required.

Verallo cam help

While the change may appear procedural, it highlights a broader point: MTD exemption rules are becoming more conditional and less automatic as implementation approaches.

Partners who assume they are excluded from MTD purely because they claim averaging relief may now need to take proactive steps to confirm their position with HMRC.

Verallo are helping clients assess whether they fall within MTD requirements and whether any exemption applications are needed ahead of the 2026/27 transition. To speak with one of our tax experts, get in touch today.