Making Tax Digital for Landlords: How to Record EPC Improvement Costs Correctly

Making Tax Digital starts in 12 days. If you have an EPC upgrade invoice on your desk — or you're planning work before April — here's exactly which category to put it in. Getting this wrong doesn't just create an MTD compliance issue. It can misrepresent your capital base when you eventually sell.

This article covers how to record EPC costs in your MTD software. If you want to know whether those costs are tax-deductible in the first place, see our companion guide: HMRC's capital vs revenue rules for EPC upgrades. These are two separate questions with two separate answers — don't conflate them.

What Making Tax Digital Means for Landlords from 6 April 2026

Making Tax Digital (MTD) for Income Tax is HMRC's shift from annual self-assessment to continuous digital record-keeping. From April 2026, affected landlords must:

• Keep digital records of all rental income and expenses in HMRC-approved software
• Submit quarterly updates to HMRC (four per year)
• File an end-of-period statement and final declaration annually

Who must join MTD?

Source: HMRC gov.uk MTD for Income Tax guidance.

If you're above the £50,000 threshold, you are in scope now. If you're below it, you have time — but the recording principles below apply whenever you do join.

Why EPC Improvement Costs Need Special Treatment in MTD

Most landlords joining MTD will open their software, see a "Property Maintenance / Repairs" category, and start dropping invoices in. This is the mistake that will follow them to completion day.

EPC improvement costs split across two fundamentally different categories:

• Revenue expenses — immediate deduction against rental income in the quarter the cost is incurred. Covers repairs that restore the property to its previous condition (like-for-like boiler replacement, replacing old draught-proofing strips).
• Capital expenses — not deductible against rental income. Tracked separately, added to the property's base cost, and offset against Capital Gains Tax when you sell.

This distinction is established by HMRC's Property Income Manual (PIM2025/PIM2030). For a full explanation of which improvements fall where and why, see our detailed guide on HMRC's capital vs revenue rules for EPC upgrades. Below we apply those rules to your MTD software.

How to Categorise Each EPC Improvement in Your MTD Software

This is the table no competitor article currently provides. Use it when you're entering invoices into your MTD software.

The category names above vary by software. In Hammock it's labelled "Capital Expenditure". In FreeAgent and Baselane, look for "Property Improvements" or a dedicated capital account separate from the profit and loss. If your software only offers a single "repairs and maintenance" bucket, flag this to your accountant — capital items must be tracked outside P&L to avoid distorting your quarterly submissions.

Cash Basis vs Accruals Basis: Which Quarter?

Under MTD, landlords can use either cash basis (record when paid) or accruals basis (record when the cost is incurred). For EPC work that spans a quarter boundary — for example, scaffolding erected in Q4 but paid in Q1 of the following year:

• Cash basis: record in Q1 when payment leaves your account
• Accruals basis: record in Q4 when the liability arises (invoice date)

Choose your basis and apply it consistently across your portfolio.

The £10,000 Cost Cap: How to Track It Digitally

From October 2025, MEES regulations include a £10,000 per-property cost cap — the maximum you're required to spend on EPC improvements before you can claim an exemption. Read the full breakdown in the £10,000 cost cap explained.

One important clarification: the cost cap is a regulatory compliance threshold, not a tax deduction. Spending £10,000 on insulation does not give you £10,000 of income tax relief. These two systems — MEES regulations and HMRC tax treatment — operate independently.

For MTD purposes, your digital records should track cost-cap-qualifying spend as a running total per property. Keep the following documents alongside your digital entries:

• Installer invoice (showing work type, property address, date, and total cost including VAT)
• EPC assessment before and after the improvement work
• Grant documentation if a scheme contributed toward the cost (see below)
• Proof of payment (bank statement or direct debit confirmation)

HMRC requires digital records to be retained for 5 years after the MTD submission deadline for income records. For capital items — which affect your CGT calculation at disposal — the practical rule is: keep invoices until you sell the property, then retain for a further 5 years.

Grants and Schemes: How BUS and ECO4 Credits Affect Your Records

If you received a grant toward EPC improvement costs, your digital records must show both the gross cost and the grant received.

Boiler Upgrade Scheme (BUS): The BUS provides up to £7,500 for air source heat pumps and £7,500 for ground source heat pumps. The grant is paid directly to your installer, who reduces your invoice accordingly. For your MTD records:

• Capital cost to record = installer's gross price minus the BUS grant
• Keep your confirmation letter from the installer showing the grant amount applied

Full eligibility rules and current grant amounts are covered in our guide on Boiler Upgrade Scheme grant amounts.

ECO4: If your property qualifies for ECO4 grant-funded insulation or heating, the grant-funded portion is not your expenditure — only any co-payment you made counts toward your £10,000 cost-cap tracking or capital base. ECO4 is ending in December 2026 — if your tenants are eligible, act before then.

Recording the net figure only (without documenting the grant) is an error — it understates the true cost of the improvement, which matters if HMRC ever queries the CGT calculation at sale.

Common Mistakes Landlords Are Making Right Now

The #1 Error: Entering Capital Improvements as "Maintenance/Repairs"

This is happening on a wide scale as landlords rush to set up MTD compliance. The mechanics are:

1. Landlord installs loft insulation — a capital improvement
2. Opens MTD software, sees "Property Maintenance" category
3. Drops the £3,500 invoice in there
4. Software records it as a revenue deduction against rental income

The immediate problem: The quarterly submission overstates allowable expenses, reducing declared profits incorrectly. The long-term problem: When the property is sold, the capital base doesn't include the insulation spend — meaning capital gains are overstated and CGT is overpaid, unless the landlord or their accountant spots the historic miscategorisation and corrects it.

Both issues expose the landlord to HMRC compliance risk.

Other Common Errors

• Missing the grant deduction: Recording gross installer cost without reducing by the BUS or ECO4 grant amount
• Wrong period: Recording on invoice date when using cash basis (should be payment date) or vice versa
• Forgetting document retention: Filing the invoice in email rather than uploading to MTD software or linked document storage — creates a compliance gap if records are ever requested

Which MTD Software Works Best for Landlords with EPC Upgrades?

Several HMRC-approved tools are popular with buy-to-let landlords:

• Hammock — property-specific MTD software with dedicated capital vs revenue split and cost-cap tracking fields. Recommended for landlords with active improvement programmes.
• Baselane — US-origin but UK-compliant, popular for multi-property portfolios. Supports capital account separation.
• FreeAgent — widely used by self-employed and landlords; handles capital items but requires manual setup of a capital expenditure category. Free with many NatWest/RBS business accounts.

Whichever software you use, the logic is the same: capital improvements must live outside the profit and loss statement. Before you enter a single invoice, confirm with your software provider how to set up a capital account — most have a help article or in-app guide. Use our property cost estimator to forecast upcoming EPC spend before it hits your accounts.

When to Use an Accountant

If your EPC programme involves more than one property or more than £3,000 of capital work, involve a property-specialist accountant before your first MTD submission. Borderline cases — partial improvements, mixed capital/revenue projects (e.g. boiler replacement plus new smart controls in a single visit) — require judgment calls that software cannot make automatically. An accountant can also review whether any element of a capital project qualifies for the "modern materials" exception as a revenue repair.

The accountant's fee is itself an allowable revenue expense under MTD.

FAQ

Do I declare EPC improvement costs quarterly or annually?

Revenue expenses (like boiler like-for-like replacements) go into your quarterly submission in the period incurred. Capital improvements are tracked separately and declared in your end-of-period statement. They don't reduce your quarterly rental profit.

What if I do the work before 6 April but haven't joined MTD yet?

Record the cost in your self-assessment return as normal for 2025–26. Once you join MTD, your digital records start from the first day of your first MTD period. You do not need to backload pre-MTD historic records into your software.

Can I split a mixed invoice (e.g. boiler repair plus new controls) between revenue and capital?

Yes — and you should. HMRC guidance confirms you can apportion a single invoice if it covers both revenue (repair) and capital (improvement) elements. Ask your installer for an itemised invoice that separates the repair component from any new-feature component.

Does the categorisation change under the Home Energy Model (HEM)?

The HMRC tax treatment (capital vs revenue) is based on the nature of the work, not the EPC assessment methodology. Whether HMRC's new Home Energy Model rates your insulation differently doesn't change whether it was a capital improvement or a repair. The tax category is fixed at the point the work is done.

Where can I find HMRC's official guidance?

HMRC's Property Income Manual — specifically PIM2025 (revenue expenses) and PIM2030 (capital expenditure) — sets out the capital vs revenue distinction. For MTD-specific recording rules, see the HMRC MTD for Income Tax guidance on gov.uk.

This article is for general information only and does not constitute tax advice. Always consult a qualified accountant or tax adviser for guidance on your specific circumstances.