When speaking with accountants, it’s clear that most are aware of the changes that Making Tax Digital for Income Tax will bring, in terms of the vast increase in the number of submissions being made. What advisors really want to know is what they should be doing now to make sure they are well prepared. Advisors are also keen to explore how they can capitalise on Making Tax Digital for Income Tax to transform and grow their practices ahead of April 2023.
Making Tax Digital is part of HMRC’s ambition to become one of the most digitally advanced tax administrations in the world. Inevitably there is bound to be a certain amount of trepidation as MTD fundamentally changes the way the tax system works. What might the penalties be for clients, or for the practice, if the rules are not diligently followed?
Making Tax Digital for Income Tax (MTDfIT) is no exception. Some practices fear that their clients won’t understand it and that it may lead to increased time and effort with no associated increase in revenue or, even worse, a drop in practice productivity.
However, there are many tangible benefits to MTDfIT that could contribute to significant business growth and development opportunities. Practices could potentially see an increase in compliance revenues, opportunities to cross-sell complementary services, and even the chance to onboard new clients who may need assistance in filing quarterly.
The opportunities are there, but first practices need a good foundation in the basics of MTDfIT before they can understand how it can be a catalyst for new opportunities with clients.
Who’s in for April 2023?
MTDfIT is a new way of reporting income to HMRC, using software to keep digital records and send income tax updates quarterly instead of filing a self-assessment tax return once a year. MTDfIT comes into effect on the 6th April 2023 and will be applied to individuals and partnerships with either trading income or property income, or both, whose turnover exceeds £10,000 per annum.
Importantly, it is the combined turnover from both trade and property that counts – for example, if your client is a taxi driver who rents out a room in their property and both incomes together exceed £10,000, MTDfIT rules will apply.
Who’s not in for April 2023?
There are no plans for Trusts, estates, Limited Liability Partnerships (LLPs), Limited Partnerships (although these are not common), partnerships with corporate partners, trustees of registered pension schemes and non-resident companies to join MTDfIT at this time.
How should practices begin to prepare now?
The first step is to establish how many of your clients will be affected from April 2023. Interestingly, when we’ve asked practices to provide an estimate of the proportion of their clients they think will form part of that first phase, we have gotten a wide range of responses. Some suggest 20% as a realistic figure, but many more believe that the regulations will impact up to 60-80% of their client base.
Some practices have already profiled their client base and as a result know the precise percentage that will be impacted by MTDfIT. They were able to do that by running reports on their databases and identifying the clients, based on the turnover threshold from last year, who would fall into the reporting criteria. Our customers use CCH Central Reporting to identify these clients.
Once clients are profiled, it’s time to segment them to find the most appropriate pathway to follow to become MTDfIT-ready.
Pathways to becoming MTDfIT-ready
For those clients affected by MTDfIT, it is important to recognise and understand their different situations, or readiness profile. To do this, practices need to assess and segment clients to determine the factors and circumstances that will influence their journey to becoming MTDfIT-ready.
Note that the key requirement for MTDfIT is ‘capturing transactions digitally, in record-keeping software, as near to real time as possible’.
Some clients will not capture transactions digitally, and others may not capture transactions at all. These clients should be classified as both the highest risk from a compliance perspective, and also likely to need the most guidance in navigating the journey to become MTDfIT-ready.
At the other end of the scale, there may be clients who are already capturing transactions digitally, perhaps in a cloud bookkeeping application or, for larger businesses, in an online accounting solution. All their invoices, receipts and expenses might be captured digitally in a data-capture application, and live bank feed data may already be flowing seamlessly into their bookkeeping application in real time.
Perhaps with these clients, practices are already monitoring their financial performance monthly or quarterly. These clients are probably already MTDfIT-ready and, for them, submitting quarterly updates to HMRC will be done at the click of a button.
There will be clients who sit somewhere in between, and they too will need profiling. Each client will have a different pathway to get from where they are to where they need to be in 2023. Some will want to take a pathway of deferral, buying themselves more time. Others will look to a pathway of exclusion. Yet more are best set on a pathway to explore what technology may be available to further help with the journey of digital links and record-keeping. One thing is certain – clients will be turning to their trusted advisors to help them navigate this new landscape.
Digital links and record-keeping
Digital links were a big talking point in the lead up to Making Tax Digital for VAT, with some uncertainty about what HMRC would count as a digital link during the soft-landing period and when that time expired. It’s similar this time around, with comparable questions being asked.
Spreadsheets and bridging software may seem like taking one step back in digital record-keeping, but as with MTD for VAT, HMRC has confirmed that both are, and will continue to remain, an acceptable form of digital record-keeping. As you would expect, the Wolters Kluwer Tax & Accounting UK MTD solution consumes data from a range of sources.
Most practices will have a substantial number of clients who currently use spreadsheets. Some may be in a position to move on to a more digitally robust solution, whereas others may have just reached the point where they perform a reliable standard of bookkeeping using spreadsheets. Others yet may not even be at the spreadsheet stage of record-keeping. Regardless, spreadsheets will be around for some time to come, and will still play a role in helping clients to become MTDfIT-ready.
Many other solutions may help to make up the digital MTDfIT readiness journey. For those clients who are ready, cloud bookkeeping solutions will play an integral role in helping to file quarterly MTDfIT submissions. Live bank feeds are another element that can help to prepare for a smooth digital journey. They require no data entry for the client or practice and can help to make submissions seamless, quarter after quarter.
Any client can make use of live bank feeds with the right solution, keeping a separate bank account either for their business and/or property portfolio, and using a solution to connect to that data automatically to categorise these transactions.
Application Programming Interfaces (APIs) are another area set to accelerate digital transformation journeys. APIs are an industry-standard mechanism for separate software applications to communicate with each other. Wolters Kluwer Tax & Accounting UK uses them extensively for bringing data into its CCH Central suite, whether from Twinfield, Xero, Sage, or QuickBooks, or from bank feeds.
MTDfIT: paving the way for new opportunities
With a good grasp of how to move clients towards MTDfIT compliance, practices are in the perfect position to capitalise on the great opportunities available.
At the very least, MTDfIT may be an opportunity to increase compliance revenues. It may also be a great opportunity to cross-sell complementary services. When the level of complexity moves up a notch for any activity, some clients will opt to pay the practice to take away that pain point.
Some opportunities will arise due to the sheer volume of taxpayers who will require help due to no longer filing their own returns using the HMRC website. According to HMRC, this could be up to 5 million individuals, equating to excellent growth opportunities for practices.
With existing clients, MTDfIT translates into having many more opportunities to have richer conversations with clients, presenting the opportunity to nurture and reinforce relationships.
The possibilities are endless, and now is the right time to prepare to make the most of them.