It’s likely your practice will have persuaded some of your clients to enter the world of digital record keeping, particularly if they are VAT-registered. But if most of your clients fall under the £85,000 VAT threshold and the firm hasn’t fully embraced digital automation, the Making Tax Digital (MTD) road map may feel like an insurmountable mountain to climb.

Since April 2019, most VAT-registered businesses with a taxable turnover above the £85,000 threshold have been keeping their accounting records and submitting their VAT returns digitally. The next landmark for MTD for VAT is from April 2022, when all VAT-registered businesses, irrespective of turnover, will also have to move to digital. Some 2.7 million businesses will be filing digitally with HMRC, setting the UK tax authority on course to become one of the most digitally advanced tax authorities in the world, with MTD a key plank in that ambition.

The MTD road map moves quickly from this point, meaning that practitioners should consider a road map for their own businesses to onboard clients to digital software and/or spreadsheets with an API link, and consider the impact on their own business if they haven’t already.

MTD for income tax

From 6 April 2023 comes MTD for income tax. It will apply to unincorporated businesses and landlords with an annual gross income above £10,000. The change will affect as many as 3.5 million people. That’s a lot of work for accountants over the next two years.

Some practices are ahead of the game, already onboarding their clients to digital software, while others may not have begun their digital journey, let alone that of clients. Rebecca Benneyworth, tax consultant and lecturer, says: “Firms have to get clients off manual paper records and on to digital. In deciding how to progress, firms have to consider what’s right for their own business as well as clients.”

Practitioners need to encourage self-employed clients to move to digital accounting and tax software this year if they want to join the pilot and gain experience and familiarity with systems a year ahead of HMRC’s deadline. Jessica Pillow of Pillow May has chosen to split her firm’s focus in two, concentrating on sole traders before landlords, because the government hasn’t yet finalised all the details for landlords’ MTD for income tax.

Pillow says: “We are getting all our sole traders on to packages now for the new tax year. We’ve been training them, so they went live on the software in April 2021 – 2021/22 will be their first year of going digital.”

From that stage, Pillow’s goal is to join the HMRC pilot in the 2022/23 tax year, ahead of MTD starting on 6 April 2023. “Even that time frame is tight,” she says.

Getting used to new software internally can be a challenge, but it will likely be even tougher for clients who are unfamiliar with digital accounting software. Pillow’s firm is predominantly using FreeAgent’s basic software because “it’s straightforward to use” and only requires a small amount of client training. It’s also popular among sole traders. “It’s a good way to introduce clients to digital packages. My staff are familiar with the software too,” she says.

After some initial instruction, Pillow suggests encouraging clients to use the software themselves rather than doing it for them, because the business benefits to the clients are significant once they familiarise themselves with the product. Benefits include: a better knowledge of cash flow, particularly important as businesses recover from COVID-19; electronic filing of receipts (to save the boxes of paperwork); automatic debtor chasing to ensure prompt payment; and software integration to streamline processes in the business.

However, as Benneyworth points out, some clients may not be comfortable with computers and software. A first step, she says, is understanding clients’ technical abilities in order to know what software, staffing and training requirements a firm needs to have in place for this milestone change to tax filing.

Compliant vendors

Another hurdle for practices, even if they are fully automated and used to using cloud software, is that the tax software for MTD isn’t yet in abundance. So far, HMRC has a very small list of MTD-compliant software vendors for income tax. It is expected that more software vendors will offer compatible software this year, but the lack of availability currently isn’t helping the decision-making process.

There is also likely to be some consolidation in the marketplace, which has been offering MTD for VAT solutions. Smaller accounting software vendors may choose not to add income tax into their packages, forcing accountants to buy alternative software to meet the MTD for income tax self assessment deadline. This will of course also involve additional training for clients and staff.

“Sole practitioners might want to keep costs down, because price-sensitive clients may be using small software vendors that won’t necessarily make the leap to MTD for income tax. It’s possible that very small self assessment software vendors may decide that it’s not worth it,” says Nick Levine, Strategy and Finance at Soldo.

On the flip side, some of the larger cloud vendors are already starting to introduce income tax modules without any material price rise. In the best-known example, Xero is launching its income tax module this year.

The earlier accountants review their software requirements to understand the impact on their own businesses, the easier it will be to have those necessary conversations with clients about potential price rises. Some may not want to continue on the digital road, so there could be client attrition.

“It may be an effort to migrate small self-assessment clients who have not yet made the leap to a digital record-keeping system in the run-up to MTD for income tax. Firms may decide that working with these clients may no longer be profitable. While there are workarounds to filing for MTD, such as bridging software, firms may seek to enter into difficult conversations sooner rather than later,” Levine says.

Pillow has chosen not to begin the process of onboarding landlords because their set up is very different to the average sole trader. Another good reason to delay digitising their tax is because not all the software options have been released yet.

Part of the stumbling block in dealing with landlords is that accountants will have to delve into their personal tax affairs as well as their property business. Many don’t separate their personal bank accounts from their landlord business. When onboarding landlords, it’ll be easier to have a separate bank account for the bank feed required.

The success of MTD couldn’t be more critical to HMRC, especially given the past year of the pandemic, which has significantly reduced tax receipts. For both practitioners and HMRC however, the road ahead is long and likely to be a bumpy one. HMRC needs to work closely with businesses and software vendors to ensure the products are available, compliant and tested in advance.

For accountants, encouraging digital uptake among clients won’t necessarily be straightforward in a climate of straitened times. And of course, there may have to be some uncomfortable pricing conversations. But the message is: don’t put off until tomorrow what you can do today. The efficiency gains for practices are not to be underestimated. Ultimately, going digital will help clients recover quicker in a post-COVID-19 world, when a better understanding of their business will be vital to survival.