Making Tax Digital – what you need to know to prepare

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The one question every AAT licensed accountant asks me is: “what do I need to do to get ready for Making Tax Digital (MTD)?”

Let’s recap on the main MTD good-to-know points.

What is MTD?

MTD was first announced by Chancellor George Osbourne in his 2015 Spring Budget as “the death of tax return.”

As time passed it became clear that with few exceptions HMRC was seeking to mandate all those in business (including landlords) to record business transactions in real-time, using MTD-compliant third-party-software and to store the supporting records digitally.

All those in business would also be required to lodge online updates at least quarterly, detailing their trading activity in a similar format to the self-employed schedules (SA 103) which form part of a self-assessment tax return.

After a protracted period of consultation and pressure from many, including AAT, the original proposals have been amended to leave the roll out of MTD looking as follows:

April 2018

Those in business and subject to a charge to income tax on their profits with turnover above £85K (the VAT threshold) will be required to join MTD (on-board).  This will require them to digitally record their business transactions using MTD-compliant software from the first day of their new accounting period commencing in the 2018/19 tax year.  Furthermore, they will be required to file online updates at least quarterly of their trading activity thereafter.

April 2019      

Those with turnover above £10K and below £85K and subject to a charge to income tax on their profits will be required to on-board from the first day of their new accounting period commencing in the 2019/20 tax year and to file updates.

In addition, all VAT registered businesses (companies included) will be required to keep a digital record of their business transactions and file MTD-compliant VAT returns.

April 2020

All those subject to a charge to corporation tax on their profits and also complex partnerships (those with a turnover >£10m) will be required to on-board from the first day of their new accounting period commencing in the 2020/21 tax year.

What is acceptable digital record keeping?

After stating that digital record keeping would only be acceptable if MTD-compliant third-party-software was used, HMRC listened to representations made by AAT and others and agreed that spreadsheets with a plug-in enabling them to link with HMRC’s backend systems to file updates could also be used.

MTD is a major opportunity for accountants to add value for their clients

For many accountants, MTD is going to disrupt the current reactive compliance driven model that they operate under and which has existed since the introduction of self-assessment back in 1996/97.

However, I really do not see that as a bad thing for those with clients operating a true business. How you will feel about the long-term effects of MTD can be illustrated through your response to the questions below.

What would you rather do?

Given a choice would you rather advise your client:

  • Six to nine months after the end of a tax year about the performance of their business. At a point when your comments are no longer able to affect the outcome of a trading period, or
  • In near-real-time about the performance of their business using rich sources of data available from state-of-the-art cloud-based computing software. At a point in time when it possible to affect the outcome of a trading period?

I strongly believe that once MTD becomes business-as-usual most accountants will prefer the second scenario.

After all, it presents them with a wonderful opportunity to provide real added-value-services to their clients at a point in time when their advice can really make a difference. As opposed to providing the traditional post tax-year-end reactive tax-compliance-driven model that so many occupy under self-assessment. Where advice given is retrospective.

The move to MTD might not be such a challenge

While many question how they will cope with the move to quarterly reporting it should not be overlooked that a small but significant bunch of accountants, possibly as many as 20% (based on my experience of talking to AAT members) already operate in the way that HMRC envisage for MTD.

They encourage their clients to use cloud-based accounting packages that offer built-in processes capable of extracting data from their bank, posting and reconciling it. In other instances, their software accepts third-party data without manual intervention.

They will be focused on the provision of timely management accounting information, often on a quarterly basis sometimes monthly to their business-owing clients.

These accountants will see the move to MTD as a great business opportunity, at the very least nothing more than the rest of us catching up with them. What’s more, almost without exception, their clients will be making monthly or quarterly payments as part of a fixed-fee arrangement.

Time to revisit your business model

Do not miss this golden opportunity to review the way that you operate.

If you run a traditional practice give serious consideration to transitioning your business to one where you can offer your clients monthly/quarterly added-value services.  These services include the production of management accounts with a focus on the provision of timely in-year advice and less on reactive tax planning.

If you’re not already doing it, offer fixed-fees coupled with monthly billing.  You stand to benefit from a more regular flow of work and a smoother cash flow.

What else should I do?

You should design a marketing strategy targeted at your clients. At the heart of which should be the message that they have nothing to worry about because you will be there for them every step of the way. Ready to make the transition as pain-free as possible.

Segment your clients by reference to the various on-boarding dates above. This way you will be aware of when they are required to on-board and you can let let them know.

Keep your clients updated in respect of emerging issues. This can be done through social media, newsletters or even breakfast meetings.

Research the third-party software market to ensure that you can advise your clients whether the software they use will be MTD-compliant, or what their alternatives might be.

Consider whether you want to be a practice that only works with users of a specific software or if you would be happy to allow your clients to dictate.

Ensure that the software you might be considering to recommend is going to be compatible with your own software.

Review your existing staffing model to ensure that you have the right numbers and mix of skills to meet the demands of any change in the way that you operate.

Brian Palmer , former tax policy adviser for AAT..

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