MTD phase 2: time to get small businesses on the slipway to digital taxes

Are businesses, clients, accountants,  and software providers ready for the next phase of Making Tax Digital?

Accountants looking ahead to the full implementation of Making Tax Digital (MTD) might think there is plenty of time to get their house in order – and their clients converted to digital.

The reality, however, is that for many accountants, the time to act is now.

Smalls businesses and the self-employed will be forced out onto the super information highway when many are used to the genteel pace of country lanes.

Moving to digital will be a major behavioural change requiring them to shift to quarterly reporting. Be prepared: the road to MTD implementation may be bumpier than many anticipate.

To quantify the challenge, consider a practice with 250 clients below the VAT threshold.

An average of 10 clients would have to be switched every month to make that deadline – and that’s without accounting for any unexpected obstacles. As with any transformation programme, the key to success may well be starting early.

The Government’s roadmap

Since 1 April 2019, VAT-registered businesses with a turnover above the VAT registration threshold (£85,000) have needed to keep records digitally and provide VAT return information to HMRC via MTD-compatible apps and software.

The current plan for businesses under the threshold is as follows:

• 2022: All VAT-registered entities, including those below the threshold, will have to use MTD-compatible software to file their VAT Returns from periods starting on or after 1 April 2022.
• 2023: From April, MTD for Income Tax will be introduced for unincorporated entities and landlords with an annual turnover above £10,000 (more on AAT’s views on this later).
• MTD for Corporation Tax: A call for consultation ended on 5 March 2021 (AAT’s view on this later too).

Upping the pace

Encouraging clients to embrace digital working has become the preferred method to achieve compliance for many firms, given the timeline in front of them and a lack of awareness of MTD among both businesses and individuals. Graham Davies, founder of digital-only firm Addition, has done just that. Addition requires its clients to use accounting and expenses software, which naturally makes them compliant with MTD as they make the quarterly filings with HMRC via the software.

“Whether people are aware of MTD or not, they’re aware of cloud accounting software, and all of those systems operate in an MTD-compliant way, so that’s where our focus is for small companies.”

How to manage the transition

When difficulties do emerge with clients, it’s about reminding them of the process of working to familiarise them with the software.

“We don’t have a formal process, but we’re definitely rooted in how we work because that’s how we keep our costs low,” says Davies. “Some customers like the idea of digital, but when it comes to doing it, they decide for themselves that we’re not right for them and they go somewhere else. There are firms out there which are happy enough to say ‘give me a bag of receipts and I’ll scan them in for you,’ but that’s not how we’d like to work,” he says.

Unfortunately, getting businesses to adopt new approaches can still be a challenge.

“It’s important to work with clients to ensure they comply,” says Lucy Cohen, co-founder of Mazuma Accountants. “When it comes to persuading clients to make the shift, it’s important that they know it isn’t a matter of choice. Our clients are a mix of digitally savvy businesses and traditional companies. For those who are not so savvy with technology, we will digitalise, account and submit their MTD reports to HMRC on their behalf.”

The decision to go paperless

AAT president David Frederick recognises says his firm, Marcus Bishop Associates, has worked hard to prepare and persuade clients.

“In May 2020, we ceased acceptance of paper records,” says David Frederick, AAT president and managing partner of Marcus Bishop Associates. “Our simple advice has been that paperless and digital working is faster, more secure and above all 100% better for health and safety. While home working has resulted in mass compliance as there has been no alternative.”

As a result, it is already 85% prepared for MTD.

Software and HMRC

By and large, the impression is that the software companies have been well prepared and supportive during MTD. But the same wasn’t said of HMRC.

Addition has built its solution around Xero. “Xero has been fantastic in the development and deployment of new features relating to MTD,” says Davies. “The biggest frustration for our advisers is HMRC. Unfortunately, the implementation of MTD in HMRC systems was far from perfect. This is where we see the most room for improvement.”

For Vertis Accounting Director Ian Jarvis, as far as MTD for VAT goes, both Xero and QuickBooks had software ready and fully working well before the launch.

“There was a great deal of advanced support in the form of online training and webinars.”

Next phases

Anecdotally, there is little real sense of preparedness among clients. For example, when Vertis Accounting director Ian Jarvis told a group of people on Zoom in March about upcoming MTD changes, it came as a surprise.

“It’s difficult to really engage clients when the details aren’t available,” he says. “It’s okay for accountants to think about these things and appreciate the change agenda, but the detail is really needed to be able to explain this to clients.”

The requirement for small clients to pay for software will be a stumbling block too.

“It would be really helpful if there were versions of the software targeted at the smallest businesses to soften the pain,” Jarvis says.

Practice view

In respect to income tax, it is still relatively early days, with this not kicking in until April 2023. Despite that, accountants would like to be able to give clients some certainty before 2022/23.

“I don’t believe we have everything we need from the Government yet – I have only seen the roadmap details and nothing specific,” Jarvis says. “I’ve seen a demonstration by Xero of their personal tax return software, which they are to launch in summer 2021. This is not yet complete – we didn’t see the MTD aspects – but it looks to be a very promising foundation for the new regime.”

Meanwhile, Addition founder, Graham Davies, says his company has seen its revenues almost double since the pandemic started.

“We certainly saw a huge forced change in people’s appetite to switch to a digital solution and we expect the trend to continue over the next 12-24 months.”

Tipping point for some accountants

Technology adoption and practice digitisation has become “do or die” for many accountants.

“While a lot of sole practitioners have got to grips with MTD, a hell of a lot haven’t,” Phil Shohet of practice consultancy Foulger Underwood observes. “A lot of sole practitioners in their late 50s and early 60s either don’t feel comfortable with new technology or aren’t interested and are just going to sell up and get out.”

Meanwhile, at the other end of the spectrum, larger firms see a chance to hoover up smaller practices. But in seising this opportunity, some will create their own MTD problems, according to Shohet.

“In some larger firms you have branches taking in mergers and not being able to educate the merged practices or their clients on their modern approach.

“Some practices are doing their own thing, some are doing it right, in terms of software, but it’s very difficult to educate some of these smaller firms that have merged into them, as they might have elderly partners.”

In Summary

It appears quiet on the MTD front and the moment, but this is something of a lull before the storm. Change is on the way, whether it’s small businesses getting used to the pace of quarterly tax and real-time data, practice owners deciding to sell up, or larger firms growing through acquisition.

The first stage of MTD involving VAT shook up the accounting industry. The following step is set to do the same.

Neil Johnson is a freelance business journalist who contributes regularly to trade publications and member organisations, covering employability, recruitment, business trends and industrial analysis.