Capacity challenges and communication gaps – are we ready for MTD for ITSA?

Is HMRC doing enough to communicate the challenges to clients who face more work and higher fees?

As of April this year, all VAT-registered businesses are legally required to keep digital VAT records and returns using Making Tax Digital (MTD)-compliant software.

MTD for Income Tax Self-Assessment (ITSA) will follow in April 2024. It seems far off, but preparations are needed sooner than many think.

MTD ITSA is likely to increase workloads exponentially, putting pressure on accountancy firms and raising concerns over capacity issues, although in the long-run the new system should save time and provide new opportunities for clients and agents alike. 

A Sage report back in March revealed that over half of accountant respondents (58.7 per cent) view MTD ITSA as a new opportunity for business growth, despite increased workload challenges.

Currently, ITSA returns are filed once a year but increased reporting under MTD means there will be a minimum of four updates per year just for self-assessment alone as well as End of Period statements at the end of the fourth quarter for each separate income stream. This means that in many cases, businesses could face fifteen returns per year in total:

• X4 MTD VAT returns (quarterly).
• X4 MTD ITSA returns for self-employment income (quarterly).
• X4 MTD ITSA returns for property income (quarterly).
• X1 End of Period Statement for self-employment income.
• X1 end of Period Statement for property income.
• Final declaration.

Behind the scenes, AAT has been lobbying for an initial twice-yearly MTD for ITSA reporting requirement rather than quarterly to help ease the pressure on businesses.

HMRC communications have been scant – there could be capacity issues

Tom Sheen, private client manager, Ashcroft

Businesses are as ready for MTD ITSA as possible, despite numerous system delays since it was first announced in 2015. During this period, communication from HMRC has been scant at best, leaving agents and software providers with the task of updating individuals.

The increased reporting under MTD ITSA means we are shifting from as little as one record request per year for our clientele to a minimum quarterly regime for self-assessment. This will cause capacity issues and mean a shift in our way of working as well as our clients.

Clients will face increased professional fees, software costs and time spent dealing with their own bookkeeping at more regular intervals, which HMRC have recognised in their policy paper.

At Ashcroft, we’ve ensured our software is MTD-compliant and staff have undergone in-house training.

Next steps: Notwithstanding any further delays, it is about communicating to clientele whether they will be affected and what the new regime looks like. Some responsibility also needs to lie with HMRC – they need to improve the way they communicate this significant change in tax reporting.

Verdict: Businesses are as ready as they can be, but HMRC communications have been scant.

Small sole traders and landlords are not ready – regular communication and expert support is crucial

Clare Bowen, Director of Business Services, Monahans

MTD ITSA will affect a broad selection of individuals, including around 2.6 million self-employed and 1 million landlords. But the scale of the challenge will make it impossible for everyone to transition within the final few months, so accountants and their clients should create a plan soon to anticipate any issues.

One of the challenges for accountants is to ensure clients see the benefits of the new system: it will be a much more efficient digital filing system which will help taxpayers avoid inputting errors and ensure records and knowledge of tax liabilities to be kept up-to-date. But the slow release of information from HMRC has made this difficult to communicate.

While large sole-trader businesses are ready for MTD ITSA, landlords and smaller sole traders are not. They still haven’t received enough information in which to understand the implications for record-keeping.

In addition, there should have been more of a phased-in approach for landlords first, including those with over £20,000 income, to differentiate between accidental landlords with just one property.

Next steps: Many firms are segmenting their clients to identify offerings for each group and determine solutions. Communication internally and with clients is key at this point so that everyone knows what they need to do now and in the future.

Verdict: Large sole traders are ready for MTD ITSA but small-scale traders and landlords are not – internal and client communications along with expert accountancy support is therefore key.

HMRC should consider interim measures due to the level of concern

Phil Hall, Head of Public Affairs & Public Policy, AAT

AAT has engaged extensively with members on this subject. While it is clear many are supportive of the MTD concept, they have genuine concerns about the manner of implementation and the likely impact on their businesses and those of their clients.

It could also have a negative impact on the overall credibility of the programme and a reputational impact on HMRC and Government. This would have implications for wider tax industry morale. The three main concerns identified by our members are:

• Communications: a lack of communication about MTD direct to the 4million+ affected individuals and businesses
• Workload: the resource implications of quadrupling tax submission requirements from an annual tax return to quarterly updates
• Threshold: the inappropriateness of the £10,000 annual MTD threshold which means those with no tax liability will be required to submit quarterly tax updates

AAT, together with ACCA, has written to the Financial Secretary to the Treasury to make her aware of members’ concerns. We have suggested some approaches to overcome difficulties.  For example,  reporting six-monthly rather than quarterly from 2024-2026 to ease into MTD and raising the MTD threshold from £10,000 to match the personal allowance (currently £12,570). We are also regularly engaging with HMRC officials on the subject. The key message for members is to start preparing NOW, don’t wait, and make sure you are doing your utmost to raise clients’ awareness and understanding of what are now imminent changes.

Next steps:  HMRC should consider raising the threshold to £10,000 and using six-monthly reporting initially. But AAT members must act now to raise clients’ awareness and prepare.

Verdict: AAT and most of its members support the concept of MTD and want it to be successful but there are genuine concerns about the way it’s being implemented. We are therefore working very hard to deliver improvements on behalf of our members and their clients. Rest assured we will continue to do so over the coming weeks and months.

People are gearing up for MTD ITSA so let’s maintain momentum

James Poyser, CEO, Provestor, sister company to InniAccounts

MTD ITSA should happen as soon as possible without any phased-in approach or further delay as businesses have been gearing up for it. Let’s build on this momentum.

I am, however, surprised HMRC hasn’t started a public campaign aimed at taxpayers to help drive awareness.

There will be workload and capacity issues, but these will vary from business to business. Quarterly returns for income tax are wafer thin – just two numbers as a minimum. And if clients are already bookkeeping using electronic software there should be very little cost in making the transition. The advantage is an updated tax estimate every quarter – saving accountants a job – and hopefully reduced tax bill shock.

At Provestor, we’re digitally native, so the transition cost for us and our clients is near-zero.

Next steps: MTD ITSA will of course be harder for some clients, especially ‘brown bag’ clients, but accountants must ensure all clients come on this journey. Accountants also need to ensure they’re getting paid fairly for their time. However, I’ve known some accountants talking about a four-fold bill increase. But HMRC estimates MTD should cost clients around £11 per month extra – including software costs – so keep that in mind when considering price hikes.

Verdict: Businesses are gearing up for MTD ITSA so let’s keep up the momentum. Quarterly returns for income tax are wafer thin and won’t cause too many problems.

Annie Makoff is a freelance journalist and editor.