Making Tax Digital (MTD) came into force in April 2019 for the majority of VAT-registered businesses with a turnover above the VAT threshold (currently £85,000). The rules can be broadly summarised as follows:
- VAT-registered businesses need to use what HMRC calls “functional compatible software” to keep digital records for VAT purposes and file VAT returns if their accountant doesn’t do so (or other agent acting on their behalf)
- Certain types of VAT-registered businesses – around 3.5% of the total – have a deferred MTD for VAT start date of October 2019, while some VAT-registered businesses can opt out of MTD for VAT, but only according to specific and unusual circumstances (see below).
The government has published VAT Notice 700/22 to explain most details about MTD for VAT and it should be considered required reading for accountants.
Non-VAT registered businesses are not yet affected by Making Tax Digital and can continue filing their taxes and storing accounting data as they always have.
HMRC has stated it will not be asked to keep digital records or update HMRC quarterly for other taxes – primarily income tax and corporation tax – until April 2021 at the earliest, pending further government announcements.
Voluntary Making Tax Digital submissions for income tax for single-business sole traders and landlords (excluding furnished holiday lets) are being accepted as part of an HMRC pilot programme, but there are no details of when this will be mandated for everybody.
MTD for VAT alone has massive implications for accountants and bookkeepers, and brings with it significant business opportunities.
Below, we look at some suggestions towards creating an MTD implementation plan or polishing your existing efforts. But first we examine the criteria for the small number of VAT-registered businesses that will not need to enrol with MTD for VAT in April 2019.
Exemptions and deferrals
HMRC has stated in VAT Notice 700/22 that there are exemptions for some organisations, as follows:
- A business that is subject to insolvency procedures.
- Those whose religious beliefs are incompatible with the requirements of MTD for VAT. This is typically that the individuals running the business are unable to use computers because of their beliefs.
- Those who because of reasons of age, disability, remoteness of location or in HMRC’s words “any other reason” that mean it’s not “reasonably practicable” for the business owner to use digital tools to keep business records or submit returns. For example, a business without an internet connection because it’s on an island that’s off the grid might be considered exempt.
HMRC has also announced that some organisations will have a deferred start date for MTD for VAT in October 2019, rather than April 2019. They comprise around 3.5% of the total and are as follows:
- Businesses required to make payments on account
- Annual accounting scheme users
- Not-for-profit organisations that are not set up as a company
- VAT divisions
- VAT groups
- Public sector entities that are required to provide additional information on their VAT return
- Local authorities
- Public corporations
- Traders based overseas
No other VAT-registered business will be exempted or deferred from MTD for VAT, despite any rumours or older information to the contrary.
To avoid loss of business or penalties, your practice needs to review processes, resources and software – as do your clients. This might involve training and certification.
Be the experts
Because of Making Tax Digital, your relationship with some of your clients is going to fundamentally change. Inform your clients about MTD and the profound effect it will have on their business practices. Work with them to create a plan.
Filing direct via the HMRC gateway is no longer an option for those that fall into scope for MTD for VAT and software must be used instead. HMRC will not provide them with any. How many of your clients are aware of this?
Use Making Tax Digital as an opportunity
In a recent survey with 500 accountants and bookkeepers carried out by Sage, 40% of accountants saw MTD as a good opportunity to help small businesses thrive and survive, while 38% said it would help acquire new clients.
MTD offers a chance to get in touch with clients that you might ordinarily only speak to once a year, so take the opportunity to advise. However, you might also consider running MTD-themed conferences, workshops, webinars and email/social media campaigns in order to attract new clients, or add value for existing ones.
Considering future clients as well as existing ones is important. 70% of new business start-ups are tech-savvy millennials, so their expectations of interacting with their accountant will be different to more traditional businesses.
Making Tax Digital
HMRC’s Making Tax Digital has changed how businesses submit VAT returns – we’ll help you with it via a free telephone consultation.
Key steps you need to take
To prepare your clients for their MTD VAT submissions, there are several suggested steps that will help you work out the scope of the implementation:
1. Understand which clients will be impacted and when
This will help you assess your workload and develop a software solution to manage it. You will need to consider how many clients you have and, of those, how many will be initially impacted by Making Tax Digital for VAT.
Think about your clients’ future needs as well. With potential business growth of some clients, it could mean an even greater number will be aﬀected.
Start by asking the right questions:
- How many clients are VAT registered – or likely to be? (Remember that MTD is a one-way street – clients can’t opt out later, even if they fall below the VAT threshold.)
- What is their current and projected turnover?
- How many may retire or exit? What are their succession plans?
- How are your clients submitting their VAT returns?
- When are your clients’ VAT quarters?
- When is your clients’ financial year end?
- Are they using software to manage their accounting needs or their business?
- Are they keeping records manually or via spreadsheet?
- How easy is it to interact and correspond with the clients?
2. Outline the services you provide and your costs
Many accountants have found that changes such as auto-enrolment have led to opportunities to provide more support to clients but the challenge has been incorporating this into their fees.
Assess how best to work with your clients. You will know from experience which clients are more capable than others. Educate them on the impact of inaccurate submissions and calculations and provide them with extra support and tuition to help pre-empt avoidable mistakes.
Making Tax Digital is an opportunity for practice and service growth. It is worth considering how you will package MTD support to existing and new clients and how you will diﬀerentiate yourself from your competitors.
Again, asking the right questions is a firm foundation for moving forward:
- Monthly, quarterly or annually – which is best for your client?
- What services will change?
- What payment methods are correct?
- What business advice is required?
- Who are clients outsourced to – with special regard to bookkeeping?
- Can quarterly and yearly dates be automated, as well as bank feeds?
- Who will manage them?
- Who will deliver?
3. Review your internal processes and resources
Consider how you currently engage with your clients and whether this will need to evolve. Once you’ve reviewed your services and costs, it’s also good to know what your team spends most of their time on.
Bank feeds are a great way to automate more manual processes and getting clients to use software will also reduce your costs to serve.
However, throughout everything bear in mind the following:
- If you are planning on expanding your client base and oﬀering new services, the less time spent processing the better.
- Be conﬁdent everyone in your practice is familiar with the bookkeeping software a client is using and know how to get the best out of the software.
- Consider how you will tackle tracking exceptions and errors. It will be important to know that adjustments need to be identiﬁed when managing quarterly returns.
- Make sure your clients have accessed their digital tax account well in advance.
- Agree what the sign oﬀ processes and touch points will be, identify the volumes you are working with and what tools you have at your disposal to support these.
Ensure clients understand the importance of moving to MTD sooner rather than later – moving now and the price stays the same but moving later is likely to incur higher fees.
Prioritise clients based on “skill” and “will” – and determine the best MTD package for them based on this, such as mobile tools and cloud accounting, for example.
Set a target for MTD conversion, such as having 80% of eligible clients switched to MTD by a set date while acknowledging that 20% of businesses won’t move.
Use MTD as an opportunity to acknowledge unprofitable clients and aim to change the situation.
4. Prepare your clients
Now’s the time to prepare your clients. Talk to them, let them know they are in safe hands and you are there to support them. You could create a communication and engagement plan for the key segments of your clients.
Current clients: Work out which of your clients use software and which don’t.
Future clients: Use social media, business press and business events to show that you can help with Making Tax Digital.
Clients who’ll transition easily: Let them know they are on the right software now and working well. Your reassurance will be good to hear.
Manual receipt clients: Get them to use software as soon as you can. The earlier you do, the better it will be for both of you. Not all manual receipt clients will be opposed to adoption.
More than 71% of individuals have mobile hones and are using technology to make purchases every day. So build case studies to show how other clients have beneﬁted and what the adoption experience was like, all thanks to you.
Clients who are using spreadsheets already show a willingness to input records. Capturing income and expenditure on a smartphone using a dedicated app or chatbot is an excellent, easy-to-use alternative.
And they don’t need a computer to record either – it can all be done from their mobile phone in real time, so it’s easier for both of you. Get your clients to download the app on to their phone and see how simple it is.
Editor’s note: This post was originally published in December 2017 and has been updated for accuracy and relevance.
Fast track your MTD plan
Putting your Making Tax Digital plan in place but need some support to see it through? Read this guide for top tips to help your practice and your clients make the move to MTD.