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MTD for Income Tax: What accountants need to know and do today

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Making Tax Digital (MTD) is part of the government’s ongoing plan to ensure all taxpayers are using software for accounting and reporting that relates to tax.

MTD for Income Tax follows the successful introduction of MTD for VAT in April 2019 and is the next step.

Following several delays, the government has said MTD for Income Tax will be mandated on 6 April 2023.

As happened with MTD for VAT, clients will turn to accountants for advice and guidance. More than this, the government is again likely to rely at least partially on accountants to educate their clients about the requirements.

This represents business opportunities and a chance for practices to grow their service offerings.

The impact on the accountancy profession will be profound. Although it’s several years away, accountancy practices with income tax clients that fall under the scope of MTD for Income Tax need to start planning today.

The government has not yet published legislation for MTD for Income Tax, or made any major announcements. We’re able to gather the following from what’s been said so far, and from the income tax pilot scheme.

Read on to find out what your accountancy practice needs to know. And here are the topics we cover in this article:

Start date for MTD for Income Tax

Who is affected by MTD for Income Tax – and how?

Accounting updates and final declaration

Opting out of MTD for Income Tax

Required software for MTD for Income Tax

MTD for VAT and MTD for Income Tax

What MTD for Income Tax means for accountants

Start now with preparations for MTD for Income Tax

Prepare a practice plan

Most of those within the scope will be required to follow MTD for Income Tax rules in their first full accounting period starting on or after 6 April 2023.

For accounting periods prior to this, they will continue to use the Self Assessment system.

In other words, even after signing up for MTD for Income Tax, your clients will still need to submit a Self Assessment return for the 2022/23 tax year by 31 January 2024, or 30 December 2023 if they want HMRC to collect taxes due from wages and pensions via PAYE (although if they’ve already signed up for the MTD for Income Tax pilot, this will not be required).

Self Assessment will still be required for individuals outside of the scope of MTD for Income Tax, and for other types of declarations – for example, for claiming certain tax reliefs of benefits, or making charity donations outside of salaried employment.

The majority of businesses and landlords with business or property income above £10,000 will be required to sign up for MTD for Income Tax, and then use compatible software for their income tax accounting for the first full accounting period starting on or after 6 April 2023.

In other words, MTD for Income Tax will affect those who would normally declare more than £10,000 in the self-employment or property boxes of the Self Assessment tax return.

To fall under the MTD for Income Tax scope, all of the £10,000+ income will have to come from either self-employed business or property rents.

For example, should one of your clients have just £9,000 from property rental to declare for income tax, and £2,000 from savings interest income, that will not require them to sign up for MTD for Income Tax.

For those signed up to MTD for Income Tax, there will no longer be a need to send a Self Assessment tax return with regard to income for the tax years occurring after your client signs up for MTD for Income Tax.

Instead, periodic updates will be made to HMRC using compatible software.

An update about business income and expenses will be sent to HMRC via software every three months (quarterly), or more frequently if your client chooses to.

An update for any income from property will also be required. Your client will then see a more up to date estimate of how much tax they owe, although it will lack end-of-year adjustments.

At the end of your client’s accounting period, they’ll be required to make End of Period Statements (EOPS) for each business they own, and also for income from property.

This should include any adjustments that are required (similar to the SA103 and SA105 schedules). In other words, there may be more than one EOPS generated by each client.

Following the end of your client’s accounting period, they will crystalise their tax in the form of a single Final Declaration for all their business income and property income.

This is a legal declaration that lets them finalise their tax position for the tax year, taking into account all sources of chargeable income and gains – including personal. This process brings together everything that the taxpayer needs to calculate their final tax liability.

As with MTD for VAT, it won’t be possible for most clients to opt out of MTD for Income Tax if they fall within its scope.

However, it’s likely that those who fall under the digital exclusion rules as defined by MTD for VAT will be able to apply to HMRC to be exempted from MTD for Income Tax.

This includes people whose disabilities mean they can’t use software, for example, for people whose remote location means internet access is impossible.

HMRC says free software will be made available for clients. Notably, it adds that this will be for “the simplest tax affairs”.

Existing cloud accounting software will be updated in time, although this might not necessarily be true for desktop accounting software.

Older software packages that are no longer supported may not be updated, so might require the client migrate their accounting to a different package.

It remains to be seen whether using spreadsheets plus a bridging solution will be possible.

The two MTD schemes for VAT and Income Tax operate independently, with their own sign up criteria.

It isn’t the case that MTD for Income Tax does applies only to those already using MTD for VAT – although many businesses already using MTD for VAT will find themselves having to sign up for MTD for Income Tax too.

It’s hard to overstate the changes MTD for Income Tax will bring for you. Here are two things to be aware of.

1. Your clients will have to use software

This is obvious, but requires exploration and clarity.

Your clients will be required to use compatible software to record their business and property income and expenditure, and send five updates every year to HMRC.

There’s likely to be automation for each of these steps, minimising the administrative impact. But your clients will still need to be aware of the requirements expected of them.

This will require a substantial change in attitude from your clients in how they approach their accounting.

It’s certainly the case that the ‘shoebox’ client who dump receipts on their accountant’s desk in January each year will have to change their ways.

It’s your role as their accountant to communicate this need for change, and to encourage it to happen.

In return, you are given significant privilege to guide your clients towards the best solution for their needs – and to bring positive changes to their clients’ businesses.

This presents additional opportunities.

Not partnering with a software vendor to sell solutions to your clients, for example, is to discard a potentially large income source. Needless to say, an MTD for Income Tax-compatible cloud accounting solution that ties into your own systems is best for both you and your client.

You can offer training in the software, perhaps as part of the sales package, or as a separate service offering.

At the very least, every UK accountant will need to be proficient in the free software package the government intends to offer because they will be facing client enquiries about this on a very regular basis.

2. You have the opportunity to offer additional advisory services

Although MTD for Income Tax should mean clients are more aware of their accounting, it doesn’t mean your fundamental role will change.

You’ll still be required to help your clients be compliant, and to help them with fundamentals such as making deductions and calculating a final income tax bill.

While it’s possible some small business owners may have an epiphany moment when they get to grips with accounting software, and realise the power it delivers, the fundamental fact that many people hate dealing with figures and the ensuing admin burden isn’t going to change.

You have nothing to fear from technology and, in fact, lots to gain.

But this is only scratching the surface of the potential that MTD for Income tax will deliver.

You will go from having a single point of contact each year, to potentially having at least five situations where your clients may need help with their accounting when they make those quarterly reports, EOPS and the final declaration.

These situations can be used to forge stronger relationships where you’re not viewed as just a number cruncher, but more of a business partner.

Using cloud software that ties in with your clients’ accounting gives the ability to monitor for problems or opportunities, and to give advice based on this.

MTD for Income Tax delivers the potential to take on more of an advisory role. It would certainly be worth taking advantage of this in order to create a practice that’s fit for the 21st century.

There are two phases for practice preparation when it comes to MTD for Income Tax for you and your clients: preparation and long term.

If you’ve already seen your clients through the transition for MTD for VAT, you’ll realise how familiar this sounds.

In the coming years, the majority of your focus should be on preparation.

Here are some questions that might help kickstart this, as well as the creation of appropriate service offerings:

  • How many of your clients currently use Self Assessment?
  • What is their current and projected turnover? And will their current or projected income from either property rental or self-employment mean they’re within the scope of MTD for Income Tax?
  • How are your clients submitting their Self Assessment returns? Do they do it themselves, or ask you to do so?
  • When are your clients’ accounting periods/financial year ends?
  • Are they using software to manage their accounting needs, or their business? Is their software old, or can it be updated?
  • Are they keeping records manually or via spreadsheets?
  • How easy is it to interact and correspond with the clients? How will they respond to your MTD for Income Tax messaging?
  • What services you offer will change – and how?
  • 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?

Once these questions are answered you can start to prepare a practice plan, using the following as guidance:

1. Highlight the importance of MTD for Income Tax

Ensure your clients understand the importance of moving to MTD for Income Tax sooner rather than later – move now and the price stays the same, but moving later is likely to incur higher fees.

Encourage your clients to take advantage of the MTD for Income Tax pilot scheme.

In April 2023, getting support from HMRC, the software vendor or even your practice will likely be very difficult because of the sheer quantity of people adopting MTD for Income Tax all of a sudden.

Get started early, however, and it will be much easier.

2. Prioritise your clients

Prioritise clients based on ‘skill’ and ‘will’ – and aim to determine the best MTD for Income Tax package for them based on this, such as mobile tools, cloud accounting, and so on.

There’s likely to be a generational divide here that you may already be aware of, with younger individuals more likely to be willing to embrace technology (perhaps to the extent that their requirement for assistance will be very minimal).

The MTD for Income Tax requirement may inspire older businesses people to bring forward their retirement date (or the time at which they sell up), and there are obvious opportunities to assist via service offerings there too.

3. Create additional service offerings

You can do this around training, or simply offer some content resources such as webinars, email newsletters, or even in-face roundtables to discuss MTD for Income Tax’s impact on client businesses.

4. Set conversion targets

Set a target for MTD conversion in your practice, such as having 80% of eligible clients switched to MTD for Income Tax within 360 days – while acknowledging that 20% of businesses won’t move.

Decide the best path for this 20% – will they simply require more coercion, or is it time to ask them to make alternative arrangements for their accounting?

5. Review unprofitable clients

Use MTD as an opportunity to acknowledge any unprofitable clients and aim to change the situation. Design new service offerings with this in mind.

Final thoughts

If your practice dealt with the implementation of MTD for VAT ahead of it being mandated in April 2019, you’ll be well aware that starting early with preparations will put you and your clients in good stead. If it didn’t, the best advice is to start now.

Look at your processes, start talking to your clients and take the steps now to not only meet the requirements for MTD for Income Tax but use it as an opportunity to help your practice and your clients really flourish.

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