Over the past few years, HMRC’s ‘Making Tax Digital’ (MTD) initiative has been a regular topic in XU Magazine. But with Making Tax Digital for VAT now up and running, what does the future rollout of MTD look like? And how can you ensure that your firm is ready?

Chris Findlow, Head of Partnerships at Kriya, looks at the history and future of MTD and the need for a flexible digital accounting setup at the heart of your accounting firm.

The need for a 21st century digital tax system

We live in a digital world. Our lives and our businesses are run and managed using online tools, digital solutions and a diverse, customised set of apps in our app stacks. And with the move to online banking, Open Banking and a growing network of fintech solutions, the financial world is ever more digital in its nature. So, why should tax be any different?

Making Tax Digital is HM Revenue & Customs’ (HMRC) initiative to upgrade, streamline and digitise the tax system. Generally speaking, the key aims of MTD are:

• To make it simpler and more effective for companies and individuals to submit their tax information – and to move this process into the digital space.
• To make it easier for HMRC to access the relevant data, in a digital format – and for returns to be digitally submitted on a more frequent basis.
• To reduce errors, late returns and missing data – and by doing so increase the tax revenues coming into the Treasury.

This means businesses and (in the near future) individual taxpayers will need to digitally record their financial transactions and submit digital tax returns. And to do this, your firm and your clients need to have the right accounting software and infrastructure in place.

A digital accounting platform at the heart of your offering

When your firm’s key processes are based around an online accounting platform, this puts you in a far better position to cope with MTD. A digital platform streamlines the key accounting processes and, most importantly, keeps you and your clients MTD-compliant.

Digital accounting allows you to:

• Record your client’s financial transactions
• Digitise and store the relevant data
• Output clients’ tax information in the right format for HMRC

The digital technology and the infrastructure are already in place for many firms. And this has meant that getting clients ready for the initial rollout of Making Tax Digital for VAT was a relatively straightforward process for most tech-savvy advisers and their business clients.

But with further expansion of MTD on the agenda, what will the future of MTD look like?

Making tax digital – the timeline to 2023

Making Tax Digital for VAT was the first stage of MTD to go live back in April 2019. It’s now mandatory for all VAT-registered businesses with a turnover over the £85,000 registration threshold to submit quarterly digital VAT returns. So ‘going digital’ is no longer just a nice-to-have for the average business owner. It’s a mandatory legal requirement, and that’s put some real impetus behind the digital transformation of the nation’s small and medium-sized businesses.

In any business economy there will be a mix of tech savvy early adopters and reluctant technophobes. But it’s the businesses that fully embraced cloud technology and online accounting early that have found it easiest to get up to speed with MTD.

If your clients have been filing their quarterly VAT returns via Xero for some time, the switch to MTD will probably have been totally imperceptible. Their bookkeeping is automated, their documents are all saved in Xero and your team can quickly pull together a digital return within the software and submit this digitally to HMRC.

The challenge now is that MTD is expanding – and that means getting your smaller sub-£85,000 turnover businesses, sole traders and property owners ready for digital returns.

Here’s the current timeline:

1. April 2022: MTD for all VAT-registered businesses – the first step will be an expansion of MTD for VAT. From the start of the 2022/23 tax year, MTD for VAT will be extended to cover all VAT-registered businesses, regardless of turnover. So, if a client submits and claims VAT, it will be mandatory to do this via the HMRC digital portal.

• The challenge: Getting smaller and micro businesses up to speed and switched over to a fully digital process could be a lengthy process, so it’s best to start this transformation as early as possible.

2. April 2023: MTD for self-assessment – the next step will be the extension of MTD to self-employed individuals and partnerships. This will cover self-assessment income tax for sole traders and also private landlords with £10,000+ of annual property income.

• The challenge: many self-employed individuals and property owners will have an extremely basic accounts process in place. Switching clients and prospects over from outmoded spreadsheets and paper files could well be an uphill struggle. There’s likely to be a need for some education around the many benefits of a digital approach and how this helps clients to manage their finances more effectively.

3. April 2026 (TBC): MTD for Corporation Tax – the plan has always been for MTD to be expanded to cover all business and income taxes at a future point in time. But it looks likely that MTD for Corporation Tax (CT) won’t become a reality for some time.

• The challenge: at present, MTD for CT is some way off. HMRC is currently running a Consultation on MTD for Corporation Tax and is looking for feedback from businesses, agents and developers around how this could work. A pilot scheme will be made available, but MTD for Corporation Tax is unlikely to become mandatory before 2026, at the earliest. So, firms will need to run MTD-compliant returns for some business taxes, with CT still dealt with in the traditional online manner.

Broadening your understanding of client’s financial situation

You could be forgiven for thinking that preparing for MTD is a compliance job. But, in fact, this mandatory switch to digital accounting has the potential to revolutionise your clients’ financial management. And, by doing so, transform the value you can add as their adviser.

Smaller clients may currently be weighed down by paper records, outdated desktop accounting and complex Excel spreadsheets. Switching to digital accounting is likely to be a revelation.

By going digital, you can:

• Get real-time reporting – with a real-time accounting system, you and your clients have all the latest business data and management information at your fingertips 24/7. This helps to improve oversight and allow faster, more insightful decisions.
• Track performance more accurately – setting clear targets and recording these metrics is hugely beneficial. You and your clients can see their companies’ financial and non-financial performance over time and spot the opportunities for improvement.
• Track tax liabilities in real-time – carefully recording every transaction makes it easier to see the impact on your clients' tax liabilities. See how much VAT, CT or income tax needs to be paid, plan out the payments and ensure the appropriate cash is available.
• Keep clients MTD-compliant – with a digital accounting platform, you ensure that all client tax returns can be dealt with either in the online or digital space. This keeps your clients compliant with MTD and improves the firm’s tax processes.
• Improve clients’ access to funding and finance – lenders will want access to clients’ financial information and cash flow forecasts before supplying any funding. This is far easier to do when you have access to the clients’ digital accounts – increasing the client’s chances of successfully accessing extra funding.

The digitisation of the small business economy is gathering pace. So adapting and evolving to achieve the benefits of digital should be front and centre of your firm’s strategy. A digital firm is more streamlined, more efficient and far better aligned with the needs of MTD.

Tax and accounting may be the first business areas where you’ll see the benefits of digital. But having a digital platform at the centre of your accounting firm paves the way for all manner of long-term efficiencies and insights.

Find out more about Kriya and how we support your accounting firm.

You can read this article along with many more in Issue 27 of XU Magazine here.