Making Tax Digital strategies for 2023 and beyond
With shrinking margins on compliance work and progressive firms already investing more in advisory services, how will you ensure your firm is ready when Making Tax Digital (MTD) for Income Tax is mandated in April 2023? More importantly, how will you do so without derailing your advisory ambitions?
These are important questions as, for most practices, a substantial part of their client base is likely to fall within its reporting criteria.
We are a business that thrives on change and we guide our customers through rapid and fundamental change on a daily basis. In this article, we’ll look at how a change in mindset is as important as a change in process in getting MTD for Income Tax right. We’ll also explore how firms can embrace technology to support this change to move forward in the profession, and the technical innovations that may keep your firm ahead of the competition.
Who’s in for April 2023?
The first step is to find out exactly how many of your clients would be affected if the effective date were today. This includes individuals, partnerships and trusts, who have either income from a trade, or income from property, or from both, where the combined income (that’s turnover, not profit) exceeds £10,000.
Clients who have a small self-employment on the side – e.g. a ride-share driver perhaps earning £5,000 per annum, who also lets his spare room via a holiday rental company, earning maybe £6,000 per annum doing so – would indeed fall within MTD for Income Tax.
The second step is to profile those clients that fall into the MTD for Income Tax bracket. This means they should be categorised or ranked on the circumstances that will determine the most appropriate MTD solution for them. Are any of them already ‘MTD ready’? When high-definition TVs first came to the market, they all had an ‘HD ready’ sticker on them because although the TV was ready, no-one was actually broadcasting in HD yet. The same applies here – you want to be ready to assign a virtual ‘MTD ready’ sticker for your clients.
It’s important to identify the factors or circumstances that will affect how you serve your clients in helping them to become MTD for Income Tax ready. Remember that the key requirement under MTD is, “capturing transactions digitally, in record-keeping software, as near to real-time as possible.” Make sure you identify which clients you only hear from once a year. It’s going to be a big change for them to be dealing with you every three months, and it may take some getting used to.
Technology should also feed into your profiling exercise. It’s worth looking at whether or not your clients are using bookkeeping software or spreadsheets, and whether these are MTD ready.
Mindset is also incredibly important in profiling clients. How open are they to leveraging technology to solve their problems? This question, answered honestly and objectively, should influence their MTD pathway.
An MTD pathway is the given starting point for each of your client types. Having profiled your clients, it will dictate how clients will get from where they are, to be where they need to be in 2023.
Some clients will want to take a pathway of deferral, buying themselves more time. Others will look to the pathway of exclusion. Others are best set on a pathway for a cloud bookkeeping solution, or a spreadsheet solution. For these clients, you may want to explore what innovative new apps may be available. These may include data and document collaboration tools, and bank automation apps that ingest live bank transactional data and automatically categorise it.
However, remember that MTD for Income Tax is for landlords as well as businesses. These solutions may be overkill for a property landlord whose rental income doesn’t change from year to year. A better pathway might be a simple income and expenditure app, like a digital data collection tool – or it might be to start using a spreadsheet to record each income and expense transaction.
If MTD for VAT is anything to go by, there are going to be a lot of different options and pathways available. There are currently over 500 MTD for VAT solutions listed on HMRC’s website, and only 10 MTD for Income Tax solutions listed. The time is ripe for evaluating which right, for you and for your clients.
Embrace your digital future
What is clear is that the future is a future of data, a future of choice and a future of inter-connectivity. It’s time to embrace the digital future, as it’s more than MTD for Income Tax. The future of tax and accounting technology is an opportunity for practices to evolve, to new services, and to create new service and better value for the business and clients alike.