General Elections, referendums and a global pandemic have thwarted HMRC’s attempts to launch Making Tax Digital for Income Tax Self Assessment (MTD ITSA) since 2015. I remember the Chancellor at the time, George Osborne, saying the words: “We will abolish the annual tax return altogether” as he announced the biggest change to the tax system since self assessment was introduced.
Fast forward to now and HMRC is ploughing ahead with MTD ITSA, with the official go-live date of April 2023 where all businesses and landlords with gross income exceeding £10,000 will have to report digitally under the new rules.
These businesses and landlords will be required to submit quarterly updates to HMRC using MTD compliant accounting software or a bridging tool, providing summary information of income and expenditure for the quarter. After the fourth quarter, an End of Period Statement will need to be made for each income source, along with a final declaration including other sources of taxable income such as savings and investment income.
As much as some accountants want MTD ITSA to disappear, we have to face the reality that it’s coming into force from April 2023. And it’ll largely be down to accountants and bookkeepers to hold the hands of clients to get them ready.
With that in mind, it’s time to get your practice ready for MTD for ITSA to avoid a significant burden in April 2023. Below are some ideas we’ve seen successfully implemented by Xero partners.
Prepare your practice for digital record keeping
I want to remove one of the early myths of digital record keeping: you do not need to keep all invoices and receipts digitally. It is only the business transactions that must be recorded in a digital form, whether that’s in accounting software or a compatible spreadsheet.
The use of software will be advantageous for a number of reasons, including the use of bank feeds that pull through accounting data on a regular basis. You can then use bank rules to do a large amount of work for you. This will make the quarterly reporting less time consuming and should lead to less human error.
Spreadsheets may play an important role in MTD for ITSA, but you need to ask whether the upkeep of these spreadsheets is going to cause an administrative burden when it comes to quarterly reporting. Accuracy of these spreadsheets will be essential for digital record keeping where formulas must be used for calculations and the ‘cut and paste’ function does not meet the digital link requirements. If spreadsheets are used, we’d suggest creating a proforma for the firm so there’s a consistent layout across all clients.
Prepare your clients for digital record keeping
An important exercise to complete now is to segment clients to identify those who are already keeping digital records, those maintaining spreadsheets, and those who still keep manual cashbooks or drop a bag of paper receipts to you once a year. This will help to identify clients who may need extra guidance in the early transition stages to MTD ITSA.
You can also see what software your clients are using and whether your team needs further training to assist with future queries.
This segmentation will then allow you to create a migration plan for all clients between now and MTD ITSA mandation, rather than having to do this for all clients in April 2023.
Align accounting period end dates
If you have a client that is registered for MTD VAT and MTD ITSA, you may have two sets of dates when quarterly reporting is required. Therefore, if a client has a non-coterminous VAT and accounting year end, consideration should be given to aligning these periods to reduce the administrative burden.
Consider MTD as a possible opportunity for your practice
There is no denying that MTD is going to cause a number of headaches and issues. However, many Xero partners see MTD as an opportunity to not only modernise their practices, but also provide added value work to their clients.
Having access to real-time information relating to a client’s business records allows informed decisions to be made for valuable services such as tax planning.
Some partners have also welcomed the introduction of quarterly reporting to reduce the January tax rush because they will already have a majority of information available to them.
And while we shouldn’t get the champagne out and celebrate that the accounting profession has finally reclaimed January, digitalisation should hopefully reduce the amount of midnight oil burnt in January each year.
Know that Xero has you covered
Xero is committed to supporting our partners with MTD for ITSA as HMRC rolls out its pilot programme from April 2022. In the meantime, from 31 August onwards, Xero Tax can be used for personal tax (as well as company accounts and tax), so you can start using Xero for your self assessment clients ahead of MTD. This will make it a more simple transition to MTD in the lead up to April 2023.
Xero is also committed to providing solutions for our partners for the entire MTD programme, and we’ll support MTD for Corporate Tax come 2026.