Accountants are essential parts of the tax process for many businesses. Without them, many businesses would find themselves at a loss, unsure what to file where. But with the new HMRC Making Tax Digital rules coming into play, accountants seem to be the last thing on everyone’s minds.
How will Making Tax Digital work?
Making Tax Digital was announced a few years ago. It is being introduced in an effort by HMRC to keep up-to-date with the times and to help businesses keep on top of their taxes and general affairs. At the moment, as of April 2022, only VAT registered businesses have to use the MTD services.
Come April 2024, this will change. From then, any self-employed sole traders or landlords earning over £10,000 in profits or property income will be required to use the new MTD for ITSA (Income Tax self-assessment) service. From April 2025, individual partners in business partnerships will be included in the MTD scheme, followed by limited businesses paying corporation tax in 2026. The current services, MTD for VAT and MTD for ITSA work slightly differently.
MTD for VAT
Every VAT registered business must now be registered for MTD for VAT. This requires them to keep sets of data relating to their VAT registration number, their VAT charges, and any information related to their VAT account.
These VAT registered businesses must use HMRC registered compatible software to communicate and submit their tax returns, and may also need bridging software to ensure their taxes are in a compatible format.
There are a few exemptions to MTD for VAT, but generally, those businesses who do not use MTD and do not submit their tax returns in time (the deadlines should remain the same) will face penalties and fines.
MTD for ITSA
This service is not yet mandatory but will be soon. It is therefore wise for accountants and managers to begin researching and setting up this process. It will soon be mandatory for any person, business, or landlords who earns over £10,000 in profits or property income and would usually complete a self-assessment tax return to calculate their income tax.
MTD for ITSA will require sole traders to sign up and register through HMRC and keep digital records. They will need to use MTD-compatible software in order to send quarterly reports to HMRC and finalise any income into an End of Period Statement/declaration. This will confirm that all updates are correct, adjust any inconsistencies, and will essentially replace the self-assessment tax return.
The quarterly reports will include income and expenses and the deadlines will depend on each business’s accounting period. For those whose accounting period aligns with the UK tax year, the quarters will be as follows:
- 6th April to 5th July
- 6th July to 5th October
- 6th October to 5th January
- 5th January to 5th April
How will making tax digital affect accountants?
Accountants will of course feel the brunt of any change in tax legislation. But this change, in particular, is bound to have a vast effect on their day-to-day work.
A snippet on educating clients by Auditox Accountancy
Part of the role of an accountant has always involved educating clients and businesses about how the finance world works in regards to smart business decisions, tax legislation, deadlines, etc. However, with these massive changes coming, accountants are going to have to become very familiar with how making tax digital affects businesses and all of the new rules very fast.
Clients are undoubtedly going to be bewildered and possibly frustrated at the adjustments they will have to make – particularly long-term clients who have always relied on paper records. Accountants will need to soften the blow and make the process as simple as possible.
Accountants will also likely have to demonstrate if not complete the making tax digital registration for many clients.
Providing tech advice
Accountants likely never expected to have to give tech advice to all of their clients, and yet here we are. The making tax digital scheme involves clients using and relying on compatible software that is simple to use and recognised by HMRC.
There is a plethora of compatible software out there to help your clients with their digital record keeping and to make sure they hit the making tax digital deadlines. It will be up to accountants to suggest the most suitable accounting software.
It is important to note that this does provide the opportunity of partnering with a compatible software provider and offering their services to your clients in exchange for some kind of benefit to suit you.
Small business owners are likely to need accounting support as April 2024 approaches. They will need to ensure that they have their tax affairs in order and that they fully understand the UK tax system so that they can begin to register and file their digital records. Many of these self-employed business owners will search for a professional advisor and guide and will likely hire an accountant to help them with MTD for income tax.
Whilst this is great for accountants, they should make sure that they do not neglect existing clients and that every client they work with follows the necessary MTD rules.
More meetings, less overflow
Accountants should also be aware that since income tax will now be reported quarterly, they will have to have more meetings with each client throughout the year. They will likely have to have even more meetings shortly after their clients register for MTD in order to ensure that there is a smooth transition from paper to digital records.
Usually, accountants find themselves having a steady number of meetings and clients throughout the year followed by a huge surge in January and April. Oftentimes, accountants will hire contractors to help cover the numbers. This is less likely to be required now that the tax system is going digital.
This will free up time for more clients, which are likely to appear, as aforementioned.
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