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In a recent survey*, award-winning accounting software provider FreeAgent, discovered that only 14.6% of accountants and bookkeepers are confident that they understand everything about the next stages of Making Tax Digital (MTD) and its impact on the UK tax system.
As we edge closer to the introduction of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) in April 2023, it’s important to dispel some of the myths that currently surround the initiative.
Myth 1. MTD is being driven by software providers
MTD is a government initiative that aims to transform and digitise the UK’s tax administration system. It is part of HMRC’s long-term vision to make it easier for business owners, self-employed people, landlords and individual taxpayers to get their tax right. While software providers are working closely with HMRC to develop software solutions, they’re not driving the initiative.
Myth 2. MTD for ITSA will mean four times as much work for practices
While some accountants and bookkeepers may view MTD for ITSA and the shift from annual to quarterly filing as an increase to their workload, this won’t necessarily be the case. Many practices currently find themselves under a lot of pressure to get their clients’ accounts prepared for the Self Assessment deadline on 31st January each year. This may involve chasing clients for paperwork, digitising their data and reconciling their transactions.
With the move to quarterly digital tax filing, practices will be able to encourage their clients to use MTD-compatible accounting software like FreeAgent to tackle and even automate some of these admin tasks themselves. Practices can then spread the rest of their to-do list – and any stress that would normally arise during the traditional ‘Self Assessment season’ – throughout the year.
Myth 3. Only accountants and bookkeepers should handle clients’ admin tasks
Many clients can feel empowered by tackling some of their own admin tasks. While some data entry errors may still occur, you can keep tabs on your clients’ activity by using FreeAgent’s Audit Trail report. It displays a record of your clients’ VAT submissions, bills, out-of-pocket expenses, mileage claims, invoices and bank transactions.
Myth 4. MTD for ITSA won’t benefit my clients
While MTD for ITSA will bring a change to how you work with your clients, there are still a number of benefits for them. For example, by keeping their accounting records in order throughout the tax year, your clients can avoid having to rush to meet their filing deadlines.
How easily clients will adapt to this new way of working may depend on the software they’ll use. FreeAgent can provide your clients with a clearer picture of their business finances without any confusing jargon. Your clients can even take care of their business admin on the go with the FreeAgent mobile app.
Myth 5. MTD for ITSA will damage my client relationships
With the introduction of quarterly filing, it’s likely that you’ll need to communicate with clients who are affected by MTD for ITSA in order to get them set up on MTD-compatible accounting software like FreeAgent. Contacting your clients in advance of their quarterly deadlines throughout the tax year should present you with further opportunities to demonstrate your value and to give your relationships a boost.
Myth 6. MTD for ITSA will leave my practice out of pocket
MTD for ITSA will likely bring an increase to your workload as you spend more time on client communications and getting them set up on MTD-compatible accounting software.
You might be reluctant to change your pricing model to reflect the extra work involved with the shift to quarterly filing and subsequent MTD-related tasks. However, it’s perfectly reasonable to reflect this extra work in your pricing model as it’s likely to have an impact on how much time you’ll spend on other client work.
If you choose to change your pricing, remember to take the time to explain to clients why.
Myth 7. There aren’t any free MTD-compatible software options available to my clients
One myth that has surfaced is that there are no free software options available for MTD, but FreeAgent does provide a free solution.
As part of their business current account services, NatWest, Royal Bank of Scotland and Ulster Bank NI provide the full version of FreeAgent completely free to all of their business current account customers for as long as they retain their bank account.
Mettle, the digital business account by NatWest, also provides the full version of FreeAgent to its customers for free. Mettle could be a great option if your clients are looking for a dedicated business account. Accounts are easy to open and are completely free, with no hidden costs or transaction fees. Your clients will get FreeAgent for free if they mark Mettle as their primary business account in the software.
Myth 8. Spreadsheets are just as good as any digital tax software
A spreadsheet might be a convenient place to store information about your clients but may not be secure enough to comply with UK GDPR data privacy and security legislation. Here’s why you might want to consider using an alternative to spreadsheets for storing information about your clients.
If your small business clients are using spreadsheets to manage their accounts, they could be spending far more time than they need to on their day-to-day admin. Clients who maintain digital records can streamline their processes and gain a better understanding of their business finances than those who don’t.
Myth 9. There’s no way to share data between the different systems required to comply with MTD for ITSA
Clients who are affected by MTD for ITSA will need to keep self-employment and property income records using MTD-compatible accounting software, which they will also use to make quarterly declarations to HMRC. However, you and your clients can continue to use existing processes to record any income that’s outside the scope of MTD for ITSA, such as capital gains or employment income received through PAYE.
Before these clients submit their annual final declaration, they may need to pull all of this information into their accounting software solution in order to finalise their tax position at the end of their accounting period.
FreeAgent is working closely with HMRC to ensure that data can flow seamlessly between systems and to make things as easy as possible for clients with multiple sources of income. Our software will be ready to support you and your clients in time for the launch of HMRC’s MTD for ITSA beta programme in April 2022.
Myth 10. It’s not possible for practices to get prepared in time
Getting your practice prepared for MTD for ITSA as soon as possible will stand you in good stead between now and April 2023. This might feel like a challenge, particularly if you have a large client base, but FreeAgent can help.
To give you a head start with your client communications, we’ve created useful email templates in our practice preparation guide to help you familiarise your clients with MTD. You can also book a free 30-minute consultation with one of our MTD experts to get advice on segmenting your clients and planning your communications.
Get in touch to find out how FreeAgent can help you increase efficiency and prepare your practice for MTD for ITSA.
*FreeAgent survey of 149 UK accountants and bookkeepers.