MTD for agents
Making Tax Digital (MTD) will lead to very significant change for many ICAEW members in practice. MTD is a major HMRC driven change to the administration of the tax system but it should be seen in the context of the increasing digitalisation of business, including the business of providing accounting and tax services.
What is MTD and what does it mean for you?
Page last updated
23 May 2019
MTD will result in significant changes to the agent-client relationship and, in some cases, to the way that a practice operates. The terms of each engagement, and the scope of the services to be provided in future, will need to be reviewed and are likely to change. MTD will also result in changes to how agents interact with HMRC, with increasing reliance being placed on commercial software and the online services that HMRC currently provides through its agent portal being withdrawn over time.
Some practices have already embraced accounting software and have moved all of their clients from using paper records or basic spreadsheets to an accounting software package. For such firms, MTD is unlikely to cause serious disruption; they will need to check that the software provider(s) being used by them and their clients will be upgrading their products to make them MTD compatible and will need to implement any upgrades required. Such firms will probably be seeking to capitalise on the opportunities provided by new add-on software in the market such as practice management and cash flow forecasting software.
Some practices have a client base that mainly keeps accounting records on paper or in a basic spreadsheet; in many cases this form of record keeping very adequately meets the needs of the business. MTD will be very disruptive for such firms as they will need to acquire and familiarise themselves with suitable software products and work with each client to find the appropriate solution. There will be additional costs, both transitional and ongoing, which may or may not be offset by the benefits of better and more real time data.
Many practices will fall somewhere between these two extremes with some clients that use accounting software and others that still maintain paper records.
What are the MTD requirements?
HMRC’s MTD transformation project started with MTD for VAT from April 2019. After MTD for VAT has been implemented, MTD for income tax (for the self-employed and those with income from property) and MTD for corporation tax are expected to follow, but not before April 2021 at the earliest. HMRC is also running an MTD for individuals transformation project.
The essential elements of MTD for VAT and income tax are:
- Businesses and organisations (which includes those with income from property) are required to maintain digital accounting records. Maintaining paper records ceases to meet the legal requirements in tax legislation.
- Businesses and organisations are required to use a functional compatible software product to submit their returns to HMRC. The software uses HMRC’s API (Application Program Interfaces) platform to submit information to HMRC. The current HMRC online tax return services are withdrawn for those within the scope of the MTD rules.
MTD for VAT
VAT registered businesses and organisations with a taxable turnover above the VAT threshold (£85,000) are required to maintain their accounting records and file their VAT returns using MTD compliant software, from the first VAT period starting on or after 1 April 2019. HMRC has announced a 6 month deferral to the start date for some more complex businesses. VAT registered businesses with turnover below the VAT threshold (ie, those that have registered voluntarily) can continue to maintain their accounting records and file their VAT returns as they do currently, at least until 2021.
Each business needs to be individually signed-up to MTD for VAT – HMRC will not automatically transfer businesses to MTD. The HMRC guidance on signing-up for businesses is available on Making Tax Digital for VAT. The guidance for agents is on Making Tax Digital for VAT as an agent: step by step.
MTD for Income Tax
Mandatory MTD reporting for income tax has been delayed but it has not gone away. HMRC still expects MTD for income tax to become mandatory, but the government has made a commitment that this will not be before 2021. The MTD pilot for income tax moved to public beta in March 2018. Businesses that meet the eligibility criteria and have MTD compatible software can sign up to MTD for income tax on gov.uk: Use software to send income tax updates. Agents can sign their clients up on Agents: use software to send income tax updates.
What do agents need to do?
Agents need to take steps to prepare both their own practices and their clients for the disruption that MTD and digitalisation will cause to the market for accounting and tax services.