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Agents will need to take steps to prepare both their own practices and their clients for the disruption that Making Tax Digital and digitalisation will cause to the market for accounting and tax services.

Make strategic decisions about the future of their practice

Some practitioners will need to consider the direction in which they wish to take their practice. Some may be prompted to consider a merger, a sale of the practice or retirement. Others may decide to reduce or withdraw from providing tax and accounts compliance services and to instead focus on advisory and financial planning work, consultancy services or a business advice service. If a firm decides that it will continue to provide compliance services it may need to consider how these services can be automated and provided more efficiently. There may be an opportunity for firms that wish to expand to acquire other firms, blocks of fees or clients that have previously managed their own tax affairs. What is clear is that, in the medium term, there is no future for paper-based tax and accounting compliance services and that HMRC will withdraw from providing web-based online services to agents.

Support available to members in practice

A number of events have been designed to help members prepare for the challenges digitalisation will pose for their practices.

In autumn 2018, ICAEW organised half day Start your digital journey workshops which explored the impact of technological trends on a practice, with a focus on the opportunities that this presents to firms as well as the risks of not seizing those opportunities.

Also in autumn 2018, CABA ran one day courses Prepare for Digital Change. This practical course helped attendees to understand the process of change, how to develop a positive mindset, how to build stronger resilience and how to handle the pressure and stay physically and mentally healthy.

These courses may be repeated in 2019; please contact the ICAEW members’ department if you would be interested in attending.

The Tax Faculty is continuing its series of webinars Demystifying MTD.

Decide what services the practice will offer

It may be necessary to review the practice’s current offering and consider whether you wish to offer some standard packages to clients or will tailor the services to match the client’s precise needs.

Some things to consider are:

  • Who will record the transactions digitally in accounting software? If your firm does not currently offer a bookkeeping service, would this be a new stream to bring on board?
  • Who will assist and train clients to make the transition to using accounting software? Is this a new service you can provide?
  • Who will submit the VAT returns and, in due course, each quarterly income tax update? For agents offering a file only service, consider what level of checking or verification of the underlying records would be required.
  • Clients may need IT support and advice on cyber and data security. Will your firm offer this or would you consider a business link to a provider of such services?
  • What additional services might you offer?

Consider the firm's fee structures and own profit forecasts

Fee structures may need to change.

Will clients continue to file their own VAT returns or ask the agent to do the final submission? If the VAT return is currently being filed by the agent will this continue if the client moves to keeping digital accounting records?

For income tax compliance, you might find that you need to move away from a fixed fee basis and charge your client work the work undertaken for each quarterly submission with a final payment due on completion of the end of year declaration.

Clients are likely to be resistant to any increase in fees for tax compliance particularly if they are having to pay for software. If the client is taking on more of the bookkeeping work they might even expect a decrease in the fee.

What impact will changes to fees and the balance of work have on the firm’s own income and profitability? What scope is there for additional added-value services?

Make decisions on acquiring software

HMRC’s strategy is for tax agents to access HMRC systems using commercial software. Agents that do not currently use commercial accounting software will need to consider doing so, even if they already use commercial tax software. The current web-based HMRC online systems are likely to be gradually phased out. HMRC is committed to providing agents with access to client information in HMRC systems and has stated that the necessary services to comply with MTD obligations on behalf of clients will be available from the start of MTD, but only via commercial software.

Agents will need to submit client information to HMRC via third party software. Commercial software companies will be providing MTD compatible software and you will need to decide which software products your firm will support and communicate this to clients. A key issue will be whether the software links easily with the accounting software being used by clients.

Consider the role of bank feeds; some clients may need to review their banking arrangements to enable the best use of bank feeds into software.

The use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets is permitted. However, the spreadsheet will need to be either API enabled or used in combination with an MTD compatible software product so that data can be sent to and received from HMRC systems. An existing spreadsheet alone is not a free solution to complying with MTD. It will be possible to use existing spreadsheets in combination with an API enabled product but these products are unlikely to be free.

When choosing software, agents should ensure that the product they choose has the functionality needed by agents. Some of the simpler products will not incorporate the full range of APIs offered by HMRC. These simpler products may be suitable for businesses when used in combination with their business tax account but not for agents who require the functionality to manage client lists and to view payments and liability information for their clients.

Where the records are maintained in more than one program or product there must be digital links between each of the pieces of software (there is a one year soft landing for this particular requirement). This is particularly significant for large and complex businesses that use a suite of different systems including some older legacy systems.

Analyse and segment the firm's client base

For many firms, an important early step is to analyse and segment their client base into groups depending on the following factors:

  • How the client currently maintains their accounting records
  • How willing and able the client is to use software to maintain digital accounting records
  • Whether the client might qualify for a digital exclusion exemption
  • The date on which the MTD requirements start for the client. The initial focus should be on those clients that are compulsory VAT registered (ie, with taxable turnover of more than £85,000) and will have to meet the requirements from April 2019
  • The complexity of the client’s record keeping systems. Clients that currently maintain digital accounting records using a suite of different software and spreadsheets (for example, groups of companies) may need particular attention. An MTD API enabled spreadsheet may provide the solution to filing the VAT return; the issue may be digitalising the links between the suite of software and spreadsheet products used and eliminating manual intervention where this is not permitted (there is a one year soft landing for meeting this particular requirement). There are some types of business (such as second hand motor traders) who may be unable to use an off the shelf software product alone and who will need to develop a solution.

Communicate with clients

One of the many dilemmas that MTD creates for members in practice is how and when to communicate the requirements to clients. To assist with this communication exercise, ICAEW is making available pro-forma factsheets for firms to adapt, brand and use as they choose.

The following factsheets are suitable for clients who have not previously been sent a communication on MTD:

Plan internal resources, training and workload

Staffing considerations are vital especially if your firm will take on more bookkeeping work and data entry. Take time to review the skill level of your employees and assess whether you need to take on some more junior members of staff. In some cases firms will want to take on more senior staff or make use of professional networks to find specialists if they intend to move away from compliance work. The Tax Faculty offers a technical referral service for Faculty members. There may be a need for staff that can assist clients to move to digital record keeping which may be a temporary requirement.

Engagement letters

Engagement letters will need updating. ICAEW Member Services has developed guidance for members.

Consider MTD branding, website updates and social media activity

How will you provide information and ongoing support to clients? Will you communicate one-to-one or via your website, webinars, emails, newsletters or social media? Do you have a page on your website with the latest MTD developments? Depending on the size of your practice we suggest appointing one individual within the firm to lead on MTD matters and disseminate information to all staff members. You can keep up to date by visiting our dedicated web pages icaew.com/mtd and watching the webinars in the Demystifying MTD series.

Sign up to MTD for VAT

Tax Faculty

This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.