Getting ready for making tax digital
Accountant & Bookkeeper Guides
7 min read
Starting as soon as 2019, UK businesses will have to start transitioning to a digital tax system – where tax is filed online every quarter. It’s a big change for you and your clients. Here are some tips to help you prepare.
Making tax digital
Her Majesty’s Revenue & Customs (HMRC) has announced their plan to make tax digital by 2019. Under the new scheme, people will have online tax accounts that track their professional and business transactions automatically. These accounts will be submitted quarterly to HMRC to estimate the taxes due.
The online system is intended to be more transparent while removing some of the inaccuracies and inefficiencies that hinder paper tax filings.
This is not the same as lodging a return online. Most UK taxpayers have already done that for years. Making tax digital has three important distinctions:
- Bank transactions and other financial information will flow automatically into people’s digital tax account, whether or not they declare that income or those expenses.
- Submissions will need to be made at least once per quarter.
- Submissions will need to be filed using some form of software (you’ll need to use an app that is integrated to your digital tax account).
Learn more by reading Making tax digital.
Where are we in the process?
While Making tax digital has been on the agenda for some time, the latest government finance bill has proposed a two-part roll out:
From April 2019, businesses with a turnover above the VAT threshold will have to keep digital records for VAT purposes.
From 2020, businesses may be asked to keep digital records and update HMRC quarterly for other taxes.
What does it mean for your clients?
Your clients will need to use some form of software to keep their VAT records and file their VAT returns.
For other forms of tax, businesses will likely be required to submit their accounts every quarter, so they’ll need to use the services of your firm more often. Some clients may feel it’s a burden. In reality, frequent interactions should be a lot more efficient because there won’t be big backlogs of work to get through.
More frequent submissions will also help your clients avoid nasty surprises. Big tax bills can accumulate over the course of a year but when tax is calculated quarterly, things are far less likely to get out of hand. The new system will also create more opportunities for advisors to help with tax planning.
If your clients choose to use accounting software, they should make sure it has online capabilities. Desktop accounting software hasn’t traditionally been able to submit tax online.
As a bonus, online accounting software also allows you and your client to:
access the business’s accounts from anywhere there’s internet
create ‘bank feeds’ so transaction data flows straight into the ledger
collaborate online by leaving and receiving messages within the software
Online accounting software can also sync with other online services such as POS software, inventory management software, or time-recording apps.
What does it mean for accountants?
Accountants are going to play a big role in the transition period for Making tax digital. You’ll need to educate your business clients, many of whom may not know how quickly it’s coming.
You’ll also see your tax clients more often. That could change how you deliver and charge for services.
Your clients may also rely on you for technology advice. If they don’t use software, or they have desktop software that can’t file tax online, they’ll ask you what to do. They’ll want you to recommend software for them to use and they may need your help setting it up.
Adjusting to digital tax will involve change, but with change comes opportunity. You'll have more regular contact with tax clients. Use the extra interaction to provide more advice.
How can you prepare your firm?
Adjusting to digital tax will involve change for all firms. You’ll need to educate your staff and prepare your clients. You may even choose to update your service offerings and pricing structures to help your clients meet their obligations. But don’t forget that with change comes opportunity.
The quarterly interaction with clients will create closer ties, allowing you to play a bigger role in their business. Here are some things to help you start thinking about Making tax digital.
Start learning how digital tax will work. Some details may change as a result of the consultation but they’re not likely to be significant. You’ll want to understand the basics now so you can explain it to clients – and answer their questions.
If you’re a sole practitioner, you’ll need to learn about it yourself but check your interpretation with peers. If you have a larger firm, consider asking a couple of staff to research Making tax digital and then present to your wider group.
How will you deliver services?
If you have clients that use only your tax services, you’re going to see a lot more of them – probably doing smaller packages of work, more often. They’ll be worried that their accounting bill is going to go up. Your first job may be to reassure them that there are advantages to making more regular submissions.
You may decide to create ‘tax packages’ with off-the-shelf pricing to give them more certainty around cost. Your marketing will need to explain clearly what your new tax service involves, including a breakdown of the client’s obligations. Tell them what you’ll need from them to file on time, every time.
Think about workflow and cash flow
If tax and compliance is a big part of your practice, your operations will change. Busy times won’t be quite so intense and there will be fewer quiet times. It could change how you use contractors for overflow work. Maybe you’ll decide to bring in more permanent staff members. Think also about how it will affect when people take their holidays.
You’ll be billing more frequently so Making tax digital should even out your cash flow. That may be a good thing but just be aware of your spending patterns. They may need to be adjusted in line with revenue.
Use it as a marketing opportunity
As you have more regular contact with tax clients, you’ll get to know their business better, and they’ll get to know you. This is your chance to build stronger relationships and provide more consulting services.
After you’ve brought them smoothly through the transition to digital tax, trust should be high. Consider how you can use this as an opportunity to promote a wider range of services. Recommend planning meetings as part of your tax service. Once you have them on software, introduce them to dashboards and other software tools like automatic invoicing and accounts payable.
This is a great chance to take on an advisory role, so think about how to:
Be aware that this is a time for the soft sell. Your clients may initially resent the extra accounting in their lives so don’t be too aggressive upselling to them. Pick the pitch that’s right for each client.
Small businesses that have traditionally filed their own taxes may decide this is the time to switch to an accountant. Some will be daunted about learning to use online software, or they may be unhappy about making quarterly submissions. Target these businesses as new clients. They’ll be feeling overwhelmed so try to create marketing materials with messages that put their mind at ease.
Many accounting firms think the transition to digital tax will be disruptive. Imagine, then, how businesses view it. They know far less about accounting and tax. Making tax digital is likely to be intimidating to them.
You can underline your value by breaking it down into plain English and putting clients at ease. Figure out how you’ll explain the changes and start communicating now. The 2018 tax year could be their last under the old scheme so it’s not too soon to start talking.
Think about software
You and your clients will be submitting taxes online, which will require software. You may simply use the HMRC app, though it’s hard to know what that will look like at this stage.
If you’d like to be better prepared, use existing software solutions. You can start familiarising yourself with those right now. Just check that the system you choose can support online filing with the HMRC. There are several options and your clients may like to see that you have more than one suggestion.
Accounting software will do more than taxes. Smart systems come with other features that will improve insight into the business, such as KPI dashboards, mobile invoicing, daily bank rec and more. The right choice will give everyone stronger insights and better control over the business so view this as an opportunity.
Start getting ready to make tax digital
Time goes quickly. Digital tax will be here before you know it. Start thinking about what it means for your practice and your clients. Although change can be difficult, this one will create more regular contact between you and your tax clients. Use the opportunity to provide them more advice and it will have knock-on benefits for both of your businesses.
Dig into Making tax digital now and start thinking about how you’ll deliver the extra level of service that UK small businesses will need.