What Making Tax Digital means for accountants

We answer common questions about how accountants can prepare their clients and practice for Making Tax Digital (MTD).

Hands typing on laptop running Making Tax Digital software in office setting

What is Making Tax Digital?

Making Tax Digital is a government initiative to digitalise the UK tax system.

In April 2022, MTD rules were extended to all VAT registered businesses, regardless of taxable turnover. This means that businesses who fall within the thresholds must now use compatible software to:

  • keep and maintain digital records
  • submit their tax return directly to HMRC

As such, accountants and bookkeepers must be ready to support their clients with digital record keeping and submitting VAT returns via HMRC-recognised MTD software.

How will Making Tax Digital affect accountants?

From April 2022, you and your clients must use MTD compatible software to keep digital records and send VAT returns. You must also sign up for an agent services account via HMRC.

According to Xero research, 45% of businesses believe their advisor is more important to them than ever. Clients may call on you for advice and guidance, so it’s crucial to ensure your team is up to speed and can clearly communicate what the rules mean in practical terms.

How to set up your accounting practice for MTD:

For a smooth transition to MTD rules, you need to:

How do you check if a client is registered for MTD?

Once you’ve signed a client up for MTD, you’ll receive a confirmation email within 72 hours from HMRC. The software your clients use should also indicate whether they’ve authorised an MTD for VAT connection.

How to add clients to your Agent Services Account

Copy across existing VAT clients from your HMRC online services account. Allow plenty of time for clients to get set up.

If you want to act for a client that you have not copied across as detailed above, they’ll need to sign up to Making Tax Digital. You can then ask them to authorise you but you cannot do this step for them.

How do I authorise a client for MTD?

In your agent services account, select ‘ask a client to authorise you’. This creates an authorisation link for you to send to your client. Just make sure they use it before it expires. Find out more on the gov.uk website.

How to set up your accounting practice for MTD for VAT:

Here’s a brief overview of what you need to do to set up your accounting practice for MTD for VAT:

  • Create an agent services account to access HMRC’s MTD features.
  • Copy existing clients across from your online services account.
  • Sign your existing clients up for MTD.
  • Ask new clients to authorise your practice from their VAT account.
  • Authorise your MTD-compatible software.

For more information, check out this helpful guide.

Which of my clients will be affected by MTD for VAT?

From April 2022, all VAT registered businesses must follow MTD rules, regardless of taxable turnover, unless exempt. This includes limited companies, partnerships, sole traders, and charities.

How do I sign my client up for MTD for VAT?

You can sign up a client for MTD on the gov.uk website with a few basic business details (a full list can be found here).

You’ll also need:

  • An agent services account
  • MTD compatible software

Expect a confirmation email from HMRC within 72 hours. If you don’t receive one, contact HMRC to confirm sign up.

How to make sure your clients are compliant with MTD for VAT phase 2

HMRC has introduced a new penalty system which will apply from January 2023, so it’s especially important for you to make sure clients are compliant.

Ensure your clients are using HMRC approved or bridging software that meets the MTD requirements. Don’t wait until the deadline to talk to your clients about MTD.

How do I submit my client’s VAT return as an agent?

MTD compatible software, such as Xero, has a function where you can submit your client’s VAT return directly to HMRC.

Once you’ve been authorised by a client, you’ll be able to submit VAT returns via their compatible software. Where this feature is located depends on the software, so reach out to your provider if you’re unsure.

What about clients who want to continue using spreadsheets?

If you still have clients who are reluctant to adopt full MTD software and want to continue using spreadsheets, they must use bridging software to ensure they comply with MTD rules.

You can explore more about bridging software, digital links, and the pitfalls to look out for, in our extensive guide.

How to set up your accounting practice for MTD for ITSA:

From April 2024, MTD for Income Tax Self Assessment (ITSA) will apply to unincorporated businesses and landlords with a total business or property income above £10,000 per year. To prepare, you must:

  • Identify the clients that will be affected by MTD for ITSA.
  • Encourage clients to start digital record keeping now, so they’re confident using software ahead of the deadline.
  • Make sure your clients register before the April 2024 deadline.

Please note ordinary partnerships are due to enter MTD for ITSA from April 2025.

Which of my clients will be affected by MTD for ITSA?

Landlords and sole traders with gross income greater than £10,000 will need to follow MTD for ITSA rules from April 2024. General partnerships will follow in 2025.

Will clients already signed up to MTD for VAT need to also sign up for income tax?

Yes. Clients that meet the criteria will need to sign up for both, separately. They can do this themselves, or you can do this on their behalf.

Which of my clients do not need to use MTD for ITSA?

Trusts, estates, and non-residential companies will not need to use MTD for ITSA, but this is subject to change as the rules roll out.

When do my clients need to sign up to MTD for ITSA?

Sole traders and landlords with gross income above £10,000 must be signed up by April 2024. Some businesses can voluntarily sign up to MTD for ITSA now. Check the criteria for voluntary registration here and keep up to date with Xero’s ITSA pilot here.

How do I sign my client up for MTD for ITSA?

First off, make sure you have:

  • Your government gateway login
  • MTD for ITSA compatible software

You’ll need to sign your client up via compatible software, and you can only do this if they’re already registered for self assessment. HMRC has a guide to signing up for MTD for ITSA.

How to make sure your clients are compliant with MTD for ITSA

Clients will need to use MTD for ITSA compatible software in order to submit their tax returns. Make sure you confirm that they have this software in place before signing them up to MTD for ITSA.

Between now and the deadline, the rules could change. Bookmark our accountants and bookkeepers resource page for regular updates on MTD.

Need more information on Making Tax Digital for accountants?

Over 100,000 accountants and bookkeepers are using Xero in their practice. Xero keeps everything stored in one place, so you can focus on the most important thing: growing your practice and supporting your clients. Learn more about why to choose Xero for MTD here.

If you want to learn more about what MTD means for you, check out our resource hub. Or, to learn more about how to get the most out of Xero, check out our Partner Consulting hub, where you can access expert advice from our digital accountancy experts.

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