Quick guide to segmenting your client base for MTD for ITSA

With Making Tax Digital for Income Tax (MTD for ITSA) on the horizon, we explore how to segment your client base.

Quick Guide To Segmenting Your Client Base For MTD For ITSA

What Making Tax Digital for ITSA means for you

Making Tax Digital, the government’s plan to overhaul the UK tax system, is now well underway. MTD for VAT started in 2019 for businesses earning over the VAT threshold. In April 2022, all VAT-registered businesses were required to start using MTD-compatible software to keep digital records and submit regular updates to HMRC.

The next stage is Making Tax Digital for Income Tax Self Assessment, which will affect sole traders and landlords from April 2024. It’s a big change for you and your clients but, by preparing early, you can ensure the transition goes as smoothly as possible. One of the most important steps to take now is segmenting your clients for MTD for ITSA.

What is client segmentation?

Client segmentation is a process of dividing your client base into groups depending on common characteristics or needs. Segmenting clients for MTD involves identifying if and when your clients will need to follow the MTD rules, how prepared they are, and what level of support they will need from you.

What are the benefits of segmenting clients for MTD for ITSA?

Client segmentation is an important step to preparing your practice for MTD for ITSA. It can help you:

  • Understand the different needs of your clients
  • Identify which clients will need extra guidance and support to get ready for MTD for ITSA
  • Tailor your services according to specific client needs, and create a strategy to support clients with the MTD for ITSA transition.

When should you begin segmenting your clients?

It’s not too early to build a client segmentation strategy. MTD for Income Tax may seem like a long way off, but now’s the time to start preparing for the April 2024 deadline. The earlier you get your practice and clients ready, the smoother and more stress-free the transition will be.

Who will be affected by MTD for ITSA?

From April 2024, sole traders and landlords with total business or property income of over £10,000 will need to follow MTD rules. This will mean using MTD-compatible software to keep and maintain digital records and send updates to HMRC. The annual Self Assessment will be replaced by quarterly updates, an End of Period Statement and a Final Declaration.

How to segment clients for MTD for Income Tax

Here is a suggestion of how you can segment your clients for MTD for ITSA:

Step 1: The first thing to do is to make sure all of your client information is up to date. Check if any clients have started using accounting software or bridging software without your knowledge. You could send a survey to clients to find out how they currently keep records, ascertain how digital-savvy they are, and how much they know about MTD for ITSA.

Step 2: Create a spreadsheet with key information about your clients.

Step 3: Work out which clients will be affected by MTD for ITSA in 2024. This will be landlords and the self-employed with total annual business or property income of over £10,000.

Step 4: Divide your clients into different groups depending on how prepared you think they are for MTD for ITSA. Those still using paper records will need educating on the digital links rule and you may need to support them with transitioning to digital record keeping. Apps like Xero Go can help make digital record keeping simple for sole traders.

Step 5: Establish a plan of action for each group of clients. Think about how and when you need to get in touch about MTD for ITSA, what kind of education they need around the MTD changes, and what support you can offer to get them ready.

You can download Xero’s complimentary client segmentation tool to help you with this process. It’s a segment overview and workload calculator that can support you with planning and preparing for MTD for ITSA.

Examples of customer segments for MTD

There are lots of different ways to segment your clients. You could also divide them according to:

  • Income level (MTD for ITSA will affect those with business and/or property income over £10,000 a year)
  • Client type, e.g sole traders, landlords, contractors etc
  • Current method of record keeping (paper, spreadsheet, cloud accounting software) and time of year records usually arrive
  • Services offered e.g. tax returns only, income & expenditure accounts
  • Willingness to embrace change
  • Preferred method of communication

Learn more about MTD for ITSA

The sooner you start to prepare for MTD for ITSA, the easier the transition will be. Find out more about Making Tax Digital for Income Tax Self Assessment on our resource hub or learn more about Xero’s MTD for ITSA beta programme and how it can help you prepare for the 2024 deadline.

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