Everything Accountants Need to Do for ‘Making Tax Digital’ Before 2019
At the start of the financial year in 2019, Her Majesty’s Revenue and Customs (HMRC) is set to launch their Making Tax Digital (MTD) policy, bringing the UK a step closer towards becoming the most digital advanced tax system in the world. In the first phase of this change, businesses with a turnover over the specified VAT threshold (around 500,000 business currently) will have to digitize their records and submit their VAT returns through software. For the accounting firms handling these businesses, a drastic overhaul of their operations will be required to adapt to Making Tax Digital. A survey by Arkk Solutions found that all respondents said that they were not prepared to varying degrees while 33 percent reported being completely unprepared.
So how can accounting firms focus on delivering the best service to their clients in the age of Making Tax Digital?
1. Segment your clients
MTD will not apply to all businesses immediately. Instead, it will be rolled out in the following stages:
- April 2019: For businesses whose taxable turnover of above the VAT threshold
- April 2019: For businesses who pay VAT
- April 2020: For businesses who are registered to pay Corporate Tax
Because of the varying timelines, you need to ensure that you segment your clients based on which category they fall under. This will help you understand which clients to prioritise and will give you a timeline to make their accounts MTD-ready.
Once you identify the clients that need to be taken up on priority, you need to segment them further into how much work they require to adapt to MTD. Clients who still largely operate manually without any software or who have complex multi-level processes will require more work. Plan a schedule around this to ensure that you allocate adequate time to each client based on their requirements.
2. Do an audit of clients existing processes
Since the core objective behind Making Tax Digital is digitization of the tax ecosystem, accounting firm’s need to do a complete analysis of their clients digital maturity. A surprising number of businesses (largely from the SME segment) still don’t operate over software. An overnight change in a company’s entire accounting process can lead to inaccuracies and confusion. To avoid this, accounting firms need to analyse the gaps and opportunities in their client’s current processes. This can help them plan ahead to ensure that they are equipped with the software and technological know-how required for Making Tax Digital. In this way, MTD provides an opportunity for accountants to take on more of an advisory role.
With the rapid digitisation of tax systems, cloud technology will become even more crucial for firms and clients alike. Operating over the cloud will automatically ease the transition into MTD. As an accounting firm, you will need to analyse the requirements of your clients and identify the right mix of features needed before finalising on a cloud service provider.
3. Conduct an internal audit of your firm
Apart from analysing your client’s readiness, you also need to ensure that your firm is equipped to handle the changes that MTD will introduce. MTD requires a digital record of all transactions and submission of MTD-adapted VAT returns. For accounting firms, this will mean a higher frequency of preparing reports. Is your accounting firm prepared to handle this change? Do a complete assessment of your accounting firm to pinpoint current gaps in capabilities and steps you can take to address them. Scaling up your accounting firm might involve adopting newer softwares or re-training your employees. You might also have to consider outsourcing basic accounting tasks to a third-party. Doing this will free up time for your employees, who will then be able to allocate more attention for clients who require more attention after MTD.
Apart from your human resources, MTD also requires software-readiness. Your firm needs to integrate with HMRC’s MTD software in order to file VAT returns. Your software team needs to familiarise themselves with this technology and prepare your firm for this change. Your team will also have to learn how they can adapt their current processes for the new software.
4. Estimate the cost involved in MTD
Once you’ve assessed the broader steps your accounting firm needs to take in the wake of MTD, you will need to work out the cost involved in making this shift. In the initial phase, you might have to spend more face-time with your clients, providing them advisory support about MTD. As a firm, you will need to make a decision about whether you will charge your clients by your usual rates for MTD-related consulting services or increase it. This decision will depend upon the estimated cost of:
Shifting clients to new software: If your clients are using an existing software, there will be an additional cost involved in migrating them to HMRC’s new software. This cost will also include moving your clients to the cloud if they aren’t already.
Training teams and clients: To ensure everything runs smoothly, both you internal team as well as your clients will need to receive adequate training on MTD and new processes to follow. This will come as an extra cost to your firm.
Based on these estimates, work out a fee for the additional hours that will help cover your extra costs.
5. Chart out business goals for your firm
The introduction of Making Tax Digital involves more than just addressing your firm’s short-term concerns; it also requires you to chart out long-term goals. With the changes MTD is likely to bring, your accounting firm will need to re-assess fundamental business objectives. When MTD was first announced, many believed that this would reduce the importance of accounting firms. However, these fears have proven to be unfounded. If anything, MTD will increase the scope for accounting firms to spend more face-time with clients and deliver higher value services that will ultimately result in higher profits for their firm.
But to achieve this objective, there are certain factors firms need to consider:
- Their existing target market: One of the best client acquisition strategies is to build an ideal client profile and target those clients that fit the requirements. But with MTD, your ideal client might have to change. If you find it more profitable to service clients that fall under MTD, you need to start targeting these types of businesses.
- Introduce new services: MTD offers you a huge opportunity to become an expert in the field and offer consulting services to current, future and potential clients. You can consider developing new services such as MTD workshops to bring in additional revenue for your firm. You can also consider productizing certain services, such as MTD-packages, to attract new clients.
- Consider outsourcing certain functions: With the additional workload that MTD will bring, this is one of the best times to start outsourcing. Low-value yet time-consuming tasks can take up too much of your team’s valuable time, hampering them from delivering the best service to your client. Outsourcing can be an excellent way to bring down overhead costs of your firm while simultaneously improving productivity, two goals that will become critical with the introduction of MTD.
Making Tax Digital is a welcome change in the tax landscape of the United Kingdom. Accounting firms should embrace it as it presents an excellent opportunity to expand their services.
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