MTD tax software options: Choose your destinyby
To hear it from some accountants, Making Tax Digital has always lived in the realms of fantasy. So why not turn to Harry Potter to demystify the impending software conflicts?
Making Tax Digital for Income Tax (MTD ITSA) is set to trigger a revolution in tax software over the next couple of years. Over the next 18 months, tax agents need to decide whether to retain their allegiance to their existing suppliers or turn to the new entrants jostling to gain their loyalty.
It’s tempting to imagine the great tax software shakeout as a ceremonial procession like the early scenes in Harry Potter where new pupils are assigned to their Hogwarts houses by the Sorting Hat.
Accountants entering the grand tax software hall are met with an array of brand logos. On one side are the shields of incumbent suppliers such as Sage, IRIS, Wolters Kluwer, and Thomson Reuters. Opposite them are cloud-based newcomers such as Taxfiler (IRIS), Capium and Nomisma.
And don’t forget the developers previously known for their bookkeeping tools that have moved into tax compliance - Xero and FreeAgent.
But lo, was that a silent green shadow lurking behind one of the columns? Could it be that QuickBooks, too, will join this fray before we get to 2023? The giant US developer already handles personal tax filing in the US and other territories and has made noises about expanding its compliance tools for UK users, but nothing has shown up on our radar yet.
For the moment, QBO users have to rely on its integration with TaxFiler for compliance, but the pressure is mounting for it to join the MTD fray. As QuickBooks enthusiast and AccountingWEB member Charlie Carne put it recently: “Everyone has to have an MTD for income tax product. If they don’t, they won’t be in the game.”
MTD ITSA: The challenges ahead
In her analysis of MTD ITSA reporting requirements in February Rebecca Cave noted: “For each trading or property business the taxpayer operates they will have to submit a quarterly report of income and expenses in defined categories. The taxpayer will also have to submit an end of period statement (EOPS) for each of those businesses.”
The second phase of MTD is also a massive new business opportunity. According to HMRC estimates, there are 4m businesses that pay income tax, but who are not VAT registered. Assuming they are not already keeping digital business records, all of these businesses or someone acting on their behalf will need to tool up before they enter the MTD ITSA regime in April 2023
The transition to MTD for income tax for all these businesses will impose numerous new demands on firms, including:
Each trading or property business the taxpayer operates will have to submit a separate quarterly report of income and expenses. VAT and income tax periods may not align, increasing the number of times you need to alert and chase them.
Initially MTD for ITSA will run in parallel to self assessment, but the intention is to incorporate all of the current forms (employment, investment and trusts and so on) into a final annual filing.
Linking bookkeeping records and MTD filing milestones with internal programs for managing client communications, monitoring client workflows, job status and billing.
As Rebecca Cave indicated, the filing formats, deadlines and requirements have not been fully resolved and no single supplier currently offers all the necessary tools in one place yet.
Wolters Kluwer’s CCH ProSuite/Twinfield combination and IRIS/Kashflow can run from data capture and bookkeeping through to filing, but both lack CRM functions or rely on partners for the client communication bits.
Capium and Nomisma are close, but again, miss some of the final elements that will be essential when the MTD ITSA workload gets serious.
Otherwise, we’re back where many accountants found themselves in 2017, before the government switched the MTD project over to VAT. Practitioners are going to need to decide which supplier they trust to look after their MTD ITSA requirements and work out what they need to add to or adapt in their existing set up to manage the expanding workload.
Don the sorting hat
At this point, imagine a big hat being placed on your head. It will start an imaginary conversation with questions that probe your tax software needs and desires. When the hat is lifted and the decision is made, which community will you join as the great tax software shakeout unfolds?
Q: Are you planning to build your firm around a core technology stack sitting on top of one of the leading cloud accounting platforms?
The most glaring behavioural change we have seen within the accounting profession during the MTD era has been the mass migration to cloud accounting platforms. Some of the most enthusiastic cloud pioneers now think “ecosystem first” and look for practice tools they can integrate with their bookkeeping platform. Xero is the most obvious beneficiary of this tendency. It responded to the needs of its partner community by buying up an obscure tax software app and turning it into a free, all-in application, Xero Tax.
Now available for preparing and submitting 2020-21 self assessment tax returns, Xero Tax comes free for its accountant partners and has the added benefit of fitting seamlessly into their existing set-ups.
Don’t forget or write off Sage, Nomisma and Capium. Each has its adherents, but none of them offer the same access as Xero to third party apps that can plug gaps in the firm’s technology stack. Once QuickBooks has an MTD ITSA solution in place, it could compete on this front, but as has been noted already, the US developer has gone a little quiet on this point in recent months.
Q: How big is your firm: do you already run a mixed network of best of breed apps and legacy systems left over from previous acquisitions?
Have no fear, the Sorting Hat hasn’t overlooked your needs. Of course you would love to realign the firm around an underlying technology platform that could integrate and untangle all the different applications you have to manage. IRIS, Wolters Kluwer and Sage are all working towards that dream - but you’re probably already familiar with the glacial speed at which they seem to be moving.
While you wait for developers to realise your dreams of interoperable bookkeeping, compliance and practice management apps, you are going to need to fill in some of the functional gaps ahead of 2023. You can experiment with some of the interesting onboarding and workflow apps that operate successfully alongside the cloud bookkeeping platforms - Senta, Karbon, Practice Ignition and AccountancyManager spring to mind here - and see how effectively they can adapt to life alongside your other best of breed and legacy programs.
Cloud tax and practice apps are still at a relatively embryonic stage, so it’s possible they could mature to the point where you’ll be able to migrate groups of clients across to the second generation cloud solution.
Q: Do you see MTD ITSA as an opportunity to expand the business by catering for all those non-digital prospective clients?
The legacy software and integration issues aren’t just an issue for big firms. Most small practices face similar issues, but on a smaller scale. If you’re comfortable with software and processes that work well for existing clients, the least disruptive option is to stick with what you’ve got as long as it works and upgrade as the need arises.
But what about all those entrepreneurs creating post-Covid startups to build new working lives around their inner passions? Accountants can start side gigs of their own too and many have been doing so in recent years to cater for the digital generation. As well as bringing in new business, this clean slate gives you an opportunity to build a sleeker, more cost efficient client management and compliance infrastructure.
Anyone mulling this idea over will already have experience with many of the tax tools available and will follow their instincts when it comes to kitting out an entry-level, MTD-compatible service line. Taxfiler marked out this territory first and with its acquisition, IRIS demonstrated that business software developers are also aware of the two-prong approach. Sage’s Business Cloud Accounting product transition fits into the same template, while Xero and FreeAgent are coming to the party from the other direction by expanding their bookkeeping platforms into tax compliance.
Q: Are you looking forward to MTD for ITSA as an opportunity to shake up your client base and streamline internal systems?
So, you might be a Nomisma or Capium fan who’s miffed your preferred product wasn’t mentioned in the last response. These programs should certainly be able to handle the workload of a startup practice moving into sole trader territory, but established practices are less likely to recalibrate their all their systems for a relatively low-margin client segment.
The all-in-one cloud suites would fit better into a broader practice transformation project or true startup where the firm was committed to taking all of its clients into a unified cloud-only environment.
Capium and Nomisma both offer a chance to leave the desktop behind and jump into the cloud, without having to take on all the technology research and implementation effort required to stay ahead in the app ecosystem stakes. Clients and your staff would have just one system to learn. Remember, however, that your firm will rely on the developer to keep up with your needs as the business develops. As we have already seen, developers of all sizes can sometimes struggle to keep up.
Q: Are you motivated by cost and looking for the cheapest solution?
It’s a natural tendency for accountants to look for potential economies. If it’s low cost software you want, the lure of FreeAgent is hard to overlook. All you need to do is push all your clients at NatWest bank, sign them up for the free software and train everyone to use it. You and they will certainly save money on software, but that’s rarely the most significant cost involved in compliance work. FreeAgent has a tidy collection of proven third party apps that will cover the most common client scenarios, but won’t match up to the Xero marketplace if you and your clients develop more sophisticated app tastes. While Xero has more of a premium price tag attached to its bookkeeping platform, its compliance modules come for free as part of the accountant’s subscription.
If you’re familiar with the old putdown, “free software is worth what you pay for it” and are looking instead for pedigree tax software for a bargain price, then Taxfiler still offers good value for money in spite of recent price increases. QuickFile and some of the other budget bookkeeping apps such as Pandle are also worth a look.
Q: Are you still not sure which way to jump, or don’t want to rock the boat until you’re absolutely certain what’s required, and when?
We all know that the MTD saga is as stuffed with plot twists and cliff-hangers as JK Rowling’s sorcery epic. And it’s human nature to avoid change. So while the tax software revolution takes place, the biggest proportion of the accounting population will probably rely on their existing providers to cope with new requirements. IRIS, Sage, CCH and Thomson Reuters - not to mention VT Software, BTCSoftware and TaxCalc - all have defensible positions in this marketplace from which customers can look on as the competing software federations grapple for supremacy.
Who’s likely to win?
Thanks to the decision to prioritise VAT, the cloud bookkeeping developers reaped the biggest harvest from the initial MTD software boom. It’s hard to ignore the credentials of large, publicly quoted multinational software groups that have the internal resources to upgrade their products to keep up with HMRC’s digitisation programme. But do they really understand how serpentine and elusive the UK tax system? After winning the first round of MTD, Xero and QuickBooks are going to be fighting on home turf for the likes of Sage, IRIS, Thomson Reuters and Wolters Kluwer when it comes to income tax.
But could we be making the mistake of viewing commercial tax software as the magic wand that will defeat the demons of MTD?
Digital banks like Countingup, Anna Money and NatWest Group subsidiaries Mettle/FreeAgent are lining up at the end of the hall offering interesting alternatives to the usual suspects. Sole traders have never had much time for bookkeeping systems, so why expect them to change their habits for MTD? Instead, we are told, intelligent business bank accounts will do the bookkeeping for them and help them ready up their quarterly submissions to HMRC for both VAT and income tax.
With all those millions of entrepreneurs also searching for answers to the MTD mystery, could the digital banking upstarts sneak in and run off with the biggest rewards? That’s a tale for another occasion.
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