Making Tax Digital (MTD) seems to be all we hear about these days. I’ve heard from a number of accountants just how sick they are of talking about it. Yet, it’s not a subject we can avoid. It’s important to ensure that your clients’ businesses are MTD compliant, whether you feel like having that discussion with clients or not. So, how do you communicate this to clients and get them to come onboard without too much hassle?

Here are 6 steps you can take to ensure your clients are fully compliant with MTD.

I know that in modern-day parenting books, parents are advised to reward their children for good behavior rather than punish them for bad behavior. And indeed, research shows that children are more responsive to praise than punishment… But what about adults? Aren’t we just as motivated by fear as by ambition?

Compliance may be a grudge expense for many businesses, but it’s worth reminding them of something that would be a much worse grudge expense – penalties for failing to comply.

Let’s face it: no one wants to pay the taxman more tax than they need to. And incurring penalties appeals to no one. So, I’m not saying use scare tactics, but let them know that these penalties are serious.

Once you’ve established what happens if your clients aren’t compliant, it’s time to get into the nitty-gritty. Obviously, your clients don’t need to know all the finer details, but they need to have a good basic understanding of what’s expected and when.

The MTD penalty system is a points-based system that took over from the previous penalty regime in January 2023. What this means is that for every submission deadline that you miss, you will receive a point against your name.

Over time, you can accrue a lot of points for late submission which will then translate into fines after reaching a certain threshold. And if you don’t comply with MTD in some way – such as not having digital records or digital links in place – you could face another penalty.

Let’s look at how these points can accrue, shall we? I’ll break this down into three sections and take a look at the potential penalties you could incur for each.

If you reach your submission penalty threshold, you’ll be fined £200. Moreover, once you reach that threshold, every following failure to make a payment on time will incur an additional fine. That should be enough to arrest your clients’ attention.

Unfortunately, avoiding penalties isn’t always that simple. For every submission obligation you have, you will have a separate points total. For example, you could be penalized separately for the late submission of your VAT return and the late submission of an ITSA quarterly update.

For VAT returns, the following penalties apply under the existing penalty system:

Accounting periods beginning on or after January 2023 for VAT taxpayers will come under the new points-based penalty system.

Today, missing the submission or payment deadline of your income tax self-assessment will give you a late submission fine of £100 if your return is up to three months late. If your submission is later than this, you accrue interest on that fine. However, in the future, things will look a bit different:

HMRC says that the penalties will also provide a sanction to encourage compliance with the new quarterly updates and end of period statement submissions. (Back to the reward-punishment debate here!)

You came in guns blazing with the bad news about penalties, but, thankfully, it’s not all bad news. The less scary news is that MTD penalty points expire after two years (counted from the month after the point is received).

However, these points don’t expire when you’re at the penalty threshold. So, all you really need to do is ensure you never reach that threshold.

And there are tools that you can use to avoid accruing penalty points. If you have compatible software and digital links in place, you are much more likely to be on track with your digital tax returns and updates.

Moreover, ensuring that you have a system that keeps track of submission deadlines – and perhaps sends you reminders – can be immensely helpful.

Before you submit VAT returns to HMRC, you can use Syft’s Audit tools to ensure that everything is accurate and you won’t be either under- or overpaying, which will in turn help you avoid MTD penalties and get you the maximum possible refund.

Here’s a quick breakdown of the VAT review tools you can employ:

You can use VAT Overview to investigate any transactional anomalies detected by Syft’s machine learning and then determine whether any errors have been made. This tool works with the following categories:

You can also take a look at your VAT accounts in more detail with Syft’s VAT reports, which enable you to drill-down into your transactions.

Syft’s VAT reports present tax movements grouped by accounts in a multi-period fashion. You can get a sense of your entity's VAT over periods determined according to your region. There are six different VAT reports available on Syft, which help you to identify any potential errors in your VAT using machine learning. These reports are:

This function helps you filter and scan the data to use your tax and company knowledge to easily identify additional errors. For example: by looking at VAT per currency you can consider whether you have treated exports or imports correctly.

Once you’ve assessed your VAT transactions with the help of Syft’s AI technology, you can be sure that you are ready to submit those returns.

You may not be looking forward to explaining MTD to your clients, but better this than them getting angry with you over fines they don’t want to pay, right? This one may be a case of applying disinfectant to the wound right away: it’ll sting now, but at least it won’t turn into an infection tomorrow.

And with the help of software like Xero and Syft, getting them up to speed needn’t be complicated or painful. For more information about MTD, take a look at our 7-step guide or explore this MTD for VAT resource hub.