Policy paper

Customer costs and benefits for the next phases of Making Tax Digital

Published 23 September 2021

1. Introduction

This paper considers the impacts, costs and benefits of the next phases of Making Tax Digital (MTD) expansion, covering smaller VAT-registered businesses with taxable turnover below the VAT threshold (£85,000) and businesses and landlords subject to Income Tax Self Assessment (ITSA) with turnover of £10,000 or above.

The government recognises the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic over the last year. In recognition of this, and of stakeholder feedback, it will now be introducing MTD ITSA a year later, in April 2024. General partnerships will not be required to join MTD ITSA until April 2025.

A later start for MTD ITSA provides more time for those required to join to make the necessary preparations and for HMRC to deliver the most robust service possible, affording additional time for testing in the pilot.

This paper brings out in further detail what MTD might look like in practice for businesses and individuals joining MTD in the coming years.

2. Background to Making Tax Digital (MTD)

In 2015, the government set out an ambition for HMRC to become one of the most digitally advanced tax authorities in the world. The UK is not alone in wanting to reap the benefits of digital enablement, with other countries taking decisive steps to modernise their tax systems and offer a more efficient experience, often via the introduction of digital reporting.

MTD will ensure the UK system keeps pace with the rapid changes taking place in society, the economy and technology to deliver the more flexible, resilient and responsive tax system that the UK will need in the years ahead. It also underpins the successful delivery of other key commitments set out in the government’s strategy Building a trusted, modern tax administration system published in July 2020, including enabling the development of a single customer record and single customer account for millions of businesses.

The government successfully introduced MTD for VAT-registered businesses with taxable turnover above the VAT threshold in April 2019. The extension of MTD to businesses under the VAT threshold (from April 2022), and to businesses within the scope of Income Tax Self-Assessment (from April 2024), will bring wider access to the benefits of MTD and further digital modernisation, for example increased accuracy in tax returns, and time saved in managing tax affairs.

3. Benefits of MTD

UK businesses are increasingly turning to digital tools to communicate remotely and work collaboratively. They are routinely securing orders, banking, paying invoices, and filing their returns online.

Many businesses and individuals now expect to be able to manage their affairs digitally, including tax, and MTD meets this expectation.

MTD has been designed to deliver a wide range of benefits – including making it easier for businesses to keep on top of their tax affairs, enabling them to see real-time data on the health of their finances and, by offering the tax authority a more accurate picture of taxpayers’ financial position, supporting enhanced resilience against any future economic shock, such as that caused by the COVID-19 pandemic.

Businesses already operating MTD are reporting time saved, reductions in input errors and increased confidence in managing their tax affairs.

3.1 Digital solutions

MTD is designed to eliminate paper-based or manual processes, through use of software and an integrated approach to business administration and tax. This allows for greater accuracy in tax returns, reducing the time businesses spend on administration, and providing businesses with more time to maximise businesses opportunities.

Digital record keeping is the start of a journey for businesses to a more modern way of working. It has been widely reported that the pandemic has increased the pace of technological change and has led to greater use of digital technologies.

More businesses have adopted digital technologies, and digital platforms have become increasingly important. For example, 80% of respondents to the Lloyds Bank UK Consumer Digital Index 2020 survey on attitudes toward digital engagement felt that digital technology was a vital support to them in lockdown.

3.2 Business efficiency and productivity

The benefits available go far wider than businesses getting their tax right first time. There is growing evidence to support the link between using digital tools and productivity – for example, the Lloyds Bank UK Business Digital Index 2019 found that digital channels saved small businesses, on average, a day a week in administration. The Enterprise Research Centre, in their State of Small Business Britain Report 2018, found that for micro-businesses, web-based accounting software could improve efficiency by 11.8%.

3.3 Feedback and research

Research and evaluation activities have found that benefits are being experienced by businesses of different sizes and in different sectors.

For example, an independent evaluation of MTD’s impact on record-keeping behaviour and scope for error among small businesses, published in March 2020, found that small businesses that subscribed to MTD VAT with fully integrated accounting and tax software reported spending less time on their tax.

Businesses reported that input errors were reduced due to digital linking and automation; that returns were more accurate, and that miscalculation errors were reduced, with figures automatically calculated by software. Businesses also reported that, through software, they were able to manage their finances daily, making errors easier to spot and rectify.

Research published in March 2021 on the costs and benefits experienced by businesses that had moved to MTD VAT, and on the experiences of businesses that had voluntarily joined MTD VAT, further support these findings. Respondent businesses identified a broad range of positive impacts to MTD and from compatible software, including increased speed ease, increased tax confidence, greater accuracy and improved business operations.

In an independent study of 2,005 businesses experiences with MTD VAT, published in July 2021, the majority reported finding the process of transitioning to submitting their tax returns via MTD easy.

The majority reported experiencing at least one benefit from MTD, such as finding it faster to prepare and submit VAT returns. The majority also stated that at least one benefit had increased over time, including speed of returns.

The vast majority noted at least one way in which they thought MTD had reduced the potential for mistakes.

Wider feedback from MTD customers, including businesses and agents from across the country, also highlight the benefits to customers.

Staff at a tearoom in Orkney who moved from manual accounts to MTD reported:

Going digital has made an immense difference to the amount of time that we have free.

An IT consultancy in Staffordshire reported:

MTD simplified running a business in an increasingly online world.

Staff at an accountancy firm based in Central Scotland reported:

We have now helped numerous clients make the transition to MTD, and in doing so most now use systems much more suited and more useful for their day-to-day operations… Not only does this help improve their efficiency, it also helps [them] as their accountants focus energy on advising them on future improvements.

You can read more testimonies of businesses’ experience of MTD on GOV.UK.

4. Costs of MTD

MTD will change the way many businesses and landlords manage their tax affairs and, therefore, businesses are likely to face some costs when moving to MTD.

Under MTD, businesses and landlords will be required by law to keep digital records. For businesses and landlords needing to use MTD TSA, they will need to send information from those records to HMRC on a quarterly basis, using MTD-compatible software. Businesses using MTD VAT need to send their VAT returns to HMRC directly from the digital records they keep.

HMRC has published revised cost estimates and impacts in the form of tax information and impact notes (TIINs) for the extension of MTD to VAT businesses under the threshold (from April 2022) and for MTD ITSA (from April 2024).

Costs illustrated within the TIINs only consider costs and savings strictly related to meeting MTD tax obligations. They include estimating a financial value for the time a business spends choosing software, familiarising themselves with new processes, as well as any direct financial costs such as paying for software (if they are not eligible to use, or choose not to use, free software options).

The experience of each business is different which makes it challenging to calculate exact administrative costs. However, HMRC believes the revised estimates give a better indication of both the transitional and continuing costs different businesses may face.

4.1 Calculating the impact of ITSA and VAT MTD on businesses

Since the introduction of MTD VAT in April 2019, to date, over 1.5 million businesses have joined MTD, including almost a third of those VAT businesses with taxable turnover below the VAT threshold joining voluntarily. A growing number of businesses now understand what it means to join and comply with MTD and there is a wide range of over 500 software products available for MTD VAT.

Over the last year, HMRC has worked closely with a range of stakeholders, businesses and representatives and gathered insights from its research programme to review and enhance initial estimates of associated administrative costs for taxpayers, which the government published in ‘Building a trusted, modern tax administration system’ in July 2020.

These include the Institute of Chartered Accountants in England and Wales (ICAEW), the Chartered Institute of Taxation (CIOT), the Federation of Small Businesses (FSB), the Institute of Chartered Accountants of Scotland (ICAS), the National Farmers’ Union (NFU) and the Administrative Burdens Advisory Board (ABAB).

Feedback from stakeholders and businesses already operating MTD for VAT indicate a higher proportion of businesses will seek agent assistance with their transition than previously assumed, more time may be needed for businesses to familiarise themselves with new processes and more businesses may seek agent support when submitting quarterly updates.

HMRC has also worked with the software industry to better understand the software options that will be available for newly incorporated businesses. A range of assumptions have been updated within the estimates, including uplifting costs and wage rates in line with inflation, updating the price of software products, and widening the range of changes in record keeping practice.

Informed by feedback from stakeholders, businesses already operating MTD VAT and the software industry, the overall cost projections have increased from previous estimates.

HMRC acknowledges that real-life experiences will differ across businesses. Factors include their existing level of digital engagement, the complexity of their business activity and tax affairs, and their relationship with their tax agent. The estimates have a greater level of detail but cannot fully account for all of these factors.

The business impacts presented in the TIINs are calculated using Standard Costs Model (SCM) methodology - an internationally recognised model that provides a consistently calculated and informed set of estimated costs against each tax obligation. All costs are averaged across the entire population affected.

4.2. What makes up customer costs?

In estimating customer costs for MTD, HMRC has looked at both transitional and continuing costs.

The costs measured are only those strictly related to meeting MTD tax obligations and are modelled using average costs to a typically efficient business.

Many of the benefits of MTD are hard to value financially, such as the productivity benefits digitalisation has been shown to bring, enhanced confidence in completing tax returns, stress reduction and improved customer experience, and therefore the totality of possible benefits are not reflected in the examples below. As such, the figures represent estimated gross costs, which might be partly or wholly outweighed by the benefits experienced.

4.2.1 Transitional costs

Transitional costs are those costs incurred by a business as they prepare for, or get used to, operating MTD. HMRC expects most businesses within scope to incur some transitional cost in moving to the new MTD requirements. Most businesses will not need to incur these costs until 2022 (if they are VAT-registered), or 2024 if only for ITSA. For some businesses, the transitional period may take up to 3 years as they get used to the new MTD processes and this has been reflected in the transitional cost estimates.

Transitional costs are likely to include the following:

• time spent in familiarisation with the new MTD obligations (digital record keeping and quarterly submission of information)
• in-house training

For some customers, this could also include:

• the purchase of new hardware or upgrading of existing hardware. This is expected to affect only a small minority (1.5%) of businesses or landlords for MTD ITSA
• additional accountancy or agents’ costs

Costs may be offset against the business’s profits when calculating tax due, which reduces the net cost for many businesses.

A business’s current level of digitalisation and complexity will be a significant factor in determining how easily it will transition to the new arrangements. Those businesses already operating MTD VAT, and that will also need to operate MTD for their ITSA, will already have the necessary hardware and will be accustomed to using software or spreadsheets to manage their accounts. As a result, their transition to MTD ITSA should be relatively easy and inexpensive.

Businesses not already using either spreadsheets or accounting software to manage their tax affairs may find they need more time to prepare, and more support to make the change.

Costs will arise as businesses spend time understanding the new rules deciding what software is most suitable or talking to a tax agent or accountant.

4.2.2 Continuing additional costs

Continuing cost estimates are based on what HMRC expects a typically efficient business to incur once it has started to operate as part of MTD. These costs are in addition to the costs that a business normally incurs in managing their taxes.

Continuing costs are likely to include:

• cost of continuing software subscription for those moving to MTD compatible software, from either paper or spreadsheet systems (although for the smallest businesses with the most straightforward affairs there will be free software available)
• additional time for making new quarterly updates (MTD ITSA only)

For some customers they are likely to include:

• cost of continuing bridging software subscription to provide MTD compatibility for those who prefer to continue using spreadsheets
• marginal increases in some existing software costs to provide MTD compatibility (although many VAT subscription-based software packages have been updated for MTD for free)

For continuing tax agent costs, where a business uses an agent to manage quarterly submissions or returns, HMRC has assumed that for a business operating MTD VAT without MTD ITSA (for example, a Limited Company), quarterly agent costs will not increase due to MTD.

Continuing additional costs are expected to remain stable over time.

4.2.3 Overall cost estimates

HMRC estimates a transitional cost to business of around £1,383 million and a net increase in the ongoing costs of tax compliance of around £152 million for those businesses mandated to use MTD for ITSA. This equates to an average transitional cost of £330 and an annual cost of £35 per business within scope. The following sections breakdown the average costs per business in more detail.

5. Core assumptions

The tables below illustrate the core assumptions for both transitional and continuing costs. All core assumptions consider the journey that a business might take to become MTD compliant.

5.1. Transitional costs

These costs apply to both VAT and ITSA businesses unless otherwise stated.

Additional agent support

Within the estimates HMRC assumes that many businesses that use an agent to manage part or all of their tax affairs will receive advice and assistance from their agent as a matter of course.

Some businesses may seek additional agent help to transition. This is help over and above that normally provided, and thus may be charged for.

This table presents the average estimated additional hours of agent help to assist with MTD transition.

Record keeping journey	Number of hours of agent help
From paper to software	10
From spreadsheet to bridging or MTD software	5
From software to MTD upgrade	5

Software set-up

Businesses are expected to need time to set up new systems or evaluate existing systems for MTD compatibility. This may include time taken to choose their preferred MTD software solution, installing the software on the computer or other device, transferring records across from other record-keeping systems, and registration. While HMRC does not expect businesses to incur a financial cost to do these things, the time spent to do them has been included in the estimates as an ‘opportunity cost’ of lost time to businesses.

The table below presents the average estimated time that a business may take to choose and set up their software for MTD. Where an agent assists with transition, the time taken has been estimated to be slightly less.

Hours of set up

Record keeping journey	Using agent to help transition	No agent help during transition
From paper to software	4	6
From spreadsheet to bridging or MTD software	2	2
From software to MTD upgrade	0	0

Hardware costs

HMRC expects only a very small proportion of small businesses to need to purchase new hardware or upgrade existing hardware to operate MTD.

MTD does not require expensive hardware with high processor speed or capability. HMRC anticipates some MTD accounting software will be able to be run on a smartphone or tablet.

Where hardware needs to be purchased, HMRC has estimated cost based on the cheapest laptop price in a major high street electronics retailer, as of September 2020.

VAT has been excluded from hardware costs for VAT businesses, because those businesses can reclaim the VAT paid. Therefore, the cost of a laptop for a VAT business is estimated to be £167, but for an ITSA-only business, it is £200.

Cost of basic laptop per business

Record keeping journey	VAT-only businesses (cost net of VAT)	ITSA-only businesses (cost inclusive of VAT)
From paper to software	£167	£200
From spreadsheet to MTD software	£167	£200

Training and familiarisation

Businesses will need to familiarise themselves with MTD and the changes they need to make to processes and practises in order to be MTD compliant. The associated costs are calculated by estimating the time taken and average cost to the business for undertaking such work.

Costs of training and familiarisation will differ depending on business size and the type of record-keeping they used prior to MTD. Longer hours of training are assumed for businesses moving from paper, compared to those moving from spreadsheet or software.

The cost to businesses that are using agents is calculated in the same way as for those not using agents, but with a 10% reduction in training and familiarisation costs to account for less time being required for training.

Record keeping journey	Number of training hours
From paper to software	8
From spreadsheet to bridging or MTD software	4
From software to MTD upgrade	2

5.2. Continuing additional costs

Continuing cost estimates are based on what HMRC expects a typically efficient business to incur, and reflect the expected ‘journey’ that the business will make to move to MTD.

As with transitional costs, the individual cost to a business will vary according to the business’s circumstances, what choices they make in how they move to MTD and the degree of agent support required.

Software

There will be a range of MTD compatible software products available. There are free products for those with the simplest affairs, bridging products for those businesses that prefer to continue using spreadsheets, and fully featured integrated software products that combine MTD compatibility with a number of other business tools, such as payroll, automatic invoicing and stock control.

HMRC remain committed to ensuring there will be free MTD ITSA software products available for the smallest businesses with straightforward affairs. This will mean that businesses will be able to choose products that meet both their needs and their budgets.

The estimated software costs were determined through discussions with software developers, and are based on their view of the anticipated software market and likely pricing strategies.

Where a business cannot or chooses not to use one of the free software products, continuing software costs will differ depending on whether the business moves to basic or complex software.

Existing software users may need to buy new software or upgrade their existing software. It is likely that some subscription-based software that businesses already use will be upgraded for free, although other software providers may charge for MTD upgrades. Some software that is currently operating MTD VAT is expected to be upgraded to provide MTD ITSA capability for free, however some software providers may make a charge for this.

Unlike existing software users, businesses moving from paper or spreadsheet to software will need to purchase software or use one of the free products available.

The table below illustrates the estimated cost of software. All figures are annual costs, with the ‘basic’ cost of software based on a ‘typical’ subscription software package providing the minimum functionality a business requires to comply with MTD.

VAT has been excluded from software costs for VAT businesses because they can reclaim the VAT paid. Therefore, the annual cost of a basic software for a VAT business is estimated to be £132, but for an ITSA-only business it is £158.

Continuing additional software costs	VAT-only	ITSA-only	ITSA & -VAT (additional costs on top of MTD VAT functionality)
Paper to free software	£0	£0	£0
Paper to basic software	£132	£158	£33
Paper to complex software	£264	£317	n/a
Spreadsheet to bridging software	£33	£40	£33
Spreadsheet to free software	£0	£0	£0
Spreadsheet to basic software	£132	£158	£33
Spreadsheet to complex software	£264	£317	n/a
Software to free upgrade	£0	£0	£0
Software to paid upgrade	£33	£40	£33

Quarterly update costs

Under MTD ITSA, businesses will need to send summary information from their digital records digitally to HMRC on a quarterly basis. This is not the same as making quarterly tax returns and there is no requirement to make any accounting or tax adjustments. Software used by businesses to keep digital records will use those records to automatically create a simple summary of business income and expenditure, which can be submitted to HMRC at the click of a button.

These quarterly update costs are applied only to businesses operating MTD ITSA. Most VAT businesses already submit quarterly returns and are not expected to shoulder any additional cost for providing quarterly MTD updates. The estimated annual cost of this quarterly update action is shown below.

The estimate assumes that it takes on average 2 minutes to submit each quarterly update electronically from software. It does not include time taken to check the data being sent, which is considered as part of the actions that a business will already take in compiling their records and should form part of their current business processes.

The cost is based on a standard comparative wage rate and is applied to all businesses needing to operate MTD ITSA, regardless of what software solution they choose or whether they use an agent.

Quarterly agent interaction costs/year	VAT-only	ITSA-only	ITSA & VAT
All journeys	£0	£3	£3

Quarterly agent costs

For businesses operating MTD ITSA HMRC has assumed that many businesses that use an agent to submit their end of year tax return will use an agent to check and / or submit the quarterly updates that will be needed under MTD ITSA.

This estimate is only applied to ITSA-only businesses because typical VAT businesses already submit quarterly returns and are not expected to incur any additional cost for providing quarterly MTD updates.

Although the estimates include time spent communicating with an agent quarterly, they do not include the time the agent will spend checking quarterly submissions as an additional cost as HMRC believes the need to submit quarterly spreads the cost of checking over the year but does not increase it. Chargeable agent time within this estimate has been assessed as 6 minutes, being the smallest unit of time agents and accountants typically charge for.

Quarterly agent interaction costs/year	VAT-only	ITSA-only	ITSA & VAT
All journeys	£0	£24	£0

6. Example additional customer costs

The examples below consider a range of typical businesses that need to operate MTD, to illustrate how the cost estimates may apply to them, as well as the available benefits of using MTD.

They represent neither a minimum, nor a maximum cost, but they do reflect the costs as applied to HMRC’s cost estimates.

The figures represent estimated gross costs, which might be partly or wholly outweighed by the wider, consequential and longer-term benefits that MTD offers businesses.

6.1 Example 1: Salma - a company director who already uses accounting software

Salma runs a limited company providing dog grooming services. Although at around £45,000 her taxable turnover is below the VAT threshold, she has chosen to register her company for VAT and therefore needs to operate MTD VAT. She is quite tech-savvy and already uses a subscription accounting package for her VAT. She confidently deals with all her businesses tax affairs and does not normally use an accountant.

Her software is upgraded free of charge to manage her MTD VAT. She uses her software provider’s support line to get advice on what she needs to do differently for MTD VAT.

Salma continues to experience all of the benefits of using software, including time saved in administration and a higher level of businesses productivity.

Cost overview - Salma	Total cost	Cash	Opportunity
Transitional Costs
Additional agent help	£0	£0
Software set-up	£0		£0
Hardware	£0	£0
Training (opportunity cost of Salma’s time)	£45		£45
Total transitional cost	£45	£0	£45
Continuing Costs
Quarterly updates	£0		£0
Quarterly agent interaction	£0	£0	£0
Software costs	£0	£0
Total continuing cost (per year)	£0	£0	£0

6.2 Example 2: Hassan - a small business owner already using software for MTD for VAT and moving to software for MTD ITSA

Hassan is a self-employed landscape gardener with turnover over of £85,000, employing one other person to help him. He already operates MTD VAT, but now needs to also operate MTD ITSA. He uses a subscription software package for his MTD VAT. At the end of the year, his accountant normally uses his VAT records, plus some additional information Hassan records on a spreadsheet, to prepare his self-assessment return for ITSA.

Hassan is aware of MTD, and takes advice from his software provider, who tells him that his software can be updated to provide MTD ITSA compatibility for a small, additional monthly charge. He asks his accountant for help to familiarise him with the additional entries he needs to make.

Hassan decides that he would like the reassurance of his accountant checking his quarterly updates for MTD ITSA, at least at first. Because the quarterly updates are simple, with the software doing all the work (as it already does for VAT), Hassan decides, once he is confident that the software produces the right data, to make the quarterly updates for ITSA himself.

He then finds that the end-of-year bills from his accountant for helping him finalise his ITSA information reduce (not shown below), but he still uses his accountant to help him claim appropriate reliefs and allowances at the end of the year.

As well as reduced costs from requiring less support from his accountant, Hassan has increased confidence in managing his tax affairs overall. He has found preparing his end of year tax return a much quicker and easier process since he has started using software to manage both his VAT and ITSA. Hassan is also pleased to have access to a comprehensive overview of his business trading and profit in one place, which supports him greatly in future planning.

Cost overview - Hassan	Total cost	Cash	Opportunity
Transitional Costs
Additional agent help	£208	£208
Software set-up	£45		£45
Hardware	£0	£0
Training	£81		£81
Total transitional cost	£335	£208	£126
Continuing Costs
Quarterly updates	£3		£3
Quarterly agent interaction	£0	£0	£0
Software costs	£33	£33
Total continuing cost (per year)	£36	£33	£3

6.3 Example 3: Eilidh: a self-employed VAT-registered business owner who buys software to replace her spreadsheets

Eilidh runs a small VAT-registered mail order business with taxable turnover of £75,000 per year. Her accountant has told her about needing to operate MTD VAT from April 2022, and suggests that she also makes the change to MTD ITSA at the same time. She needs no new hardware, and currently uses a spreadsheet for her accounts.

Her accountant suggests that she would benefit from managing both MTD VAT and her ITSA through software. Eilidh shops around for a suitable software package for both ITSA and VAT. She decides on one of the existing MTD VAT subscription software packages because of the additional business management tools it provides, with the MTD ITSA functionality added separately for a small charge.

Eilidh usually uses an agent to submit her returns for both VAT and ITSA, so she asks her agent for additional help in making the move to MTD for both.

Although Eilidh is confident in record-keeping, she decides that she would like to continue to use her agent for reassurance when making her MTD ITSA quarterly updates on a continuing basis.

Eilidh finds that her software includes additional features to help her run her business, and integration with her bank account that reduces the time she spends on administration for her business (not reflected in the net costs below). Over time, Eilidh feels she no longer requires agent support, reducing the continuing costs shown below, and she finds that the accuracy of her record keeping improves through use of software for her accounts when compared with spreadsheets.

Cost overview – Eilidh	Total cost	Cash	Opportunity
VAT
Transitional Costs
Additional agent help	£208	£208
Software set-up	£45		£45
Hardware	£0	£0
Training	£81		£81
a) VAT transitional cost	£335	£208	£126
Continuing Costs (per year)
Quarterly updates	£0		£0
Quarterly agent interaction	£0	£0	£0
Software costs	£132	£132
c) VAT continuing cost (per year)	£132	£132	£0

Cost overview – Eilidh	Total cost	Cash	Opportunity
ITSA
Transitional Costs
Additional agent help	£208	£208
Software set-up	£45		£45
Hardware	£0	£0
Training	£81		£81
b) ITSA transitional cost	£335	£208	£126
Continuing Costs (per year)
Quarterly updates	£3		£3
Quarterly agent interaction	£24	£20	£4
Software costs (cost of adding ITSA MTD functionality on to MTD VAT solution)	£33	£33
d) ITSA continuing cost (per year)	£60	£53	£7

6.4 Example 4:Ciaran - a landlord who chooses free MTD ITSA software

Ciaran is a landlord, renting out a single property, which generates an annual turnover of £10,800. Like two-thirds of people turning over between £10,000 and £12,500 from a trade or renting property, Ciaran’s other income means he still has to pay Income Tax.

He currently uses a spreadsheet to manage his rental income and expenditure but will need to use MTD ITSA. He reads about MTD on GOV.UK, and watches some of HMRC’s YouTube videos to understand how things will change for him. He doesn’t usually use an accountant, but for reassurance decides to take advice about moving to MTD.

The accountant suggests that because Ciaran’s business is very simple, he may be able to use a free MTD ITSA product. Ciaran decides that he will use one of the free products that are listed on GOV.UK. Although he follows the online guidance from the software provider, he wants to make sure he is getting it right so seeks further advice from the accountant on where he needs to make software entries.

Once Ciaran has set up his MTD software, he sees how simple it is to make the quarterly updates and how the information needed each quarter, and at the end of the year, is automatically prepared for him. The tax information that is produced on Ciaran’s HMRC Digital Tax Account throughout the year, based on his quarterly updates, enables Ciaran to see how his tax position is developing throughout the year. He does not request continuing support from the accountant.

Cost overview - Ciaran	Total cost	Cash	Opportunity
Transitional Costs
Additional agent help	£250	£250
Software set-up	£45		£45
Hardware	£0	£0
Training	£81		£81
Total transitional cost	£376	£250	£126
Continuing Costs
Quarterly updates	£3		£3
Quarterly agent interaction	£0	£0	£0
Software costs	£0	£0
Total continuing cost (per year)	£3	£0	£3

6.5. Example 5: Jeff - a self-employed joiner who keeps paper records

Jeff is a self-employed joiner and needs to operate MTD ITSA. He currently keeps all his records on paper and uses his accountant to compile and submit his Income Tax return each year. His income is £30,000 per year. Jeff has a computer, but it is old and unreliable. His accountant has told him about MTD and he has read the MTD guidance on GOV.UK, but is unsure how to get started. He asks his accountant for additional help during transition.

He buys a new computer and chooses a basic subscription software package because of the extensive support that is included. He is guided through the software set-up by the software provider, which takes a bit of time. He seeks additional help from his accountant to start using the software to issue invoices and record his business expenditure, to make sure that he is doing so correctly.

For his quarterly updates Jeff chooses to have his accountant check and submit them in the same way that he did for his Income Tax return. Jeff’s accountant helps him claim appropriate reliefs and allowances at the end of the year.

Moving his records to a software package enables Jeff to make a number of improvements to the way he runs his business. When he opens his software the business dashboard immediately flags customers who have exceeded their credit terms, and he can click through and send them an email to chase payments, or a statement showing amounts outstanding. If a customer asks for a copy invoice, he can send it with one click, rather than having to photocopy the original and post it to his customer. His bank account shows on his dashboard too.

Jeff now feels much more in control of his business finances, as he can see what funds are due in and check that he has sufficient money to meet bills that are falling due. This supports him greatly in future planning. Jeff has found his end of year tax return a much quicker and easier process, due to his use of software.

Jeff also feels much more confident and skilled in using digital platforms and can see the benefits that software and new hardware have brought and continue to bring to him and his business.

Cost overview- Jeff	Total cost	Cash	Opportunity
Transitional Costs
Additional agent help	£500	£500
Software set-up	£90		£90
Hardware	£200	£200
Training	£163		£163
Total transitional cost	£953	£700	£253
Continuing Costs
Quarterly updates	£3		£3
Quarterly agent interaction	£24	£20	£4
Software costs	£158	£158
Total continuing cost (per year)	£185	£178	£7

6.6 Example: Ieuan and Ffion - a small partnership that chooses to use spreadsheets with bridging software

Ieuan and Ffion are partners in a small nursery business. The business has turnover over £85,000 so they already use MTD VAT. They manage their tax affairs using spreadsheets for both ITSA and VAT and use bridging software to send their MTD VAT returns to HMRC. They decide they want to continue using a spreadsheet to manage their MTD ITSA. They do not normally use an agent.

Ffion is confident in using spreadsheets and both Ieuan and Ffion are used to using bridging software from their MTD VAT experience. Their existing bridging software cannot be used for MTD ITSA, so they choose a different bridging software provider from the choices presented on GOV.UK.

After taking the time to link all the necessary data from the spreadsheet to the new bridging software and testing it, they feel able to make the change to MTD ITSA without needing additional assistance. Ieuan and Ffion are pleased to be using a familiar system for managing their tax affairs and that they were able to make the transition to MTD ITSA without significant additional costs.

Cost overview – Ieuan and Ffion	Total cost	Cash	Opportunity
Transitional Costs
Additional agent help	£0	£0
Software set-up	£45		£45
Hardware	£0	£0
Training	£90		£90
Total transitional cost	£135	£0	£135
Continuing Costs
Quarterly updates	£3		£3
Quarterly agent interaction	£0	£0
Software costs	£33	£33
Total continuing cost (per year)	£36	£33	£3