UK SMEs require collaboration between FinTechs and accountants for making tax digital

By Puja Sharma

One in five UK sole traders have never heard of Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA), despite the government announcing it seven years ago, a new report has found.

Research by Coconut revealed that a potential one million extra sole traders would now be willing to pay for accounting services to support them with the changes coming via MTD, which the majority (61%) said they found confusing, complicated, and a major concern in terms of time and cost.

Surveying sole traders across the UK to fully understand their views, Coconut’s report, “Making Tax Digital and sole traders: the £360m opportunities for the accounting industry”, highlights the support that accountants, FinTech, industry bodies, and government need to provide sole traders to ensure they are fully prepared for the upcoming MTD changes.

The report finds sole traders spend an average of five hours on their self-assessment tax returns each year. MTD introduces new quarterly updates, as well as an end-of-period statement (i.e. yearly summary) and final declaration, replacing the current single Self Assessment return due by the end of January.

The news builds on Coconut’s research in 2019, looking at how well self-employed people understood MTD ahead of changes for VAT-registered businesses. Nearly a quarter (23%) said they had never heard of MTD and this year’s report shows this percentage reducing only marginally to 21%, meaning there has been little progress in the last three years to improve understanding of the MTD rules amongst the UK’s entrepreneurs.

Carly Liston, Executive Director at Fortus East Limited, said: “Sole traders are typically considered to be time-intensive, low-margin clients – but, as outlined in this report, accountants and bookkeepers who adopt the right tools, processes, and workflows will be well-placed to benefit from the increased work created by the digitalisation of sole traders.”

“Accountants and bookkeepers were pivotal in ensuring that the Making Tax Digital for VAT rollout went to plan, and it looks like it’ll be just the same for MTD ITSA. As well as poor levels of awareness, over half (60%) of sole traders said they were either underprepared or not prepared at all for the changes, with nearly a third (31%) admitting they put off doing their taxes for as long as possible because it increases their anxiety.”

Given the scale of the changes, four in ten (40%) sole traders who don’t currently use an accountant said they would now be willing to pay a monthly amount for accountancy and tax support to help manage the impact of MTD. Based on an average £30 monthly cost for Self Assessment accountancy services, this could create a potential £360 million growth opportunity for the industry.

Of those that already use an accountant, the benefits are clear, with three quarters (77%) stating that using one had significantly reduced their stress levels, and four out of five (80%) saying it has freed up their time and allowed them to focus more on running their business.

Sam O’Connor, Chartered Accountant, and CEO at Coconut, said: “The growth in self-employment and entrepreneurship is a major shift in how people work, enabled by new technology and driven by the Covid lockdowns, yet there is an overwhelming lack of support for the people who are integral to the growth of the UK economy.”

“We have a duty, along with others in the industry, to work together to support sole traders as they comply with Making Tax Digital requirements for Income Tax Self Assessment. The report findings show action is needed immediately; we need to create more awareness of Making Tax Digital and help people with bookkeeping and tax, as well as support people to access accountants who can take the burden off their shoulders. Giving sole traders time to prepare is essential and with less than two years to go, time is running short.” he added.

Key findings

• Coconut‘s report highlights the support accountants and FinTech need to provide sole traders to ensure they are fully prepared for upcoming Making Tax Digital changes.
• One in five sole traders (21%) surveyed have never heard of MTD – equivalent to 670,000 – with 60% saying they are underprepared for the changes
• New requirements could mean an additional 20 hours spent on tax returns per year by each sole trader – a potential 64 million extra hours across the industry – and increase anxiety for those who need to comply with the new rules if support is not available
• Research finds one million extra sole traders would be willing to pay for accounting services to support them with the changes.