The new tax regime has clear winners – but they’re not taxpayers

The brave, but possibly expensive, new world of digital record-keeping is only a month away. Sole traders earning more than £50,000 will have to file their tax returns quarterly from 6 April, with lower earners following over the next two years.

Yes, the dreaded Making Tax Digital is here and with it comes MTD software – by government order. The government and the tax industry say it will help small businesses because the “little and often” approach beats the annual mad scramble to meet tax obligations. HMRC claims fully functional software could save between 20 and 39 hours a year on record-keeping.

But whether the 3 million taxpayers eventually caught in the net will benefit is another question. The tax industry and many banks certainly will.

The UK tax software market is forecast to grow by more than 10% a year, more than doubling between 2023 and 2031. HMRC estimates businesses could spend up to £420 a year on software, alongside average transition costs of £280 to £350 and about £115 annually to run the system. Its list of approved software includes about 50 options, ranging from obscure brands to big players such as QuickBooks, Xero, FreeAgent and some digital banks.

Providers often offer basic packages at low or no cost, then sell extra services. Once users rely on a platform for their daily finances, they are less likely to switch elsewhere.

Banks see the same opportunity. Last week Sage, the UK’s second-largest technology company, told customers in a newsletter that MTD represented “the next big opportunity” for banks and fintechs because it could “boost daily engagement, reduce churn, and accelerate time-to-market”.

Starling, Monzo and Tide all offer MTD packages, with Starling reporting a 50% rise in account openings over the past year. Virgin Money has partnered with Xero, while NatWest has owned FreeAgent since 2018.

Accountants also expect a boost. Two-thirds of UK accountants believe MTD will be positive for their businesses by bringing new clients and improving ties with existing ones. TaxAdviser magazine suggests firms “may be able to sell them additional advisory services, which will provide another boost to your firm’s profitability”. They may also “gain financially from new commercial partnerships” with software providers.

HMRC does list free software options. But these tend to offer only basic sole trader functions. At Monzo, for instance, categorising spending, attaching receipts and sending invoices means upgrading from a free Lite version to a £9 monthly package.

FreeAgent is only free if you bank with NatWest, RBS or Mettle. Otherwise it costs £33 a month.

In other words, MTD may reduce paperwork – but it is also quietly turning tax compliance into yet another subscription service. Cui bono?

Photograph by Natalia Lebedinskaia/Getty Images