The UK government’s Making Tax Digital (MTD) initiative is reshaping how businesses, landlords and their advisers handle tax compliance. While the move to digital record-keeping and more frequent submissions offers improved efficiency and transparency, it may also introduce new risks for accountants.

Below, we set out the key considerations that accountants need to keep in mind as we move into a digital tax landscape.

More frequent reporting = greater exposure to errors

Under MTD, clients must file quarterly updates in addition to a year-end declaration. This creates five reporting events per client each year instead of one.

Each submission is a potential error point. A late or incorrect filing could result in HMRC penalties – and clients may hold their accountant responsible. From a PII perspective, practices should ensure their engagement letters clarify responsibility for timely and accurate record-keeping, and that liability caps align with their insurance coverage.

Client vs accountant responsibilities

Many SMEs and landlords may incorrectly assume their accountant is handling everything. Unless this is addressed, disputes could arise if clients fail to keep proper records, or if they are late to provide information.

Accountants must be explicit about who is responsible for what, for instance:

• client: maintaining accurate digital records, using approved software, supplying data on time.
• accountant: preparing and submitting reports based on information provided, offering advisory support.

Maintaining a clear division of responsibilities reduces negligence claims. Insurers will expect firms to document these boundaries in their engagement letters.

Software and third-party risks

MTD requires the use of HMRC-recognised software. But accountants cannot guarantee that third-party systems will be error-free, secure, or always available. If a client suffers a loss due to software failure, they may still try to pursue the accountant for recovery.

Most professional indemnity insurance (PII) policies exclude liability for third-party IT failures, and engagement letters should explicitly state that accountants will not be held liable for such losses.

GDPR compliance, cybercrime and data security

Cloud accounting and digital submissions naturally increase exposure to data breaches and cybercrime. A lost file or hacked login could have regulatory and financial consequences and therefore practices should consider a separate Cyber Liability policy to ensure coverage for data breaches, ransomware and GDPR-related claims.

HMRC penalties

HMRC is introducing a points-based penalty system for late submissions. Even if the issue lies with client behaviour or HMRC systems, clients may assume their accountant is to blame and engagement letters should state that penalties remain the client’s responsibility. Accountants can assist with appeals but should not assume liability for fines.

Outsourcing and subcontracting

Some firms may outsource digital bookkeeping or submission support to cope with the increased workload. But if errors occur, liability can still rest with the firm – so check whether your PII policy covers outsourced services. Disclose outsourcing arrangements in engagement letters and ensure subcontractors carry adequate cover.

Reputational risk

MTD may also pose reputational risks. A compliance failure, even if not strictly the accountant’s fault, could harm client trust. To preserve their reputation, firms should prepare early, set clear engagement terms, and use technology effectively. If successful, this can turn compliance into an advisory opportunity. Insurers often favour firms that demonstrate robust compliance risk management – including staff training, client education and documented processes.

For more information, visit Lockton's Accountants page.

Chloe Sweet, vice president, global professional and financial risks, Lockton Companies LLP

Further resources

Read ACCA's security advice for accountancy practices

Read Professional Conduct in Relation to Taxation's guidance on MTD for Income Tax 

Download ACCA's engagement letter with MTD schedule of services