Making tax digital: Fact stranger than fiction

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There are two more HMRC publications in the Making Tax Digital (MTD) dialogue worth taking note of: ‘Making Tax Digital: Illustrative Case Studies’ and ‘Making Tax Digital: Myth-buster’.

These both set out to allay fears about the MTD procedure. But to really make the inevitable work, it’s time for practitioners to contribute to the debate, say Philip and Sarah McNeill.

The digital vision

The future is going to be digital. Digital has the potential to provide more regular payment of tax; simpler, more cost effective processing for HMRC; earlier receipt of information to check against its growing store of bulk data; and more opportunity for earlier intervention. So at one extreme, we have a future with quarterly digital accounts prepared on a tax basis, with quarterly payments of tax based on actual results in real time. But how do we get there? And how rapidly?

Myth-buster and case studies

‘Myth-buster’ (published on 25 January) looks at five supposedly common misconceptions about MTD. That:

  • Businesses will need to do four tax returns a year
  • MTD doesn’t consider those digitally excluded
  • Most businesses don’t want to do tax digitally
  • Businesses will need extra records and digitisation will cost a fortune
  • MTD will increase errors and hinder compliance

These issues are going to inform practitioner-client conversations for some time to come, as the detail is worked out. 

But for now, for practitioners, the illustrative document is possibly more important reading. Asking ‘What does tax feel like now?’ for four fictional clients, the case studies then explain ‘How MTD will help’ this type of client in the era to come.  

Fiction

The four case study clients looked at by HMRC are fictional examples, but practitioners will recognise them. They are:

  • Employed ‘customers’ with sources of untaxed income they need to report to HMRC
  • Self-employed taxpayers
  • Pensioners whose pension exceeds their personal allowance which they need to report to HMRC
  • Small companies

For the clients in the case study, ‘how tax feels now’ isn’t good - in all manner of ways. So MTD, according to this publication, is going to help in a variety of scenarios.

There is for instance, the use of smart phones to record invoices, and the use of apps. For Geeta, the employed customer who also has rental income and private tuition fees, the third party app on her smart phone helps her ‘incorporate record keeping into her routine’ and send HMRC monthly information. The pensioner whose case is examined is ‘digitally confident’ and uses the web routinely in her private life.

Fictional case studies can be excellent. In 1823, a Yorkshire schoolmaster was successfully prosecuted for gross neglect which had resulted in a number of pupils going blind. Yet it took the publication of Nicholas Nickleby 15 years later, and the image of the fictional Wackford Squeers, before the school was closed down.

There will be many accountancy firms for whom the transition to digital has already been made: Whose clients, like those in the HMRC illustrative case studies, are only too eager to embrace the new digital world. There is nothing wrong with fiction per se: Dickens’ portrait of the Yorkshire schoolmaster was so effective that a number of contemporary Yorkshire schoolmasters were convinced it was them.  

But the problem with fictionalised case studies for digital tax is that there may be one image missing: your client’s.

Practitioner expertise

The clients in the case study are the particular concern of small and medium-sized practices. The MTD debate is something to which such practices are uniquely placed to contribute. This is their area of expertise.

These practices know that not all clients are as digitally-savvy as those in HMRC’s publication. Where is the Luddite ‘carrier bag’ client, who still brings invoices into the office in the Tesco bag? The bag bulging with receipts for everything from last year’s MOT certificate, to this year’s home insurance renewal… the cement mixer purchase, to the box of biros, Mars bar and sandwiches?

According to the FreeAgent survey, 66% of practitioner time is spent on what is essentially number crunching: From processing expenses to chasing missing data. So if the client ‘goes digital’ how will things change? If what you have is spaghetti, manual spaghetti or digital spaghetti, makes little difference. The result is spaghetti. 

Luddite clients and practical problems

There can be an enormous gap between where clients are now, and the real time required by MTD. Some long-established, pre self assessment clients, like farmers for example, still have 30 April year ends. For some of these clients, the 30 April 2014 accounts (1 May 2013 to 30 April 2014) might only have gone in last week (January 2016). The accounts to April 2014 fall in the tax year 6 April 2014 to 5 April 2015, with the final tax, under current rules, not due until 31 January 2016.

Paying tax on earnings from May 2013 in January 2016 is a long way from real time, and from here, you can’t get to real time in 12 months. And there are rules about changing year ends and overlap relief to work out. 

Then there’s the issue of stock, if four accurate sets of figures are to be clicked and sent to HMRC with MTD. A James Herriot- type practice we once knew, had a lot of farming clients: Two straw bales set up in the field and the auditor counting the pedigree lambs as the dog chased them through. How many computer programs can count sheep? Or provide a small business with a reliable stock figure?

Practices which deal with clients like these might not think they have time to get involved with HMRC consultations on MTD – but perhaps it’s time to think again.

Fact - stranger than fiction

To assist in the MTD dialogue, practitioners need to speak out. They are the ones with the facts. While there’s a dialogue to engage in, they need to communicate their own case studies. To explain how their representative clients find ‘tax now’, and explain how they are going to make out in the digital world.

Recent research into digital engagement suggests that there is a long way to go before many clients feel equipped for digital. One paper looking at digital capability in small and medium sized business, published last Autumn, found that ‘a quarter of SMEs report that they do not possess basic digital skills.’ The findings of another paper, looking at digital engagement in later life, suggest that internet use drops off sharply with age, beginning at about age 50.

So here’s another character, Theophilus Wellington – a farming client. He is fictional, but there are many like him in fact. For Mr Wellington, all purchases go onto the ‘Middle Shires Farmers’ account. That’s everything from the sheep dog food to the tea bags, and from the new car to animal feed. So present him with the facility to use a smart phone, and the scanned and coded invoice is posted to cost of sales. But who will notice the margins don’t fit?

Time to get involved

That’s why Mr Wellington has an accountant. He doesn’t keep a dog and bark himself. Theophilus Wellington is a farmer, but he could just as easily be a builder, an engineer, an IT consultant: The list is endless. These are the clients that practitioners know about, and these are the clients that will be relying on their advisers to guide them into the digital world. Starting now, with MTD-HMRC dialogue.

HMRC is looking for interaction so treat this as an opportunity. Profile typical case study clients - because if enough practitioners do it, it might just change the system. One way in, for instance, is via the discussion events HMRC have announced on simpler tax payments. But there will be others.

The challenge is a big one: There are accountants talking of leaving practice rather than face the transition to digital. But practitioner knowledge of real clients is unparalleled. And if practitioners don’t create that lifelike image of real clients, our clients’ digital future will be shaped without it.

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08th Feb 2016 16:31

We need your stories

Please post your (fictional) client profiles below. Do you know a farmer like Theo Wellington?

Perhaps your cleint is Bob Builder who receives most of his payments in cash and pays for materials out of cash before banking the balance.

Do you have Salt-of-the-Earth cleints who have never touched a computer but have a number of let properties they inherited.

How will those cleints cope with Making Tax Digitial?

 

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11th Feb 2016 15:41

Making tax digital

I approach retirement age with huge relief. MTD to me shows HMRC's complete ignorance of a substantial tranche of their 'customers'. Only a few self employed have a real handle on the tax rules. "I'm just a digger driver, I leave all that paperwork to you Jes". Most work far longer hours for far less money than employed office sitters, of which I was one in an earlier corporate life. With all the cajoling, explaining, urging, threatening in the world, you won't change the mind-set of the majority of the solo self employed.

If they feel squeezed into a mould outside their knowledge and comfort zone, they'll quit, go underground, or pass the buck to us, depending on their personality and moral code. Most of my client base is below VAT threshold turnover so they only prepare (I use the word loosely) their final books after their year end.

If I was carrying on with this job, I would be setting up an initial 'baseline' chat with such clients to explain what we needed to be doing from now on. Then having a brief quarterly review - SCRIPTED, by phone or brief visit - with such clients. From that we would submit a 'best estimate' quarter for them. That would be minimum extra cost; and cooperation from them would be able to be 'forced' because the HMRC reporting will be a requirement from Big Brother, not the accountant being a bit OTT as they often think we are. Perhaps it could become a welcome opportunity for spreading the load, relieving the year end stress.. and we might end up thanking HMRC ??!!

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11th Feb 2016 13:38

Making tax digital

error

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By lme
16th Feb 2016 16:42

Bad experience

We recently helped an elderly client migrate from paper and pencil ledgers to the cloud. The whole experience ended in disaster when, after investing significant time and energy, by them and by us, including the client buying a smart phone to make best use of the technology, which we all thought would really help her, their internet proved to be ridiculously slow. This is the only client we have had with a slow internet and it was truly terrible, even though they are based very near us and ours is very fast. The client is a carer for her husband as well as being elderly, and running quite a busy business.

They managed to stay sane and go back to spreadsheets as a slightly better alternative to paper but the whole thing could have been avoided if only we had an inkling it was possible to have such a slow internet connection. I spoke to our MP who did not seem surprised and assured me faster broadband will arrive but I dread having to broach this again with this client as we all feel badly scarred by their experience. It's an exceptional case, usually helping clients onto new technology has proven very successful and popular for us.

 

Hope this helps. It feels like cruelty and makes me sick to think i might have to go over this again with this particular client who truly gave it her best and we were all defeated by the technology.

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09th Mar 2016 10:49

Farmers are a good example

The whole point of annual accounts is that they match income to costs according to the production cycle. Quarterly reporting will impose artificial cycles of production. Farmer Giles year end is 31 March. His sheep lamb and cows calve about then, so by the end of June he has a lot of lambs nearly ready to sell and some good sized calves. He will probably also have harvested much of his fodder for the winter - high stock valuation. However, at this point in his cycle he will be skint because he hasn't sold many lambs or calves and he has had to pay for the fertiliser used to make the crops grow, and the contractor who harvested the crops. He's also fed the sheep, lambs and cattle and had to pay for that. Now he has to borrow money to pay taxes to HMRC, so he can't afford the deposit on that equipment he was going to buy that would have wiped out any profit anyway. By the end of September he has sold most of his lambs and calves, but has now finished harvesting his crops for the winter so his valuation is still reasonably high, so probably neutral for tax. December and he has finished selling livestock and used half of his fodder. By the end of March his feed stocks are exhausted and he doesn't have any animals to sell yet, so he has lost money for this quarter. Hopefully whatever rules are in place then will allow him to reclaim the tax he paid 9 months ago.

By the way, he is one of the clients that brings in his VAT return figures each quarter on a piece of paper as he can't submit them online because he's never learned how to use a computer.

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11th May 2016 08:49

it's like so many government 'initiatives' - it's actually adding glue to the wheels of commerce, and also making my personal work life even more of a nightmare. I'm surrounded by dopey clients who take 0% responsibility for all this toss, so of curse when the fines roll in they just look at me with their doe-eyes, and say "i thought you were looking after it all Malc", and expect ME to pay the fines. grrrrrr
Think of RTI who runs that - clients or accountants? etc.
We already file everything onslime with HMRCy so why change anything? Just make everyone else do same

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