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MTDfIT - an alternative approach

30th Oct 2021
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So much has been written on here about MTD that yet another post may appear superfluous. Just recently, Giles McCallum of HMRC had his say. It was nothing we hadn't heard before, just the same old claptrap from a rigid bureaucracy totally out of touch with its "customers". Then Rebecca Benneyworth tried to explain in her blog that it was going to happen come what may and what she had done with her practice to prepare for it. For her troubles, she got shot down in flames for appearing to be in favour of it, although she has since made it clear that she doesn't approve of the £10,000 threshold any more than the rest of us. However, it did serve to show the massive opposition there appears to be to MTDfIT amongst small practitioners.

In this piece, I am looking to canvass opinion on what might be a credible alternative approach that could, with a good sprinkle of wishful thinking, persuade HMRC to water down their current proposals. So far, we have been railing against this to no effect whatsoever as far as I can see. We all know what the pitfalls of this badly thought-out scheme are; i.e. the extra costs to tiny businesses, the lack of any benefit to most of them, the huge waste of time for all concerned, the pipedream prospects of it ever achieving its stated ends, the draconian way it is being imposed on us without brooking any dissent, the tsunami of £200 fines heading the way of those who don't/can't comply. There is no point in re-hashing these arguments. What we need to do is come up with something better.

HMRC are worried about poor record keeping. They think paper records are inherently unreliable and cause a loss of tax revenue. In this, they are making 2 big errors of judgement. Firstly, they tar everyone with the same brush. Not all paper records are unreliable. Indeed, most of them are perfectly adequate and suitable for the size of the business, and whilst the clients may benefit from using digital methods more, including spreadsheets, that is a decision for them to make, based on cost, time, trouble and added value.

Secondly, errors from paper records do not lead to such huge tax losses that it justifies this draconian change. Most errors are on the expenses, which in most cases are tiny. Income is not often missed, in my experience, and if it is missed by accident, as sometimes happens with cash receipts, MTD will do little to prevent that. A client is just as likely to forget to scan a cash receipt as they are to enter it in their cashbook. If cash receipts are missed on purpose, MTD will do nothing to prevent that. If somebody is determined to dodge tax on cash in hand, they will do. It can only be detected and deterred by targeted HMRC enquiries.

Enough guff. My proposals are two-fold as follows:

1) MTDfIT should be merged with MTDfVAT. The same data should be used for both. VAT registered traders should only need to submit VAT returns, not quarterly MTD returns. If HMRC need more data, they should put more boxes on the VAT return. They could make room by removing Boxes 2, 8 and 9 which are zero on the vast majority of returns. Those doing business with Northern Ireland should complete a separate VAT(NI) return. HMRC should change their systems so that VAT and Income Tax are served from the same returns. This is what making the tax system suitable for the digital age should really mean. All HMRC systems should talk to each other - in the same language.   

2) Non-VAT registered businesses should have the option of getting their accounting records approved by a qualified accountant.Those who pass would be exempt from keeping digital records (if they are not already doing so) and making quarterly submissions. We would become a bit like MOT test stations. We would weed out all those businesses (based on universal testing standards) who need to either go digital and comply with MTDfIT or up their game and start keeping proper books. There would be no maximum fee by law, but firms offering this service would be only be recommended and listed by HMRC if they a) belong to a recognised body, and b) agree to abide by certain standards of service, such as a maximum fee agreed with the profession. If a client passes (and that would probably include most landlords keeping paper records) we would flag them on our Agent Services portal and HMRC would issue a certificate exempting them until the next check was due in say 3-5 years.

The universal testing standards would revolve around the following:

a) use of existing software to keep accounting records (and how well they use it)

b) the use of alternative digital records like eBay reports and spreadsheets (and how good they are)

c) how good their paper accounting records are (in relation to the size/type/complexity of the business)

d) whether they keep all their receipts, how many there are, how legible they are and how well documented they are

e) the use of a separate business bank account (and how separate it really is) and how often it is reconciled to the accounting rcords

f) the size and frequency of cash transactions, whether they are banked regularly and how well/often they are reconciled to sales invoices

g) whether they prepare invoices/receipts for all customers and keep a digital record (and how good they are)

h) how they account for their drawings from the business

i) whether they hire book-keepers (internal or external) to keep their accounts up-to-date

The smallest and simplest businesses (like landlords) would get a lot more leeway on their need to comply with MTDfIT. Larger, more complex businesses would have to meet higher standards to gain exemption. The scoring systems would need to be based on set criteria to avoid some firms passing their clients more easily than others. Clients who do not use qualified firms to prepare their accounts and tax returns would also have higher hurdles to jump.

That's the bare bones of it. If this gains enough support, we could write a joint letter from all approving firms to Lucy Frazer, the Financial Secretary to the Treasury, and try to schedule a meeting with her. It's a big IF, but maybe she will have the clout to do something about this, especially if we point out the political fall-out of the current plans going wrong.

Replies (11)

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By Ajtms
05th Nov 2021 10:59

Thanks Christopher, this is brilliant, so well thought out and logical. I totally support your proposal.

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By North East Accountant
05th Nov 2021 12:53

Proposal 1 - agreed, very good idea.

Proposal 2 - disagree with this. "Non-VAT registered businesses should have the option of getting their accounting records approved by a qualified accountant."

I would not want to be approving clients records as HMRC may then hold us liable for client errors or omissions, and without doing a full audit (at significant cost which they wouldn't pay for) we could not give that assurance.

Also a lot of your criteria are very subjective.

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Replying to North East Accountant:
By cfield
05th Nov 2021 13:29

Good point on Proposal 2. There would of course have to be very low limits on the extent to which agents were held liable for passing clients incorrectly, and that was why I suggested the universal testing standards, but nobody would be forced to offer that service. It would be entirely up to you. The review itself would have to be way below a proper audit or it would just be unaffordable for the client and/or uneconomic to even offer it. I disagree that a full audit would be necessary. It shouldn't take more than an hour to decide if a client's records are up to scratch, probably less in most cases. No need to analyse the bank statements or reconcile them, or add anything up. Maybe just do some sample tests, check a few invoices. It would be almost a cursory check for most clients. We all know what good and bad accounting records look like. The tests are bound to be subjective, as it would be impossible to set performance measures for every size/type of business, but most accountants would probably come to the right decision based on universal testing standards. It is the unrepresented taxpayers who are the biggest risk in terms of bad accounting records as there is no one to pull them up or turn them into proper accounts, and they would have to comply with MTDfIT by default. The whole idea of this proposal is to stop everyone else having to comply with it when there is no reason to.

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By johnjenkins
05th Nov 2021 13:19

There are only two ways to go if HMRC don't want this all crashing around them.
The first is to make sure MTD for VAT using only one return, as you suggested, is up and running smoothly. Then the £85 to £50k self employed. Once this is up and running smoothly then all the other self-employed (including landlords). Forget the £10k limit.
Second you make every business VAT registered and again wait until the over £85k is running smoothly then £85-£50k etc.
No penalties until everything running smoothly.

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Replying to johnjenkins:
By cfield
05th Nov 2021 13:40

That would be throwing the baby out with the bathwater. Total overkill to make all businesses VAT registered. I think they'd rather do the MTD submissions. It would have the triple whammy effect of a) reducing economic activity, as tax rises always do, leading to less tax revenue, b) cause huge VAT losses when firms go under as they run out of money, and c) increase non-compliance or black market activity by a factor of 10 as small businesses either fail to register, fail to do the returns on time or just opt out of compliance altogether.

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Replying to cfield:
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By johnjenkins
05th Nov 2021 14:53

There's not much difference between MTD for over £10k and all business on MTD. In fact if all business were VAT registered you have a level playing field without the cliff edge. Talking of black economy, that won't change as those that want to keep their turnover under the £85k could well take cash. To me it's a much better idea than what HMRC are proposing at the moment. I add something. It wouldn't surprise me if in the not too distant future it will be a condition of business to register for VAT. I forgot to say in my previous post that no money would change hands between registered business. So HMRC would only receive VAT from Joe public not business as they do now. VAT is not supposed to be a tax on business.

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Replying to johnjenkins:
By cfield
05th Nov 2021 16:22

Well bang goes that attic conversion I was going to do then. And the conservatory. It's just going to cost far too much. Sorry Mr Builder. You'll just have to go out of business and claim state benefits. Sorry Mr Taxpayer. You'll just have to fork out yet more tax to pay for the benefits and the state spending no longer covered by Mr Builder's tax. Sorry Future Generations. You'll just have to pay more taxes to cover the interest on the National Debt and redeem the old gilts.

We don't want a level playing field for all businesses. We want to lend the small ones a hand to get them on the ladder, give them a good start, nourish them so they make more money, employ more people and pay more taxes in future. Most of them need a competitive edge in those early fragile years. VAT is a handy (though inadvertent or the EU would have banned it) way to achieve that. All you'll do with your idea is move the cliff edge from £85k to zero and drive many of them out of business. MTDfIT will probably have that effect too, once those £200 fines start flying around.

Anyway, this is supposed to be about my proposed reforms to MTD, not an excuse for people to get on their hobby horses about other things. I only want to hear why my idea may or may not work.

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Replying to cfield:
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By johnjenkins
05th Nov 2021 17:18

Your idea will not work because firstly HMRC won't use it and second, more important, you're actually agreeing about quarterly updates for the under £85k and trying to make the problem fit the answer when the answer is quarterly updates will not work under any circumstances.

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Replying to johnjenkins:
By cfield
05th Nov 2021 18:00

Well you know that and I know that and so does everyone else except HMRC and the Treasury. The point is, they're not going to cancel it altogether, we all know that, so the idea is to take away the notion of making it mandatory for all (which is a trifle draconian to put it mildly) and try to restrict it to those it is allegedly aimed at with poor accounting records. Of course, we all know it won't cure that problem, as clients who don't use software correctly have even worse records than those using paper, but that's what HMRC have chosen to believe, so let's just humour them and treat it as a damage limitation exercise. In effect, a compromise that will take away the most damning criticism. With exposure from the media and a huge public outcry, it is the best we can hope for and might even have some beneficial effect on the standard of record-keeping if it is used as a bogeyman to scare us all into being good little boys and girls.

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Replying to cfield:
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By johnjenkins
08th Nov 2021 09:52

I am not one to agree with everything that HMRC try to shove on us. Where I do agree (SA), I support it wholeheartedly and make every effort to make it work. I actually believe in digitisation and have experimented with most things on the market. Unfortunately since the days of Gordon Brown, HMRC have been trying to oust the extent to which Accountants have any say in our clients tax affairs and employment status. IR35 and Mandatory quarterly updates are just two of those nails HMRC are trying to put in the coffin. I am a person who loves my profession and won't stand by while HMRC try and destroy the heart of it. It's been proved that IR 35 doesn't work. Just look at the shortage of IT, HGV drivers, and hospital staff, a lot due to IR35 and people being forced onto umbrella companies who charge for the privilege. Unless this is nipped in the bud then we will see many early retirements, not only in the Accountancy profession but in construction and other areas where experienced people are needed to train the youngsters coming through. Computers and digitisation, especially when forced on us will not solve a problem that isn't there or can't be solved.

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By tedbuck
05th Nov 2021 14:57

Everything HMRC says depends on the misguided theory that people will change their habits because a computer is involved. They won't - why on earth should they? They will also learn that it is easier to 'lose' dodgy expenses in a computer account where it was an 'accident' as 'I pressed the wrong button' than it is to make a deliberate handwritten 'error' which sits and looks back at them.
They will know, as do we, that HMRC does not have sufficiently experienced staff to find most of these errors so they will go undetected and the 'Tax Gap' will increase.
The proof of these thoughts lies in the fact that HMRC is pressing on despite all that has been said. All we really need is for someone to write a book on 'How to fudge your MTDfITSA records'. Of course I suppose its title would have to be more like 'Learn how to do your MTD returns' but the thought is the same.
Not for me I'm afraid - I'm for out - perhaps I will take up writing. The really upsetting thing is that my taxes (and yours) are being wasted in huge amounts on such a stupid scheme. It's about as bad as the Test and Trace Fiasco. Just shows that Government Departments are totally useless at organising. I'll bet the cost of this in taxpayers' money not to mention the cost to taxpayers in wasted time and money in their own businesses will be about 10 times the extra tax they expect to collect but won't. What a pig's breakfast.

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