Who will resist or embrace MTD?

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Jason Piper
Senior Manager, Business Law and Tax
ACCA
Columnist
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Jason Piper examines HMRC’s research into which businesses will be receptive to MTD for Business, and which will be resistant.

Past experience

On 14 January 2016, as a representative of ACCA I went to a meeting to discuss the government’s proposals for Making Tax Digital with the then Financial Secretary to the Treasury David Gauke and officials from HM Treasury and HMRC.

I took along a spreadsheet analysing the results of research HMRC had done into digital engagement, which mapped the conclusions onto the national statistics business population data. The figures were a bit rough and ready, but they contained some eye-catching highlights.

In particular, the proportion of taxpayers who regarded themselves as “digitally excluded”, whether by choice or circumstance, was significant, at around 800,000. Of those, fully 490,000 said they’d rather disengage from the tax system altogether than communicate digitally with government. So I was interested to read this research paper HMRC: Making Tax Digital for Business segmentation research which does a more scientific job of my initial estimate.

Latest research

The report is based on a weighted survey of nearly 3,000 businesses turning over between £10,000 and £10m and with fewer than 20 employees. It identifies five broadly similar-sized groups of taxpayers, which are given labels ranging from most to least accepting of the changes: Embracing, Receptive, Tentative, Reluctant and Resistant.

As I did back in 2016, the research team extrapolates from their sample the expected overall size of each group across the UK economy as a whole.

One immediate warning sign for accountants is that the largest single group is the Resistant population – a majority of whom said they’d make no effort to implement MTD unless there were penalties.

HMRC estimates the overall size of this group at 1.1m businesses, with as many as 670,000 in the “prefer to pay penalties” category. That’s an even less optimistic overall picture than I had found. From the way HMRC structured their research we know that these businesses are the most likely group to rely on tax agents for help and advice.

Focus on VAT

With the start of MTD for VAT less than eight months away, we really need to know what shape the VAT-registered population is in. Around 40% of UK businesses are VAT registered, but only half those registrations are compulsory – just one million or so. All the voluntary business registrations are going to be in our target population from this research, as the 250,000 or so turning over more than £10m will all be subject to compulsory registration.

The initial survey work for this project was done back in September to November 2016, when we were still expecting mandatory income tax MTD reporting to apply from April 2018, and details of the MTD for VAT regime were totally unknown.

Although the research asked which taxes respondents were registered for, and their turnover relative to the VAT threshold, it didn’t ask whether the VAT registrations were voluntary. While we might estimate that around 60% of the 1.7m VAT-registered businesses would be exempt from MTD, as they are voluntarily VAT registered, we’ve no idea which 60% that is.

Digging deeper

I looked at an earlier piece of research based on the same survey, released in December 2017, Making Tax Digital for Business: Survey of small businesses and landlords. One of the more surprising findings was that 5% of the respondents thought the only tax they were registered for was VAT. The researchers noted, “This is not technically possible, but findings are based on reported data from customers.”

That 5% of respondents isn’t recognised in the classifications in the current report, so I dug deeper and uncovered some other strange things.

The percentage of respondents declaring “turnover above the VAT threshold” suggests 1.7m businesses who should be compulsorily registered for VAT, but that’s also the number who report actually being VAT registered – leaving no room for voluntary registrations in the “below the threshold” population.

This suggests that as result of the weighting of respondents, effectively we are hearing more from compulsorily VAT-registered businesses, and have captured fewer voluntary registrants than should have been the case. For MTD preparations that’s probably less worrying than it being the other way around, but we still don’t know where the million or so of VAT-registered businesses who won’t need to implement MTD are sitting.

Are those businesses still VAT registered? A large number of businesses deregistered from VAT when the flat rate scheme was altered for limited cost traders from April 2017, which was after the survey data was collected.

Conclusion

Does this report help us specifically in planning for the MTD for VAT rollout?

It might help HMRC estimate its resourcing needs at a national level, and it may give the software companies some idea of what they can expect to contend with.

For accountants, the answer to that question is probably “no”. It’s almost certainly less use than your own knowledge of your clients.

About Jason Piper

Jason Piper

Jason Piper works in the Professional Insights team of ACCA dealing with tax and business law matters. His policy and research interests cover all aspects of the design and implementation of tax systems and their interaction with business form and the wider economic environment.

He represents ACCA at a number of international expert groups on tax and business law matters, convened by the UK Government, the European Commission, Accountancy Europe, the European Association of Craft, Small and Medium Sized Enterprises (UEAPME) and the Business and Industry Advisory Committee to the OECD (BIAC).

Replies

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03rd Aug 2018 17:59

I still do not know Exactly what MTD is supposed to achieve?
Not one of my (admittedly few) clients are aware of it- and I'm in no hurry to burden them with the details. If I did they would not be interested.
They have enough with AE, RTI, PAYE, CT, Data Protection etc. etc. etc. And all this at a time when our 'confidence' in HMRC is at an all time low.
It's like HS2- unwanted, intrusive, costly and totally the wrong solution.
I really hope Brexit scuppers this mad plan.

Thanks (7)
By Tornado
03rd Aug 2018 18:30

The research seems to suggest that no one has any real idea of what is going on!

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05th Aug 2018 13:32

Digital communication with government for statutory returns is clearly where we should be heading in the 21st century. The old system of paper returns sent by snailmail is history.

We're getting there, slowly. But the emphasis ought to be on 'slowly'. Mandation of MTD is the wrong way to go, especially when HMRC has not yet proven the systems involved, or set out the benefits to any party to the process.

A slow and steady growth in users would give time for the new systems to bed in and for teething problems to be solved. It worked for online end-of-year PAYE filing.

Contrast that with PAYE RTI, which is still a source of error, frustration and massive timewasting six years down the line from the pilot testing.

My own PAYE code for this year was laughably incorrect, because the HMRC system, six years in, had taken my annual salary (on a director-only, annual payroll) and multiplied it by about (not exactly) twelve to estimate my income for the year, then issued me with a tiny T-code to apply to my non-existent monthly payments.

And I helped a local granny the other day who had a P800 showing £600 underpaid last year. The system had allocated her allowances £-for-£ against her very predictable three private pension sources, but not allocated anything against her equally predictable state pension. Inexplicable does not begin to cover it.

Given the continuing issues with duplicate records and inaccurate coding after six years of RTI, with the automatic penalty regime still switched off because the numbers are so unreliable, I am not optimistic that MTD will have much chance of working as envisaged for some years to come. It will work in time, but not just yet.

HMRC should be brave enough to tell the minister that it can't be delivered as a mandatory regime to the promised timescale, and should allow businesses to join on a voluntary basis, before introducing staged mandation for increasingly smaller businesses over, perhaps, a five-year timescale from 2020. Resources diverted to preparations for Brexit (in HMRC *and* in business) would surely rank as a 'reasonable excuse' all round?

Thanks (13)
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06th Aug 2018 10:54

I'm not sure that digital anything is necesarily 'the way to go'.
Most of the small traders I deal with start from pencil and paper in doing quotes, making up billing etc. and then 'enter it into the system' because they have to, if only to send by email.
This is source nr. 1 of error - in transcription.
However, if you're going to force MTD into that arena then its got to be simple, predictable and easy to understand, and with an obvious benefit.
As far as I can see, for most of these guys its yet another invisible menace about to be sprung on them with zilch notice and information - and will be seen, correctly from their point of view, as just another HMRC ploy to screw them over for fines and hassle and spending yet more money to do HMRC's job for it.
It really dosnt matter how much you try to prepare them for it, their focus is on day to day real business of raising revenue - but aware that at any time HMG/HMRC will spring yet another cost/levy/admin burden on them, out of sheer bloody spite, and we'll deal with that on the day.

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06th Aug 2018 13:13

Osborne, who is not an accountant, said in his last budget that he would like to scrap the annual tax return. This is never going to be possible.
Unfortunately HMRC have really gone to town on this. If MTD ever starts, there will be a lot more work to do for everyone and no benefit as the due dates for payment will be unchanged. None of my clients have yet received any communication on it from HMRC with the start date for vat less than 8 months away. In my opinion it is doomed to failure and I shall be advising most of my clients to make a claim for exemption as they are digitally excluded.

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06th Aug 2018 16:12

I feel I/we in our firm have been duped. Alarmed at what was happening we have been pushing third party software to our customers like crazy. Almost bullying anyone with a year-end later than 30th June that unless they start entering into the software we are giving them they will run into trouble with their last VAT return next year. Now, on closer inspection I understand that there are systems that will accept data via Excel? This means that our customers that can`t be bothered to have to learn new tricks have been led down the wrong path. That, by next spring we can continue to file their VAT returns as now, though not through our agents site but just through a provider gateway. Total cost to us around £300 a year for unlimited. Or have I got it wrong again? Because I certianly got it wrong when I purchased 200 licenses in March thinking I was getting them at a decent price!! What a fool and paying £200 a month, telling people they MUST use ......... or all is lost? Well done .... and ................ all your urgency got to me. Fell for it like a? I`ll let you finish the sentence.

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07th Aug 2018 09:08

It's the lack of challenge that gets me. ICAEW, ACCA etc are all too chummy with HMRC and ignore their public interest mandate falling to actively challenge HMRC.

Mind you it's everywhere that you turn. Eg. Ad on radio to get a smart meter saying it will save you money. No it will not, getting a smart meter will save you no money whatsoever. Only turning lights off, using less etc will.

Same with MTD we are told it's going to reduce errors and close the tax gap. No it won't.

Just because you say it repeatedly doesn't make it true.

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to North East Accountant
10th Aug 2018 16:19

From the North East, it may seem there's a lack of challenge from the ICAEW, ACCA, etc, but that's simply not true.

I attended the launch event as one of the ICAEW reps, when the project was called 'Making Tax Easier' (it morphed into MTD immediately thereafter, when it was clear there was going to be nothing easy about it). I can assure you that nobody was, or is, giving HMRC a free ride, and the ambitions set out at that launch have already been scaled back drastically in the face of reality. The ICAEW has been pushing back against mandation from the outset - read the Tax Faculty's technical releases and condoc responses. The original MTD timetable has already slipped (quarterly business tax returns *were* going to start this year, and it's only VAT that's coming next year) . I have no 'inside information', but it may yet slip further.

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07th Aug 2018 09:35

I sympathise totally with you Lutondata. My own strategy all along has been to assume that MTD had as much chance of success as the Titanic in 1912 once the lookout saw the iceberg. Unless and until hard data consistently causes me to doubt this strategy, I will continue. If anything the hard data in the last 6 months - the pilot is a joke, for example - tends to provide confirmation of my strategy, not a cause for an about turn.

See my earlier posts for details on this strategy, which I call MTU - Making Tax Up.

Thanks (4)
07th Aug 2018 13:31

Interesting article Jason

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22nd Aug 2018 14:49

Ironically, I sat through another 45 minutes "advertorial" sponsored by Sage with accounting web the other day. Same faces with the same message. A quiet urgency to convert everyoneonto cloud book keeping systems. Totally ignoring mine and many other questions about bridging software. At the death it was reluctantly touched on. Yes, Mr Sage I would rather take someones figures and put them into an API rather than answer a 1000 questions of "Where do I put this in Sage" or "How do I do this in Sage" I tried, I really did and I failed. Thank goodness for the Clearbooks presentation today. It was honest and informative. It dispells all the hype about converting to double entry cloud systems. We can still use Excel and they have an elegant solution with their micro a hybrid. Just testing at the moment and it looks ideal. Rant over, for a while! P.S Taxcalc are developing an api and BTC and others already have it. So don`t get conned the way I was.

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