Making Tax Digital - in Defence of HMRC
One of the challenges in writing anything is to encourage people to read what you write. I thought an inflammatory title might be a good way to start. Hence I am following the structure of the Hegelian Dialectic and write a longer anti-thesis to the thesis of the House of Lords Select Committee (as reported on AccountingWEB).
The good news for those who don't like MTD is that soon HMRC is going to switch it off. The bad news for those people, however, is that they are switching it off to enable updating the software so that more people can use it. It is not clear exactly when more businesses will be able to join the pilot, but the system will be restarted on 4 December.
When the system restarts, however, the problem with direct debits will still remain. That problem is that if a tax payer pays by direct debit then they need to join the pilot scheme 3 working weeks plus 24 hours before the filing date (The payment date for VAT). This is really difficult for monthly submitters because there is a very small window during which they are after one submission and sufficiently far before the other. I have put more details on my website.
Many say they would rather not join the pilot for various reasons. However, although you can withdraw, it is really a good idea to implement as much of the MTD process as can be done whilst suppliers have plenty of spare time for support. The support for MTD comes both from suppliers and from HMRC.
My company (I own 100% of the shares as well as being CEO) has as its target market those normally smaller companies which are using spreadsheets for their accounts. We have already done live pilot scheme submissions for such organisations. The contra-argument to the House of Lords Select Committee report is that in practice MTD has been implemented in full for smaller organisations merely by putting a few links into spreadsheets so that the summary VAT 9 boxes is produced by Excel (or Open Office - Calc or Apple Numbers etc)
Although our pilot scheme is free, we intend to charge £20 per year for the first VAT number and £5 per year for each additional VAT number. That is substantially less than the figures reported in paragraph 145 of the House of Lords Report. In that HMRC estimate initial costs of £109 and ongoing costs of £43.
HMRC publish a list of suppliers here.
Although some charge quite a bit there are also others that do not charge that much. Hence the basic assumptions in the House of Lords Select Committee report are wrong. There is no reason why MTD should cost an arm and a leg.
It is important to understand that MTD for VAT only involves sending the same nine boxes of information to HMRC via the API as are sent either via the government gateway or through the XML system being used by a small number of taxpayers.
That does not, of course, mean that MTD is a total doddle for everyone. Some taxpayers will have to use a spreadsheet to keep their VAT records and then upload the summary to the net. Some cloud users may find that they have to also have a bridging provider to deal with FRS, Partial Exemption or Annual Accounting.
Obviously, I have a conflict of interest relating to MTD in that I am intending to make a profit out of it. However, as someone who actually writes software to interface with the API, I would claim that I have a good solid understanding of what the facts actually are.
Throughout the world, tax authorities are moving towards greater electronic reporting. For example, this report from Italy indicates that it is putting in a system where invoices go to the tax authorities before going to the customer as is Greece and these follow from reporting systems in real time in Spain and Hungary. This may be only where invoices are B2B in the main, but it is substantially more reporting than happens under MTD.
Why do it?
From a business point of view, I would argue that with the limited costs of £20 per year and the greater accuracy and speed of submitting vat returns is a benefit. For a firm of accounts doing multiple returns being able to automatically work out which returns remain to be done (according to HMRC records) and to speed up the process of submission is also an advantage.
From the public interest, there is a benefit in both the accuracy and the anti-avoidance benefit of a full audit trail including the formulae used for the calculations. That full audit trail exists for spreadsheet users as well as those using other mechanisms of calculating the figures for the return.
Some argue that they should not join the pilot because they can never leave. In theory, people can leave, but in fact, it has to date been so hard to join the pilot scheme that I am not aware of anyone wanting to leave. For those with quarterly submissions, we are almost into the final quarter of the pilot scheme anyway.
In the end, however, the resolution of the issues relating to the House of Lords report will fall mainly in how enforcement action works. I don't personally expect HMRC to take enforcement action against businesses who are trying to implement MTD. They are more likely to target those who are refusing to take any action. The first step from 1st April 2019 is to submit the data via the API. It is only from April 2020 that digital links are required.
Hence to light the blue touch paper, there is a merit in having a full electronic audit trail for submissions for VAT, the costs are not necessarily that high and benefits exist both for the businesses and also for the public interest as a whole.