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MTD pushes practitioners towards the exit

16th May 2019
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Since the initial announcement about MTD there have been voices in the profession proclaiming the final straw, and that time was probably up on their life in practice.

AccountingWEB has seen regular comments along those lines, often citing great frustration with the change management required for clients, additional workload, cost, perceived self interest by the software suppliers, and of course various inadequacies of HMRC.

But what is the picture actually like? Has there been a flood, a steady flow, or just a trickle finally calling it a day?

MTD has had an impact

Jeremy Clarke from ICAS, who helps members at times of buying or selling their business, is clear that MTD very much played a role. “Once things became clearer a year ago there was a significant change, and we saw a three times increase in the number of firms interested or ready to sell – most of which were sole practitioners.  

Supporting time-consuming and complex implementations of new requirements has been relentless: self assessment, RTI, auto enrolment, GDPR, AML and now MTD. It hasn’t been easy.”

Nicola Draper, director of broker Drape Hinks agrees. “MTD has been the final straw for those already under pressure and who see too much emphasis on systems and not relationships. A real consequence was that in 2017 there was a buyers’ fatigue with so many practices coming on to the market which drove the prices available right down, although it has recovered somewhat.”

Delay and implementation has bought a lull

The delay in mandation and the focus on VAT has certainly helped to stem an even bigger rush to market. “If you’re a small practice with not many VAT clients, especially with bridging software options rather than migrating to the cloud, things are a little more manageable than first suggested. So there are still people wanting to sell, but it’s not quite as busy at this point,” explained Clarke.

Draper develops this further by suggesting a practical timeline has also played a part. “There is much more activity to come as those that decided to sell around September/October wait until after they become compliant and mandation has come into effect. The buying and selling cycle takes six months, and little happens around December and January anyway. So the choice was to embrace what needed to be done and pick up again in March and April, which is what is happening”.

Being MTD ready goes beyond client systems

Through mandation firms have had to adapt, and although there has been an obvious focus on helping clients, the general attention to internal systems is a big factor in M&A conversations.

“We ask sellers to tell us what systems they use, and to be clear and about to what extent they are MTD compliant,” said Draper. ”Process is highly valued (even more so now) and impacts on what buyers are prepared to pay.”

Looking to the future, Clarke sees this as a trend that will continue. “There will be more consolidation in the midmarket, and smaller firms subsumed. But this depends on how well prepared people are too implement the next phases of MTD, not just VAT.”

This presents significant growth potential for others. “The flip side is that those that are geared up for it have a real opportunity to grab market share, even with lower margins by leveraging the tech," continued Clarke. 

“With the benefits of great process and structure of the practice – you can do compliance work very efficiently. And there’s no sign that the volume of work will disappear.”

Draper recognises that for the proportion that is already struggling to make the changes, widening the scope of MTD is also widening the gap between them and potential purchasers. “Buyers who are very digital and process driven get frustrated with sellers who are in this position – it’s almost a different world, different attitudes, and even different language.”

Multiples and pricing in the future

So what about the value of practices moving forward?

For Clarke, the equation is quite simple: the more you can demonstrably be seen as on top of however MTD progresses the greater the opportunity to maximise the sale price.

“A buyer who has to do the heavy lifting just so that they can get the margin from compliance moving forward will have the whip hand. So, being MTD ready (period) is the way to drive value and as a consequence, I do think multiples will increase. If you’re not then your multiples will go down. But even now we’re starting from a relatively low base.”

Interestingly, one of the lures of a more digital tax regime and digitalisation, in general, is the potential for greater insight-driven work, regular client contact, and higher margin services.

However, these ‘basic advisory’ type services may not actually increase what you can get in terms of the sale price.

“We can only sell the recurring fees, and we may still be selling the recurring compliance in the future,” said Draper.

“Some buyers may buy on profit or EBITDA, but this is still unusual for the majority of the market. If you can incorporate your services into a monthly fee then this may be fine, but not advisory based on one-off projects or ad hoc billing.”

Too early to evaluate just yet

We are of course only in May 2019, with the first cohort of mandatory filing filtering through now. So it may be too early to see if there has been any ramping up of those deciding that the digital tax world is really not for them. However, Clarke has a feeling time will quickly tell.

“The real crunch point will be in August. There will be a period where people will see how things have gone and relax a bit, and maybe decide it wasn’t so bad. However, the fear will be that it may also encourage the government to go further quicker.

“It will happen in due course anyway, but if the timing is not realistic then it will cause problems for the profession and business - and then we could some really interesting activity.”

Replies (71)

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Replying to mr. mischief:
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By johnhemming
18th May 2019 14:17

There is a good argument that the first to dominate a market can get a strong defensive position, but I think the experience of Google and Amazon skews the thinking of investors.

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Replying to mr. mischief:
Locutus of Borg
By Locutus
18th May 2019 13:29

Although presumably if Xero got into serious financial difficulties (and couldn't raise any new money), its share price would collapse and a competitor would buy them out on the cheap.

The new owner might then slash the company's probably bloated marketing budget and exit poorly-performing markets to turn a profit.

As far as the end user is concerned (in the markets that Xero remains in), they will still be able to use the product.

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Replying to Locutus:
Chris M
By mr. mischief
18th May 2019 13:31

Yes, that is no doubt what Marconi shareholders thought too. To name but one of many possible examples.

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7om
By Tom 7000
18th May 2019 13:52

How strange., getting clients to install an addin to xl (bridging software) takes 10 minutes. I am not sure what all the fuss is about....

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Replying to Tom 7000:
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By johnhemming
18th May 2019 14:33

If people start with handwritten accounts there is a bit more to do.

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Replying to Tom 7000:
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By GHarr497688
19th May 2019 15:58

The fuss I think is that bridging was never the intention and so Hmrc moved to goal post which is unfair and taxpayers who have never used spreadsheets struggle with them .

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Replying to GHarr497688:
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By johnhemming
18th May 2019 17:16

You are right that spreadsheets are not necessarily a simple option. When people have to get the formulae right they often get them wrong.

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By North East Accountant
20th May 2019 12:14

All Xero has to do is increase prices, reduce innovation and marketing spend, and hey presto, making lots of money.

This will happen as sure as night follows day as it's all about land grab at the minute.

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Replying to North East Accountant:
Chris M
By mr. mischief
20th May 2019 13:13

That's all JDS Uniphase and Friends Reunited had to do, too. To name but two failed software companies from the noughties.

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Replying to mr. mischief:
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By North East Accountant
20th May 2019 15:08

Only history will judge who is right Mr Mischief....and then I can say I told you so. Or eat humble pie!

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Replying to North East Accountant:
Chris M
By mr. mischief
20th May 2019 16:39

I am not saying Xero will bust. What I am saying, though, is that the egos of the Board are leading them to pursue a "bet the house" business plan, when more sensible options are available which will provide a faster return for shareholders and hence secure the jobs of their staff.

I sold RBS shares at a loss when they took over ABN Amro. That was very clearly an ego-driven, bet the house business plan which ended up just about losing the house.

Nobody can claim Xero is conservatively run, whatever other claims they can make about it

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Replying to mr. mischief:
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By Ken Howard
21st May 2019 07:55

I'm already an accredited accountant for Quickbooks, Kashflow, Clearbooks and Freeagent. Joining their accountant schemes was easy.

I tried a couple of years ago to join Xero, but found it impossible as they don't have telephone numbers and you can't just click through their website to create an accountant account. It's all filling in an online form and waiting for a call back, that in fact never came, so I just forget about them. Over the last month, I've again tried to join Xero, but despite filling in their online form every week for the past month, I've not heard anything from them and still there are no telephone numbers to ring.

Not impressed at all, so shan't be bothering anymore and will stick with the other cloud options we already use.

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Replying to mr. mischief:
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By Ken Howard
21st May 2019 07:55

Duplicated post-ignore

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Replying to Ken Howard:
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By david.bransbury
21st May 2019 09:09

Very surprised at this.

Xero's business plan is to sell/entice their software to the accountants and who then become advocates to their clients (the cult method). Even their TV advert says "speak to your accountant".

Interesting to see if you get a call as we know someone at Xero will read this.

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Replying to mr. mischief:
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By david.bransbury
21st May 2019 09:16

Friends Reunited was sold to ITV for £120 million. I don't think the original owners were certainly failures.

(A mate was offered a position in the company in its infancy. It has some regrets in not taking it!)

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By Ken Howard
21st May 2019 07:51

"Sorry there is a problem with the service" is the webpage we've been getting from HMRC when trying to register and activate clients for VAT under the new ASA. Says it all really.

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By david.bransbury
21st May 2019 09:55

My views are

1, Bridging software is here to stay
2, However long term it would not be used for general bookkeeping but for calculations most software cannot cope with such as partial exemption, group schemes etc.
3, As more information/taxes become required to be filed under MTD, Excel will become less of an option than for the die hard Excel users. Putting manual record client onto Excel may be a short term gain but a long term pain.
4, Firms should not underestimate the CGT changes coming in next year. For those practitioners who do respond well to change the 30 day reporting and paying of CGT on residential properties from next year may be another "nail in the coffin". Of course we will be at fault if a client gets a penalty, we should of been mind readers.
5, On here we often get the comment I can't get my clients on the cloud as we don't have reliable broadband in our area. 5G is coming (ignore what Trump says it will be g0ing live in the UK at the end of next month).

Finally I have tried to put lots on people on cloud software over the last few years. In my experience I think it is wrong to assume the older generation is not willing to change but all youngsters are up for it. Even clients who work in the IT/technology businesses some try to avoid cloud use as much as possible while others want to be 100% cloud for everything.

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Replying to david.bransbury:
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By GHarr497688
21st May 2019 11:32

Having to try and work out what the future holds and what different ages wants or does in itself shows this process of MTD isn’t working well . What you say is fair enough but I keep saying what MTD was introduced for is not happening so Hmrc should make a public statement as to why 80% of taxpayers are struggling and that’s before it goes to other Taxes !!

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Replying to GHarr497688:
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By johnjenkins
21st May 2019 12:30

MTD is not for the tax payer, it is for HMRC. All transactions from every business will be tagged. Then algorithms will be set up to analyse every business and hey presto, HMRC will bombard us with umpteen different scenarios that they think should have happened and penalties galore if you don't reply to nonsensical queries.

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By Neil Daws
26th Jun 2019 12:35

Sole Practitioners need to think seriously about shedding their large MTD-affected jobs. It won't be long before the local HMRC Compliance Offices commence their 'surprise visits'.

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