How MTD stifled practice innovation

When George Osborne infamously declared the “death of the tax return” in 2015, nobody could predict the very-slow-moving car crash that was about to happen. Eight years later, the digital tax transformation project has undergone multiple delays and faced a flurry of criticism, but the tax return is still very much breathing.

While Osborne’s original vision has yet to come to fruition, Making Tax Digital (MTD) has regardless had a profound impact on the accountancy profession. The irony is that while the then Chancellor hailed the digital project as innovating the tax system, an argument can be made that it has actually had the opposite effect. 

Practices have had their hands so full with getting clients prepared first for MTD for VAT and then the proposed start date of Making Tax Digital for income tax self assessment (MTD ITSA), that there was no time for anything else. 

Innovation sucked into the MTD vortex

Data from the Accounting Excellence Awards entries shows the sharp rise in firms putting cloud accounting systems in place as a result of the MTD effect. But for many firms, this is where their innovation started and stopped. The demands to get ready for MTD narrowed the firms’ ability to explore the tools.

According to the founder of Accounting Excellence Award-winning firm Farnell Clarke and cloud pioneer Will Farnell, there has been a pause in tech innovation compared to the pre-MTD period. “There’s people that had gone out and put clients on Xero and QBO, but had not put them on a Dext or an Auto Entry, so they’re kind of missing the whole point.”

Similarly, Alex Falcon Huerta from Soaring Falcon Accountancy said the panic from firms to adopt cloud tools as part of the initial push to get ready for MTD created a situation where some firms were just doing the bare minimum to comply.

Reflecting back on the HMRC roadshow in 2018/19 that she attended, Falcon Huerta remembered how “people were just scared about getting their books in the cloud. I still hear from firms that don’t want to go any further with digitalisation because they found it hard.”

So while MTD acted as a catalyst in pushing firms online, the real tech adoption appears to be low. “They’ve been told that what they’re doing is tech innovation, but they haven’t adapted their service model to say, ‘If we’re going to use those tools, we’ve got to fundamentally change how we use them’,” commented Farnell.

Where is the innovation?

The obsession with MTD also clipped the wings of cutting-edge firms. Glenn Martin, the founder of Avery Martin, has noticed a lack of innovation in the aftermath of the delay. “To lead as an accountant, you really have to be doing the next big thing, and at the minute, what is that new thing?” he said.

“A lot of the software vendors switched all their focus to developing MTD products, and didn’t develop the core products, while practices spent a lot of time testing other apps for MTD and cleaning up their client bases,” said Martin.

The time lost to MTD created a situation where more firms were able to catch up with the original pacesetters, which for Martin has made it more difficult to differentiate himself. 

“I used to always think we were towards the front end of the game. But at the minute, I just feel we are just like any other accountant now. Everybody is using the same tools and there’s not new stuff really coming through. We haven’t got a unique offering anymore, whereas five years ago, we did,” said Martin. 

It’s not just MTD that’s stifled innovation. Along the way it’s had to take the back seat for the pandemic, which caused firms to drop everything and support their small business clients with furlough claims and self-employed income support scheme support. 

Then the aftermath of Brexit meant firms were spending far too long getting their heads around the complexities of VAT rules and treatments after the UK left the European Union on 1 January 2021, and not enough time thinking about client experience. 

Throw in additional admin headaches from GDPR and anti-money laundering compliance, and it’s no wonder innovation has stalled for many firms and they haven’t shifted out of their first gears of cloud innovation. 

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What has MTD ever done for us?

This paints a bleak picture of the current state of innovation. Not wanting to go on a “What have the Romans ever done for us?” monologue, but there is a lot to credit MTD with. 

When Osborne made the announcement in 2015, only 42% of Accounting Excellence entrants were talking about the cloud. In 2016 that number jumped to 57% and then skyrocketed to 73% in 2017 and by the time the pandemic hit in 2020 and firms needed software to support remote working, that number had climbed to 89%.

Running alongside that upwards trajectory was an uptick in adoption of expense capture tools and practice management apps, as the demand of MTD galvanised firms into looking towards technology to support them with challenges of collecting client data and an increased workload.

Meanwhile, the shock of the pandemic forced firms to embrace remote working, flexible working and video conferencing software.

But while these steps are positive, the stop-start nature of MTD has stopped the average accounting firm from going all in and sharpening their continuous improvement mindsets. 

As such, Farnell maintains only 20% of the profession have adopted the core cloud technology, and only 20% of that figure could be considered within the digital vanguard and have the rest of the cloud solution right too. “It’s almost as if we’re waiting for the firms to catch up with the leaps that were made from a technology perspective five to six years ago.” 

What’s next?

Another twist in the MTD story happened at the end of last year when the Treasury delayed the digital project for a further two years. The “death of the tax return” has been pushed back until April 2026, giving firms extra space to not only get on track with their plans but also to innovate. 

They have finally been given breathing space, without the distractions of a pandemic or Brexit, to focus just on their practice without the ominous ticking time bomb of MTD. 

As Falcon Huerta said: “People have to go online, not just because of MTD but because of their own business reasons, and have all of their information in the cloud so they can make decisions through real-time reporting.”

Meanwhile, Martin believes firms will use this period to focus inward and get their business more streamlined, such as getting their “practice management singing. Because for many accountants, it’s currently only doing half of what it’s capable of, because they’ve just not had the time to do it.”

MTD ITSA has not gone away, but the pressure has. Practice owners can now use the time to identify efficiencies within their own practices, examine their people, clients, processes and strategy, alongside their technology offering. 

For the first time in a long while firms have the opportunity to break away from the average and embrace practice innovation again.

This article is an extract from our new editorial special report: “The practice innovation handbook”. Download it now to access expert advice and real-life examples to help you identify areas for improvement in your firm and make changes that will drive innovation and boost efficiency.