Don't resist MTD for the wrong reasonsby
Am I in a minority of one in cautiously accepting and even embracing HMRC’s Making Tax Digital initiative, asks Charlie Carne.
Andrew Oury’s article arguing that HMRC was ignoring the impracticalities of MTD and sleepwalking into disaster drew a lot of supportive comments from AccountingWEB members last week.
I beg to differ, however, and so did a couple of other members. While Andrew did raise some genuine points of concern around security, he made the mistake of conflating MTD with quarterly payments. The motivation behind MTD, he suggested, was to raise more taxes by collecting them much earlier rather than raising tax rates. There is a government call for evidence on the possibility of quarterly payments but, even if they do become a feature of the tax system, that’s not an argument against MTD. The figures submitted quarterly might help HMRC to calculate the liabilities, but I’d argue that the underlying purpose behind the digital tax initiative is not about payments, but to change the way businesses keep records.
Yes, some firms will face a challenge to keep more up-to-date records in an electronic format, but larger businesses already keep regular quarterly or monthly accounts, so MTD doesn’t pose a much of a problem for them. My stance is that the benefits for small businesses of compiling quarterly accounts for MTD will ultimately outweigh the drawbacks.
Lack of understanding
That’s not to say that MTD is a complete triumph, but any criticism of the initiative should address what it is trying to achieve rather than attacking it on false premises. When MTD was first mooted in 2016, I remember attending a meeting at the Treasury where the focus was aimed squarely at income tax and not VAT. The lack of understanding from HMRC and the Treasury on how this would work in practice was most obvious when an HMRC official told a room of practising accountants that we would no longer need to file an annual tax return for our clients, as we’d just file a simple report five times a year.
No matter how few the data points to be filed, we are still filing a tax return and are required to be conscientious and accurate in so doing.
The business (and its accountant, if it had one) would still have to work on the accounts four times a year, instead of just one (for non-VAT registered businesses). Like most of the profession, I was deeply concerned that our workload would be potentially quadrupled. I welcomed the switch to VAT as the initial implementation of MTD with great relief, as this did not require any additional filing, but merely changed the method by which we filed the familiar VAT return. HMRC had clearly recognised the mire into which it had stepped and sensibly realised that it made sense to proceed more cautiously.
As with most government IT projects, the initial implementation was a disaster. Creating an Agent Services Account (ASA) and linking it to HMRC’s old VAT mainframe system was far from intuitive. Two years in, however, the system now works pretty well.
Focus on record keeping, not filing
Since MTD for VAT still files the same nine boxes on the return, some accountants question the whole rationale for MTD. But they’re missing the point entirely. The purpose of MTD is not to change the way in which the data is filed, but rather to change the way businesses keep their records. By forcing filing via compliant software, HMRC can ensure that the business is keeping digital records and not simply grabbing a bunch of receipts once a quarter and adding them up (unchecked and unreconciled) and filing nine numbers via an online form.
If a check is made on the return, the software ensures that each field has an inbuilt analysis of every transaction that comprises the total. This was not the case pre-MTD for businesses that did not keep meticulous records.
The argument for MTD
Why do I now welcome MTD? Previously, I struggled to persuade some smaller businesses to use a proper accounting system, but now they have no choice. I benefit from being able to work from proper records, maintained throughout the year and I no longer have to prepare all of the quarterly accounts in the few, short days before the deadline when my client deigns to present the data to me.
AccountingWEB member Self-employed and Happy made the same point in a comment on Andrew Oury’s article: “All of our MTD clients are up to date within 14 days of every month end, along with a rolling CT estimate… This is the type of service accountants should be moving to for the majority of their clients if they wish to remain relevant.”
Like “Self-employed and…” I am fortunate in working with IT-literate clients who aren’t afraid to use a computer. My view would, perhaps, be entirely different if I had a rural practice with elderly clients who didn’t even use internet banking.
MTD has led to significant change in the accounting software industry. As well as the big players in the bookkeeping space (QuickBooks, Xero, FreeAgent, etc), tax software providers such as Taxfiler and TaxCalc also produce MTD-compliant VAT filing and reporting tools. In time, and as HMRC opens up more APIs, I expect that this software will gradually add more reporting functionality.
Instead of struggling with HMRC’s appalling reporting, we can choose from a range of third-party software providers who will compete to give us what we want. The old HMRC mainframe, for example, was never able to tell the accountants via their agents’ logins how much VAT had been paid. As a result of MTD and ASA moving onto HMRC’s Enterprise Tax Management Platform, accountants will soon see the same data that is available on their clients’ own tax accounts, including details of payments and assessments, making it much easier to reconcile our figures to those held by HMRC. Payment information will be available from launch for MTD for income tax and is being introduced over the course of 2021/22 for MTD for VAT.
We now need to ready ourselves for the imminent launch of MTD for ITSA. This is a much more extensive project and will require even more small clients to use software throughout the year, rather than having them gather up their paperwork as an annual project.
I don’t pretend that I’m not concerned as to how this will work in practice as we will now have to file four times as often for each client. However, the biggest criticism that I hear about this – that the data will be meaningless until we finalise the year-end, as it won’t include provisions and adjustments – is entirely unfounded.
In all the recent MTD sessions I’ve attended recently, HMRC officials made it clear they don’t expect or require any adjustments to be made mid-year. As I explained in relation to MTD for VAT, the purpose is not to produce an estimate of quarterly profits, but to ensure that taxpayers are maintaining proper records in a digital form. There is no requirement to make quarterly adjustments; if you have not done so, you can still tick the box that the return is accurate from a transactional basis, not an IFRS-compliant basis.
In the long term, I suspect that HMRC will carry out their initial tax reviews via direct access to the digitally connected accounting software. With some adjustments to tax legislation, this could lead to a requirement for all invoices to contain unique identifiers that HMRC could track, ensuring that every cost deduction and input VAT claim is matched by an equivalent income and output VAT declaration in the supplier’s books. I’ve had client VAT inspections where HMRC asked for specific sales invoices from my client to ensure that these matched what had been claimed in the books of another business that had been inspected. If this could all be done online and via automatic processes, HMRC could spot more fraud and do so much more efficiently.
With less than two years to go before MTD for income tax becomes mandatory, shouldn’t accountants stop complaining about it (especially for the wrong reasons) and get on with planning and implementing how they are going to manage the transition instead?
By all means look for potential troublespots and be cautious about how you approach the project but, just as importantly, devote some rational thought to what MTD is trying to achieve and recognise that there might be some benefits for your clients in complying with it.