Government sleepwalks MTD into disasterby
In this MTD epic, tax expert Andrew Oury delves into recent updates of the MTD roadmap and analyses the material implications for small businesses and accountants.
By April 2022, MTD will cover all businesses that pay VAT, and by April 2026 corporation tax will be paid by all companies via MTD. Self-assessors will come into the scheme by 2023.
One of the main motivations of MTD appears to be to increase revenue by pulling forward tax payments, without the government raising tax rates.
In March 2021, HMRC commissioned Kantar to conduct qualitative research on the costs and benefits of MTD for small businesses. Worth noting is that:
- The sample size was small (31 interviewees), making it difficult to do a completely thorough analysis of the impact MTD has had.
- The “majority in the sample found themselves in a neutral position” in terms of costs vs benefits. Tor these users the benefits of MTD were counterbalanced by software costs and time spent learning, integrating and implementing it.
- The data was meant to be a multi-sector analysis, with a list of 19 possible sectors at the end. Nevertheless, over half the interviewees appeared in just two sectors.
The sector analysis was a particular weak spot in the research. MTD will affect cyclical sectors such as farming differently than a professional services industry, which has a more linear income model.
This could be a potentially major issue because of the time it takes to calculate corporation tax. All accounts are based
Corporation taxes are derived from accounting profits reported under IFRS or UK GAAP. Making the proper provisions and valuing stocks and impairments correctly takes time and to agree on what is recoverable. In some cases it’s impossible to put together compliant accounts in real-time.
For example an arable farmer with a 30 September year-end will face several questions:
- Are they going to be able to accurately estimate the amount of grain in their barn as well as its value in an instant? They could get somebody in to do this assessment, but are they all going to do it on 30 September?
- What is the lead time? Otherwise, the whole of the farming industry is going to have to stop at the end of September to work out accounts for the government and then pay the money over.
- How would the farmer go about estimating income quarterly? How would they know what to pay? Would it have to be some sort of estimate?
More recently, dry spring seasons have stunted crop growth and a wet autumn and waterlogged fields could curtail new plantings and harvest yields. Next year, growth may be perfect, but for some horticultural crops, an entire farm’s output could be wiped out by freak weather.
When even the Met Office is unsure about weather predictions a week ahead, how can HMRC expect certain businesses to forecast what it’s going to be like next quarter?
Add to this the poor broadband connection in some rural areas, and it’s clear MTD will present significant challenges to certain sectors.
When starting a new business, first-year profits are frequently invested back into the business, creating employment and stimulating activity. To have to pay corporation tax so soon could stifle entrepreneurship.
With a greater onus on recording transactions swiftly and correctly, the burden of proof falls on the company or self-assessor to explain any anomalies in the tax year. For the most part, however, these entities are not qualified tax professionals.
They do not have the years of training required to protect their business properly, so tax breaks could go unclaimed while avoidable errors are penalised by HMRC.
The Kantar research found that employing an adviser to help a small business input the data correctly alongside quarterly fees for an accountant to enter the VAT returns and the cost of the software package to do so created a worst-case scenario.
And many entities might well end up consulting an adviser for corporation tax returns.
Bumps in the road for HMRC
The MTD rollout begs the question of what would happen if a taxpayer overpaid their quarterly tax. HMRC says that income tax rebates are generally completed within 8-12 weeks and it’s unlikely that process is going to speed up.
It’s not just because of an institutional reluctance to give back money, but because of due diligence and legislative red tape. This could leave us with a traffic jam of tax rebate requests that will only get worse.
Thinking back to our farmer example, HMRC could look at their average profitability over whatever timespan and say this is how much they owe per quarter. If that farmer has had a bad year and claims a rebate, how will that work year in, year out?
There are many of these examples; take Christmas cards and crackers or fireworks (or any festive item). These industries need to invest and invest and then fit all of their sales into a very short period – they cannot even out the cycles that underpin their business.
The pandemic illustrates how harmful MTD for income tax could be. Some people paying their quarterly income tax on account would have ended up suddenly losing their businesses. How would the government deal with the sudden deluge of tax rebates at a time when it really needed the money?
There are security issues to think about. We were concerned to see that on the very first page of suppliers listed, one of them doesn’t use a secure SSL certificate (https) for its website and, more egregiously, its login page. Given how sensitive the data being inputted is, this is very troubling.
There are several ways a fraudster might be able to get access to the credentials of somebody logging into a poorly secured website. That scammer could interfere with VAT returns for the month, which might take HMRC up to 30 days to reimburse. This could have a serious impact on a small business and would be exponentially worse if it was MTD for income tax.
The question is, does the software provider take any responsibility if their poor internet security was responsible for the taxpayer being penalised? Should they be answerable?
Interrogating the software providers
The government does not provide MTD as a direct service. It is a legal obligation for the taxpayer. The only service HMRC provides is an application programming interface (API) for the software providers. Private software providers are facilitating the service for the taxpayer/adviser.
It seems like an obvious distinction, but it becomes more relevant as we scrutinise the position of the software companies in this relationship.
HMRC lists more than 500 professional software companies that supply MTD for VAT products, but there is little to no help from them when it comes to choosing the provider that may be right for you.
If they are not going to be answerable to HMRC for any failings on the website, then we believe that they should be compelled to adhere to secure IT practices, either by some legislation or by some sort of ombudsman.
IT best practice is not the only area that is worth focusing on. Financial software is by no stretch of the imagination a novelty; it is the real-time connection to HMRC that has truly changed the nature of the software provider.
It is unsurprising therefore that these providers leapt at the opportunity to adapt their business model and attract more customers. Many claim that in using their packages, the user will save on costly accountancy fees.
The death of the accountant?
Software providers promote their software by saying how easy it is to use and how it will solve tax problems at a few clicks of the button. This rhetoric is dangerous. Software companies are lulling people into a false sense that they can rely on the software and don’t need expensive advisors.
But the truth is rather different. You cannot know a payroll has been correctly run or a tax correctly claimed unless you understand the law and rules involved. You very much do need to know which box to tick, or button to click.
So taxpayers are being encouraged to move away from professional services providers and work more directly with the software to calculate tax liabilities that will be due immediately. Trying to unpick an honest mistake when they put in their accounts “wages” but meant “dividends” is going to be all but impossible. And HMRC could further hold them liable for their errors if it deems they acted in a negligent or even fraudulent manner.
Some providers say that they have accountants on staff in order to reassure the users. However, when looking through the staff lists of many of these providers some of the most senior staff positions were occupied by junior accountancy professionals or ones who hadn’t even qualified yet.
As software providers flex their muscles more and more, users will also expect from the software companies a measure of decent tax advice. Although this cannot compare to a qualified tax professional giving direct, experienced advice, understanding how that advice is going to fit into the framework of professional standards will be an ongoing challenge.
My concern is that the government hasn’t considered the full ramifications of the MTD project. To my eye, it looks like MTD has been designed with a linear mindset that only has one goal: to meet revenue targets. Businesses have always had idiosyncrasies – unexpected periods of fallow earnings, for example – and, up until now, there has been some leeway in coping with them within the comparatively rigid tax framework. I also would hate entrepreneurship to be stifled in this country as a result of taxing income too rapidly.
Serious questions will need to be asked of this initiative to avoid sleepwalking into disaster.