Spreadsheet accounts at risk in MTD ITSA plansby
HMRC’s iterative approach to Making Tax Digital for income tax software specifications is raising concerns within the profession that key principles and legal conditions - including the use of spreadsheet accounts - are being left behind.
The rumble of software previews from developers working on Making Tax Digital for income tax (MTD ITSA) products is posing more questions than answers this spring.
Xero and QuickBooks both announced their plans earlier this month, but when AccountingWEB checked HMRC’s MTD ITSA software page to review progress across the wider industry, four previously “Available now” products had dropped down to the “In development” section.
As Xero tax compliance manager Stuart Miller told AccountingWEB, HMRC had “decoupled” its production requirements, so that developers could get credentials for a single step, or the entire MTD process from quarterly updates through to the end of year submission (EOPS) and the finalisation state, where adjustments and allowances are applied to generate a tax computation from HMRC.
Change of tack
When HMRC changed tack in December, however, its developers also retired a number of the application programming interfaces (APIs) on which pioneering ITSA developers had built their products.
One of the names missing from the “Available now” list is IRIS. Jenny Strudwick, tax product director at IRIS Software Group explained: “We did have all functions available in 2018 and had customers who successfully tested all the processes. During the past four years, HMRC has learned and made slight changes across all the APIs involved.”
As a result, developers had to test their latest MTD ITSA code against new APIs.
Now they’ve seen a lot of that work undone, MTD software suppliers are a little cannier about their product development plans and are encouraging HMRC to take a more agile approach to the project.
The web-oriented agile approach takes on large and complicated projects in short bursts and then tests and refines the end product as the project evolves. It’s rapid and flexible, for sure, but the ultimate project objectives and governing principles can sometimes get lost. The “suck it and see” philosophy is also creating a vacuum for the definitive guidance that tax advisers rely on.
Updating quarterly statements
The HMRC MTD ITSA software list isn’t the only anomaly to emerge in recent conversations. Xero’s approach, for example, is based on correcting omissions and errors in quarterly submissions and writing them back into the Xero ledger. As Miller acknowledged, the EOPS software journey document Xero’s programmers followed includes the instructions: “If the information the customer has previously provided relating to that source of business income is not correct or complete… then the EOPS declaration is rejected, and error messages are returned. The changes must be made to any relevant periodic or annual summaries and then follow the existing process of submitting updates and triggering the calculation before attempting the declaration again.”
After completing their EOPS declaration, if taxpayers need to revise anything on their business income records, “Then they must make the change to the relevant periodic or annual summaries,” the guide explains.
But the software documentation is at odds with the current legislation, Statutory Instrument 1076 on omissions and corrections.
The law on this point is surprisingly clear: “[If] a quarterly update is provided to HMRC which contains incorrect or incomplete information; and an end of period statement has not been provided for the relevant period to which the quarterly update applies, the relevant person must provide the correct or complete information in the next quarterly update or end of period statement.”
Xero chose its path to satisfy the software tests, but a poll of other developers revealed a broad range of responses to the situation.
BTCSoftware director Rob Ellis offered this interpretation: “When they first released the MTD ITSA end-points [the target and source of any API calls], there was no ability to amend, so they always had to be corrected in the following period. The end-points now do allow in-quarter amendments.”
Although there is a disconnect between the statutory instrument and the APIs, Ellis said, “If the API supports something, then we will use it.” While BTCSoftware can write back to some accounting ledgers, he continued: “Not all agents have all their clients on one platform. As we do with VAT, we support a variety of digital links into our MTD products including CSV imports and a spreadsheet option for those who don’t use a bookkeeping solution.
“As long as the spreadsheet is designed in the right way, you can amend the data and resubmit it to HMRC as a retrospective update. It’s not an issue, it’s just one submission you’re repeating.”
At QuickBooks, UK lead product manager for tax and accounting Tom Menzies recognised that HMRC needed up-to-date income and expense data from taxpayers to feed an accurate tax calculation back down to the filing software. “If information changes after submission, you can go back – it’s not like VAT. This is an annual journey - you can update HMRC when new information comes in - and you can also update/correct at the next submission,” he said.
Spreadsheets at stake?
HMRC’s promise to accept spreadsheets as digital records was made in February 2017, before the MTD project switched its focus to VAT. As a result, many within the profession, including TaxCalc’s Dean Shepherd, are convinced that spreadsheets will continue to be supported within the ITSA roll-out.
But the ability to reconcile and write back adjustments to the original accounting records would challenge many informal spreadsheet bookkeeping systems, their users and the tax agents involved in the process. As North East Accountant commented on the Xero MTD ITSA article: “This has huge ramifications. If it's the first one then never mind four quarterly updates, there could be tons… for every income source.”
Kevin Ringer added: “HMRC failed to consider how clients operate in the real world. Joe the Plumber might actually use QBO for his plumbing business, but he’s also in partnership with his brother in another business which uses Xero. And he has a rental property in joint names with his wife and she uses a spreadsheet and bridging software. How is all this software going to work together so that Joe files a tax return is beyond me.”
Tom Menzies at QuickBooks remained confident that the current definition of digital records would be valid under MTD for VAT and ITSA. “MTD is a programme of providing digital records… I can’t see why that definition would not hold and why an Excel system would be ineligible.” Looking at the scenario described by Kevin Ringer, Menzies commented: “They’re going to want to keep all these [separate] records outside of the books and not muddy the waters.”
How to handle multiple sources of income within the end of period statement and align the finalisation statements to original records are complex questions that don’t have any answers yet.
Like BTCSoftware and QuickBooks, IRIS MTD ITSA software will support both in-quarter and subsequent amendments, with write-backs to the original records. Cirrostratus, Forbes Computer and tax lecturer Rebecca Benneyworth, meanwhile, are sticking to what’s written in SI1076 and relying on amendments submitted in the next period.
And here lies the curse of agile development. By allowing a wide degree of flexibility to market-driven solutions, HMRC has delegated a lot of responsibility for MTD processes to software developers who are interpreting the guidance in their own way.
Dean Shepherd at TaxCalc voiced concern that the way the regulations were written could “inadvertently” affect the rules and undermine the role of spreadsheets. “Along with Rebecca Benneyworth, I’m confident that common sense will prevail,” he said.
“I still think there’s a place for spreadsheets in MTD for the right clients. Property clients are the greatest risk for getting ready for MTD and spreadsheets will be the path of least resistance to get them ready.”
HMRC guidance due
This confusion is not helping accountants and businesses who are making plans for MTD ITSA and trying to decide on appropriate solutions to meet their needs - including digital record-keeping systems. All the while, the clock is ticking towards April 2024 and cutting down the time that developers, agents and taxpayers have to implement, test and refine their process for the new filing mechanism.
AccountingWEB approached HMRC with the following questions relating to issues raised in this article:
Following the logic of the software journey documentation and how it's been implemented by some developers, will HMRC require quarterly updates and EOPS to be reconciled?
No. EOPs is a declaration against a summary total of all the information sent over the year. It is not a separate submission.
Are any changes being planned to update the secondary regulations on this point?
We believe there is no requirement to update the secondary regulations on this point. The guidance provided to developers is consistent with the regulations.
Will the principle of digital links be the same for MTD ITSA as for VAT, or are the requirements changing as the software spec develops?
Yes. The exact detail will follow in the ITSA Notices, which will be published this summer. We will consult with stakeholders before publishing.
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AccountingWEB’s Editor at large has been with the site since 1999, rising from news editor to editor in chief, global editor and head of insight. As a roving editor, he continues to investigate the profession's use of technology around the world. He devotes his spare time to technology history and an oddball collection of stringed instruments...