These both set out to allay fears about the MTD procedure. But to really make the inevitable work, it’s time for practitioners to contribute to the debate, say Philip and Sarah McNeill.
The digital vision
The future is going to be digital. Digital has the potential to provide more regular payment of tax; simpler, more cost effective processing for HMRC; earlier receipt of information to check against its growing store of bulk data; and more opportunity for earlier intervention. So at one extreme, we have a future with quarterly digital accounts prepared on a tax basis, with quarterly payments of tax based on actual results in real time. But how do we get there? And how rapidly?
Myth-buster and case studies
‘Myth-buster’ (published on 25 January) looks at five supposedly common misconceptions about MTD. That:
- Businesses will need to do four tax returns a year
- MTD doesn’t consider those digitally excluded
- Most businesses don’t want to do tax digitally
- Businesses will need extra records and digitisation will cost a fortune
- MTD will increase errors and hinder compliance
These issues are going to inform practitioner-client conversations for some time to come, as the detail is worked out.
But for now, for practitioners, the illustrative document is possibly more important reading. Asking ‘What does tax feel like now?’ for four fictional clients, the case studies then explain ‘How MTD will help’ this type of client in the era to come.
The four case study clients looked at by HMRC are fictional examples, but practitioners will recognise them. They are:
- Employed ‘customers’ with sources of untaxed income they need to report to HMRC
- Self-employed taxpayers
- Pensioners whose pension exceeds their personal allowance which they need to report to HMRC
- Small companies
For the clients in the case study, ‘how tax feels now’ isn’t good - in all manner of ways. So MTD, according to this publication, is going to help in a variety of scenarios.
There is for instance, the use of smart phones to record invoices, and the use of apps. For Geeta, the employed customer who also has rental income and private tuition fees, the third party app on her smart phone helps her ‘incorporate record keeping into her routine’ and send HMRC monthly information. The pensioner whose case is examined is ‘digitally confident’ and uses the web routinely in her private life.
Fictional case studies can be excellent. In 1823, a Yorkshire schoolmaster was successfully prosecuted for gross neglect which had resulted in a number of pupils going blind. Yet it took the publication of Nicholas Nickleby 15 years later, and the image of the fictional Wackford Squeers, before the school was closed down.
There will be many accountancy firms for whom the transition to digital has already been made: Whose clients, like those in the HMRC illustrative case studies, are only too eager to embrace the new digital world. There is nothing wrong with fiction per se: Dickens’ portrait of the Yorkshire schoolmaster was so effective that a number of contemporary Yorkshire schoolmasters were convinced it was them.
But the problem with fictionalised case studies for digital tax is that there may be one image missing: your client’s.
The clients in the case study are the particular concern of small and medium-sized practices. The MTD debate is something to which such practices are uniquely placed to contribute. This is their area of expertise.
These practices know that not all clients are as digitally-savvy as those in HMRC’s publication. Where is the Luddite ‘carrier bag’ client, who still brings invoices into the office in the Tesco bag? The bag bulging with receipts for everything from last year’s MOT certificate, to this year’s home insurance renewal… the cement mixer purchase, to the box of biros, Mars bar and sandwiches?
According to the FreeAgent survey, 66% of practitioner time is spent on what is essentially number crunching: From processing expenses to chasing missing data. So if the client ‘goes digital’ how will things change? If what you have is spaghetti, manual spaghetti or digital spaghetti, makes little difference. The result is spaghetti.
Luddite clients and practical problems
There can be an enormous gap between where clients are now, and the real time required by MTD. Some long-established, pre self assessment clients, like farmers for example, still have 30 April year ends. For some of these clients, the 30 April 2014 accounts (1 May 2013 to 30 April 2014) might only have gone in last week (January 2016). The accounts to April 2014 fall in the tax year 6 April 2014 to 5 April 2015, with the final tax, under current rules, not due until 31 January 2016.
Paying tax on earnings from May 2013 in January 2016 is a long way from real time, and from here, you can’t get to real time in 12 months. And there are rules about changing year ends and overlap relief to work out.
Then there’s the issue of stock, if four accurate sets of figures are to be clicked and sent to HMRC with MTD. A James Herriot- type practice we once knew, had a lot of farming clients: Two straw bales set up in the field and the auditor counting the pedigree lambs as the dog chased them through. How many computer programs can count sheep? Or provide a small business with a reliable stock figure?
Practices which deal with clients like these might not think they have time to get involved with HMRC consultations on MTD – but perhaps it’s time to think again.
Fact - stranger than fiction
To assist in the MTD dialogue, practitioners need to speak out. They are the ones with the facts. While there’s a dialogue to engage in, they need to communicate their own case studies. To explain how their representative clients find ‘tax now’, and explain how they are going to make out in the digital world.
Recent research into digital engagement suggests that there is a long way to go before many clients feel equipped for digital. One paper looking at digital capability in small and medium sized business, published last Autumn, found that ‘a quarter of SMEs report that they do not possess basic digital skills.’ The findings of another paper, looking at digital engagement in later life, suggest that internet use drops off sharply with age, beginning at about age 50.
So here’s another character, Theophilus Wellington – a farming client. He is fictional, but there are many like him in fact. For Mr Wellington, all purchases go onto the ‘Middle Shires Farmers’ account. That’s everything from the sheep dog food to the tea bags, and from the new car to animal feed. So present him with the facility to use a smart phone, and the scanned and coded invoice is posted to cost of sales. But who will notice the margins don’t fit?
Time to get involved
That’s why Mr Wellington has an accountant. He doesn’t keep a dog and bark himself. Theophilus Wellington is a farmer, but he could just as easily be a builder, an engineer, an IT consultant: The list is endless. These are the clients that practitioners know about, and these are the clients that will be relying on their advisers to guide them into the digital world. Starting now, with MTD-HMRC dialogue.
HMRC is looking for interaction so treat this as an opportunity. Profile typical case study clients - because if enough practitioners do it, it might just change the system. One way in, for instance, is via the discussion events HMRC have announced on simpler tax payments. But there will be others.
The challenge is a big one: There are accountants talking of leaving practice rather than face the transition to digital. But practitioner knowledge of real clients is unparalleled. And if practitioners don’t create that lifelike image of real clients, our clients’ digital future will be shaped without it.
About Philip and Sarah McNeill
Philip and Sarah McNeill write widely on tax and other matters for both the popular and professional press.