MTD cost benefit sums called into question

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HMRC’s rationale and timetable for Making Tax Digital (MTD) came under intense questioning from tax accountants and software developers at the House of Lords Economic Affairs Committee on Monday afternoon.

Tax department executives, who are due to give evidence at Finance Bill hearings later this month, are likely to face a barrage of questions arising from yesterday’s initial evidence hearing.

Committee chairman Lord Hollick said that the committee agenda picked up from the findings of the Treasury select committee last month and would feed into deliberations around the legislation enabling MTD in the Finance Bill 2017.

The Lords committee has no direct powers to block the legislation, but could pave the way for more determined parliamentary scrutiny of HMRC’s plans.

Fuelled by a detailed deconstruction of HMRC’s estimates presented by tax campaigner and City University professor Richard Murphy, the Lords committee already harbours reservations on many of the topics raised by accountancy bodies and AccountingWEB members alike.

Questionable cost/benefit calculations

According to Murphy’s analysis, when software costs are stripped out of HMRC’s £170m estimate of the extra cost to business of MTD, £103m is left to cover the cost of quarterly updates from 5.9m businesses - equivalent to £4.36 per update. Using the national minimum wage as a benchmark, he suggested HMRC was allowing 35mins to complete each update. “That is not plausible,” Murphy told the committee. Based on his estimate that the tasks involved in filing each update would take around half a day, he estimated the cost to business of MTD would be £1.8bn.

When asked by Baronness Kingsmill whether MTD would reduce compliance costs for business, John Whiting, the outgoing Office of Tax Simplification tax policy director replied, “Most of us have some doubts that it will be cheaper.”

Whiting also happens to be a non-executive director at HMRC. Towards the end of his evidence, he commented: “HMRC bases a lot of information on the standard cost model. One useful thing that might come out of this might be pressure to update that to a more modern model. Life has moved on. We’re not convinced that it’s capturing all the right costs.”

Focus and sequencing

Robin Williamson, technical director of the Low Income Tax Reform Group told the committee that most of the tax profession lobbied for a substantially higher exemption limit than the £10,000 currently proposed in HMRC’s documentation - but not yet decided.  It would be sensible to align the limit with the VAT threshold, he added, “on basis that VAT payers will be more familiar with online filing”. Rather than reducing errors on small business tax filings, “I very much fear that a lot of people will drift into the shadow economy rather than facing substantial compliance costs that will go with [MTD],” Williamson said.

Whiting endorsed this stance, telling the committee: “I wouldn’t have started from here. I would build on the success of the existing system for [VAT] efiling and broaden it out.”

One of the assumptions HMRC relies on to push the MTD agenda is to reduce the £8bn of tax lost as a result of errors by small businesses. Each of the accountants giving evidence to the Lords committee questioned the reliability of this assumption. Whiting and Williamson both pointed out that better record-keeping could see an increase in expenses claimed. Williamson also drew attention to HMRC’s own errors - which include “horrendous” errors he has seen in PAYE codes. HMRC did carry out a study on small business record-keeping in 2015. “If we can see that [report] we’ll be better informed,” he added.

Murphy articulated a formula that appeared to strike a chord with the committee: “I would start with larger companies, where I think there’s a significant problem with tax unpaid. Then go to small landlords - start with businesses that employ accountants.”

According to Murphy, only a portion of the £8bn tax gap is down to businesses failing to take due care with their returns, and of that 50% is down to small businesses - equivalent to £2.7bn. In contrast, he said the criminal economy is funnelling some £4bn of tax out of the economy and another £6bn of tax is not paid. “It seems the Revenue is looking at a problem they can see, but ignoring the problem they can't see. So they’re penalising the people who are trying to be compliant.”

Ahead of the hearing, Murphy briefed AccountingWEB on his evidence - listen below:

Readiness and education

After the accountants, software industry representatives took their places in the chairs facing the committee in the shape of IRIS CEO Kevin Dady and Kevin Hart, chairman of the software industry trade body BASDA.

The committee was clearly concerned by the points raised in a survey of accountants who use IRIS, showing that 53% of them had clients that did not use accounting aids, and 98% of whom were dissatisfied with the information provided by HMRC on MTD during the consultation period last summer. These findings were very much along the same lines as feedback from AccountingWEB’s MTD survey with Thomson Reuters.

Responding to the survey findings, Lord Leigh commented: “Doesn’t this demonstrate HMRC’s complete lack of real experience? They do not understand business. This is ridiculous, they’re not living in the commercial world.”

Hart and Dady both explained how the massive education effort surrounding tax initiatives such MTD often falls on accountants and their software suppliers. “We’re trying to educate our market via accountants,” said Dady.

The readiness issue extended from taxpayers to HMRC’s in-house systems and whether the software providers could meet the proposed deadlines for testing new systems by this April and going live in April 2018.

When Lord Tugendhat asked if the software industry could meet HMRC’s timetable, Daly replied, “IRIS is as ready as it can be. We’re in leading cohort of suppliers talking to HMRC on a technical basis. We could be better prepared to be frank with you.”

The information flow could have been better to support the ambitious timescales, but is accelerating, he continued, adding that an additional three months would be helpful to be able to test the systems through a full year.

In the final exchanges of the committee hearing Lord Hollick suggested that its advice to HMRC would be: “Take more time, have a longer pilot, and start with larger companies.”

BASDA’s Kevin Hart noted that there were still a number of challenges to work through and that HMRC was beginning to realise “the heat is most certainly on”.

Dady added: “We need to know that that is going to be maintained, so we can support our customers. If they can’t reach HMRC, they’ll ring us.”

In a farewell that doesn’t bode well for tax department representatives when they turn up later in the month, Lord Hollick commented, “We’ll certainly take this up with HMRC.” The full committee hearing can be viewed on Parliament TV.

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About John Stokdyk

John Stokdyk, AccountingWEB head of insight

AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.

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07th Feb 2017 16:17

John, this is the best report I have read on Aweb in a long time. Journalism lives!

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By Tornado
07th Feb 2017 16:21

"Hart and Dady both explained how the massive education effort surrounding tax initiatives such MTD often falls on accountants and their software suppliers. “We’re trying to educate our market via accountants,” said Dady."

As I have said before, I was one of the first Accountants in the UK to prepare Accounts using commercial accounting software in 1981. I have been through the process many times of trying to get my clients to use computerised accounting systems but the majority are not interested or simply incapable of using the technology or understanding anything other than the basics of Accountancy & Taxation.

I do not intend to spend many unpaid hours again trying to achieve the impossible so as far as I am concerned, the responsibility for educating people about how to use accounting software will be entirely down to HMRC and the software suppliers.

They can work upwards from "How do I turn the computer on" through explanations about the difference between revenue & capital and not least of all explaining why drawings are not tax deductible.

Good luck to them.

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to Tornado
13th Feb 2017 13:56

Tornado wrote:

I do not intend to spend many unpaid hours again trying to achieve the impossible so as far as I am concerned, the responsibility for educating people about how to use accounting software will be entirely down to HMRC and the software suppliers.

They can work upwards from "How do I turn the computer on" through explanations about the difference between revenue & capital and not least of all explaining why drawings are not tax deductible.

Good luck to them.


A client of mine phoned me on Saturday - he couldn't get Sage to load. Somehow the actual Sage program had got corrupted because the client had forced a power-down because the laptop was running slow. The client couldn't find the original Sage CD to reinstall the program. He needed to get on with work. All I could do was offer to look at it for him so he delivered it to my home. He was really apologetic but there was nothing else that could be done - he needed Sage working. It took me about an hour to fix it. On a Saturday. I recon most taxpayers will be expecting their accountants to sort out all their IT woes when MTD is here.
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By adeyb
07th Feb 2017 16:58

After 27 years working for a Chartered Accountant last year I have moved away (I now work in a more sedentary environment, I work in an accounts office for a company).

I have to say I really have no ambition in returning if this is the future.

Although now a relative success (tongue in cheek) the online systems that is Self Assessment and PAYE haven't happened over night, with the former taking over a decade to get to a reasonable place, it seems HMRC have not learnt anything about taking small steps.

I really do think this is an experiment doomed to fail if they carry on this specific path.

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07th Feb 2017 17:58

The sheer arrogance, ignorance, complacency and ineptitude of HMRC top brass just staggers me. it shouldn't, as HMRC are delivering a 1 out of 10 tax service and so I am used to getting really stupid stuff dropped from on high.

But just about every quote from the MTD team just leaves me open-mouthed. Clueless wallies, utterly clueless!

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07th Feb 2017 18:12

HMRC could change a lot of moods by just changing one part of MTD which is: Forget a one month filing window and make it 3 months.

It wouldn't be great and I'd still see no logic in any part of this but at least it would make it it far more realistic a proposal for accountants and taxpayers alike to make a success of. Summer holidays, Easter and Christmas could be navigated with ease.

Additionally the larger the business the more complicated the affairs and you can't properly review things with a matter of days to investigate issues.

Better record keeping, better data for HMRC, all still well within the window for tax payments.

I only see one reason why HMRC would object to this and that is that they want the penalties.

Thanks (3)
07th Feb 2017 19:38

Prof Richard Murphy... I think I'm in love! His summary/thoughts on MTD in front of the committee were right on and I note that there was murmuring in agreement in the background by other attendees. I felt that John Whiting didnt press the problems.

Thanks (8)
By Tornado
to Jennifer Adams
08th Feb 2017 13:45

"Prof Richard Murphy... I think I'm in love!"

Me too.

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08th Feb 2017 08:48

Richard rightly points out that complying with tax authority requirements costs a lot of time and money.

Oddly the opposite argument he uses to justify producing country-by-country reporting, or paying tax in general, where he says it costs nothing to do so. Consistent as ever.

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08th Feb 2017 09:48

It was interesting to watch the BBC news last night with their NHS special which suggested they were short about £1billion a year to cover basic services.

Which as a country we dont have money for. Apparently.

But we have endless billions to give to software companies that will deliver no obvious savings for the tax man and an extra admin burden for the public.

Its a strange world we live in.

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By Tornado
08th Feb 2017 11:20

Having again today to deal with incorrect HMRC PAYE records (long phone calls, inexplicable explanations, etc) I personally think there should be a full scale inquiry/review into the way that HMRC is run as a whole.

MTD is just a small part of the incompetence demonstrated by HMRC over the last few years and I think it is time that the way they operate as a whole was looked at in fine detail before we progress any further with a very complex project such as MTD.

I feel sure that many others would agree with me.

EDIT : Part of the problem with PAYE seems to be the antiquated notion that a month ends on the 5th day of the following month. Surely if you are going to radically improve the tax administration system the first thing you would do is ensure that reporting and accounting periods are based on calender months. We have the prospect of an expensive MTD system that ignores the one change that is really needed.

This alone highlights the complete lack of understanding by the MTD Team about the current tax administration system and what is REALLY required.

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By Peter-S
to Tornado
08th Feb 2017 11:32

Tornado wrote:

Having again today to deal with incorrect HMRC PAYE records (long phone calls, inexplicable explanations, etc) I personally think there should be a full scale inquiry/review into the way that HMRC is run as a whole.

MTD is just a small part of the incompetence demonstrated by HMRC over the last few years and I think it is time that the way they operate as a whole was looked at in fine detail before we progress any further with a very complex project such as MTD.

I feel sure that many others would agree with me.

I certainly do agree. A colleague has just had a technical query about a MGD return that has disappeared from the system answered along the lines of the technicians can't answer questions about vat which of course it wasn't. That was batted back to them and after an apology they are now looking properly at the original query.
Along with countless others I have just received a P800 calculation for a pensioner client saying she is owed £28 refund, totally ignoring the fact that she has been a SA 'customer' for several years because of rental income and actually owes them £400.
Whilst these might be looked at as minor irritations they are not uncommon and give no confidence in anything substantially new working at all well.

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to Peter-S
08th Feb 2017 11:41

P800s issued to self assessment clients has happened to me several times. It is a nonsense.

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08th Feb 2017 11:26

Am I right in thinking that - 1) the Treasury Select Committee said that MTD is complete nonsense and should be ditched, the Lords Economic Affairs Committee said the figures are all wrong as is the general approach, most industry bodies are very much against it; and, HMRC said this week that most people are broadly in favour of MTD and we should go ahead with a few minor changes? 2) Then that the next step is to draft legislation, run it around the houses a while when we will really know what we are in for? 3) In the meantime, the trial runs from April 2017 to April 2018, after which we will all be fined for not filing returns properly? 4) The software (which will be free) is not written yet because it is not specified yet because until 1) and 2) have happened, we don't really know how it is supposed to work?

As a small business which employs a few people and pays VAT, we already send monthly returns to HMRC for payroll costs and quarterly returns for VAT sales and purchases. Would it not be easier to get those two systems linked together to start with? That would account for almost all of our income and expenditure with the end of year accounts just mopping up the complex bits. The only obvious purpose of MTD is to generate loads of money from fining us all for not doing it properly.

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to john hextall
08th Feb 2017 11:44

This is a good suggestion. Those who complete VAT Returns are already reporting turnover and costs to HMRC and HMRC already have the payroll data under RTI. Another reason why they should start with VAT Registered businesses first and make the VAT threshold the reporting limit.

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08th Feb 2017 11:32

The fiasco of Her Majesty's Ridiculous Cluster knocking the C2 NI off tax calculations that start with the line 'Income from self-employment' shows that their own record-keeping is inadequate and they ought to be fined £3,000 in every case.

It is encouraging that everybody except the Cluster themselves, more-or-less agrees the Cluster's not fit for purpose and are completely delusional.

Whether this results in a positive outcome or the steamroller comes out, remains to be seen...

I'm less despondent that I was yesterday.

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08th Feb 2017 12:55

Where is the democracy when you have the Treasury Committee, The Lords Economic Affairs Committee, Accountancy Bodies, Federation of Small Businesses, Accountants in general and businesses all saying that this is unworkable and yet STILL it rolls on.

Who exactly is driving this because clearly this country is fast becoming a dictatorship.

If only HMRC would invite a dozen of us around for afternoon tea then I swear that a workable, realistic, model for this could be sorted out in a couple of hours!

Handing a small business owner a smart phone, an app, a deadline and expecting more accurate accounting data and a correct tax calculation is an utter joke.

HMRC keep saying they expect businesses to maintain records as they go and that's why they want a one month filing window

Richard Murphy clearly gets the reality though when he points out that each update would take at least half a day (per quarter) and yet he calculates that HMRC believe this to be a cost of £4.36 per business per update!

I must remember next time I'm recruiting to take on a builder to join the bookkeeping team - HMRC believe they can do this in 36 minutes per quarter....wow the profit for the practice would be astounding!

If only every business had a receipt for each expense immediately to hand to scan though - factor in lost receipts with only a bank record to identify to support it, emailed receipts etc and for an untrained individual to produce correct records... well it's even worse than Mr Murphy anticipates.

Thanks (3)
By Tornado
to feelingthestrain
08th Feb 2017 13:43

Your points are valid although I think the democratic process will win through in the end. Although MTD has the hallmarks of an EU Directive (created by ignorant bureaucrats and made mandatory under pain of onerous fines) we are beginning to see the democratic process starting to work again.

The very fact that MPs and the Lords are looking at this closely and are both realising that they now have the power to actually do something about this without interference from the EU, gives me immense confidence that MTD will NOT go ahead as HMRC envisage.

As you say, a project like this should have been started by talking to the people that know, not necessarily at afternoon tea (what a lovely thought) but along similar lines.

What always puzzles me is why is this all so blindingly obvious to us yet those in charge of projects like this do not seem to understand what it is they are trying to do.

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to Tornado
08th Feb 2017 13:33

Up until now though businesses, and accountants supporting them, have found a way somehow to just about keep things together.

This is the first time I think we have been faced with something which we all agree is impossible particularly with the proposed time constraints stopping us from helping our clients in the way we currently do.

Cloud accountancy practices, and software providers, attract taxpayers/businesses who are ready willing and able to do things themselves.

It's everyone else that I am worried about.

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to Tornado
08th Feb 2017 16:31

Eh? What part of this is mandated by the EU?

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By Tornado
to ireallyshouldknowthisbut
08th Feb 2017 17:02

A fair point.

I was not suggesting that the EU has anything to do with MTD, although I don't know that it does not, it was just my view that the MTD Team are following an EU style approach to MTD.

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By Peter-S
08th Feb 2017 14:35

I imagine there is a stat somewhere that confirms how many paper tax returns are still filed annually. I believe it is quite a few which doesn't suggest the inbuilt desire for all tax payers to go digital that HMRC would have us believe is the case. Computers just aren't everybody's thing.

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By kdbr
08th Feb 2017 16:23

As has been said a good article, one that I've copied to my MP, who's taking a keen interest...

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09th Feb 2017 07:59

"Cloud accountancy practices, and software providers, attract taxpayers/businesses who are ready willing and able to do things themselves."

In my experience this is a 90% plus accurate statement, and becomes 100% accurate when the words "and able" are deleted.

The cloud is 30% decent software, 40% hype and 40% smoke and mirrors. Similar in many ways to MTD itself, except there the proportions are 2, 49 and 49.

So on one of my cloud clients yet again this quarter we have sales on the VAT return not agreeing to sales in the trial balance. The difference is £6,000 on sales of around £100k.

Now my guess is that 90% of DIY Cloud folks will not even know that those two numbers should be exactly the same. And of the other 10%, at most 1% will have the skills to identify where things have gone wrong and fix it.

From the outside there is no way of knowing which Cloud software does the business and which has holes in it. Arguably the most noise and hype is coming from exactly those product providers with the most smoke and mirrors built into the coding.

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By Tornado
10th Feb 2017 12:31

OK, let us get really serious here.

Kevin Dady may seem confident that IRIS can deliver MTD compliant software but after nearly a year, he is unable to fix serious bugs in his PTP Opentax software where the tax calculations automatically 'tick' boxes on second (or more) employment sections of the 2016 Tax Return that have not been ticked and even more seriously, boxes on the second or more Capital Gains calculations are automatically 'ticked' when they should not be, such as declarations that estimates have been used where they have not been, and that the asset has been part disposed where it has not been.

Fortunately the tax calculations are correct but if HMRC come back on this then I shall have to advise them that I had no control over the output of the approved software I was using and they must take the matter up with IRIS.

What is even more alarming is that surely with cloud based software, it is easy to fix such errors quickly overnight so that everyone benefits as soon as possible but IRIS seem to take months to fix the simplest of problems, many of which should not have been there in the first place.

I do have some sympathy with IRIS as they, and other software suppliers, are not given sufficient time by the Government to properly incorporate changes into their software but this will be the norm with MTD and if they cannot cope with current products then how are they going to cope with new products?

Kevin Dady would do us all a big favour, and gain more respect, if he was truthful about the real problems of developing MTD compliant software and just honestly admit that it will take several years to develop reliable and accurate MTD software and he should not encourage the Government with promises that cannot be met.

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