Former Tax & IT Partner
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MTD pilot testing
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MTD pilot testing

MTD for ITSA: Need to boost pilot users

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Paul Aplin is concerned about the timescale for introducing MTD for ITSA and urges a rapid relaxation of the restrictions on who can participate in the pilot programme.

19th Aug 2021
Former Tax & IT Partner
Columnist
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HMRC recently published a report prepared by IFF Research, based on more than 2,000 interviews with businesses that have filed under MTD for VAT. It contains some interesting insights and reading it, I reflected on what we could learn from it in the run-up to MTD for ITSA.

Any lessons need to be taken on board very quickly, given that if the basis period proposals proceed as Rebecca Cave has highlighted many more businesses could enter MTD for ITSA in April 2023 than had been anticipated.

Benefits of MTD

The research found that businesses using fully compatible MTD software were more likely to report benefits outweighing costs and increased confidence in getting their VAT calculations right, whereas businesses that previously used paper or spreadsheets were more likely to feel that costs outweighed benefits.

Two thirds felt that MTD for VAT had reduced the potential for mistakes and reported increased confidence in using technology. The proportion using software or apps for record keeping increased from 72% to 87%. Most found the experience of starting submissions easy.

The number of businesses keeping paper VAT records reduced from 33% to 21% and the number using spreadsheets fell from 36% to 25%.

Real time records

The degree to which businesses are moving to more frequent record keeping is important. Keeping records closer to real time should improve accuracy and – building on that essential foundation - enable a business to use digital tools such as invoice generation and automated debt-chasing as well as yielding more accurate, up to date financial information.

The research is encouraging: the proportion of businesses updating their records on a continuous basis increased since the introduction of MTD for VAT from 38% to 48%. Those more likely to update their records on a continuous basis (and it is continuous updating rather than quarterly that is the ultimate goal) were, however, larger businesses, non-profit organisations, charities and those not using an agent.

The report gives some insight into how fully businesses are using the potential of software and apps. The most commonly used features were management tools not related to tax, cloud-based record keeping, e-invoicing and automatic bank reconciliation. For me, it is these very features that should be driving take up of cloud-based software and apps: tools that hold potential for freeing time and for boosting business efficiency, cashflow and profitability (and which are not seen as simply digital substitutes for manual processes or tools to comply with an obligation).

Costs for smaller businesses

One finding in the report particularly stands out for me: smaller businesses - those with fewer than 10 employees and those with small to medium turnover – were more likely to incur costs when introducing a new software package. Not only did very small businesses report the cost of new software, they also highlighted the need for discussions with an accountant or bookkeeper.

This is hardly surprising: in my experience it is generally the smallest businesses that tend to rely on manual records or spreadsheets (although those records can be of very high quality). It is those same businesses that need the most help to move successfully to digital.

Lessons for MTD ITSA

Businesses within the mandated MTD for VAT population will have built experience and confidence by the time they have to adopt MTD for ITSA. I hope most will find that the software they are using for MTD for VAT will also serve them for ITSA, but the mechanics behind the ITSA submissions will be rather different to that required to submit for VAT.

The remaining VAT registered businesses (those with turnover below the VAT threshold) will be mandated into MTD for VAT from April 2022, though it should be noted that a substantial number – around 30% - have already adopted MTD for VAT voluntarily.

Those unincorporated businesses will have to join MTD for ITSA from 2023 onwards. While MTD for ITSA is a very different – and more complex - proposition, they will at least have gained some experience of using software for record keeping.

First timers

There will also be a very substantial number of businesses and landlords who have not had to register for MTD for VAT and who will begin using software for the first time. Many will need advice, training and support from their accountants. While some will need very little help, others will need considerable support to make this transition successfully.

As Rebecca Cave pointed out, the basis period proposals could result in many more businesses having to make this change earlier than expected.

Capacity must therefore be a concern: training takes time and has to be delivered by people who are themselves well trained and who are good trainers. It is in everyone’s interest – including HMRC’s – that the training is effective so that we achieve both the core MTD goal of better, more accurate records and a broader goal of using digital tools to improve efficiency and productivity.

The pilot

The research clearly shows that businesses perceive benefits from MTD, but also that MTD creates costs – transitional and ongoing – and that the smallest businesses are particularly impacted.

MTD for ITSA is a very different proposition to MTD for VAT and reflecting on where we currently are, I am becoming increasingly concerned about the timescale and particularly the pilot programme.

The tight restrictions on who can join the pilot - which was supposed to have been widened to support “the vast majority of sole traders and landlords by April 2021” - need to be relaxed very soon if numbers are to build to the level we need to see ahead – preferably well ahead - of mandation. It is only as numbers in the pilot build that we – businesses, agents, software developers and HMRC – will gain the data and experience needed to successfully deliver the programme. Just as with MTD for VAT, it can only be delivered through a joint effort.

April 2023 is not far away.   

Replies (8)

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By Paul Crowley
19th Aug 2021 18:12

I have no faith in surveys
Surveys allways result in the desired result of the survey buyer
I probably have 2 clients who successfully started MTD for VAT and were pleased with results
No one else is grateful to HM Gov for being bullied into compliant software.

Those bullied in generally were getting the spreadsheet version correct all bar a few items that we corrected at next accounts production
Those same traders we are now pointing out more errors
Because the auto system makes wrong assumptions and does not read the invoices ( you know actually reading like only Humans can ).

Bigger traders, no issues as were already using compliant software properly
All those would be prepared to give survey the result they wanted
But then they were not bullied in
Not aware that any client with £7,000 self employed income and £5,000 rent would ever use software unless gives fines for not doing so.
Whoops
Yes we had a self employed bookeeper do exactly that. combined her trade and rent all in a SAGE TB
It would have been quicker for my firm to have started from bank statements than try to figure out the combined Sage TB

Thanks (5)
Replying to Paul Crowley:
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By Peter-S
23rd Aug 2021 12:13

I've participated in surveys in the past primarily geared at assessing the efficiency of HMRC and the standard type question would be 'thinking of your last interaction with HMRC …." and 9 times out of 10 the last interaction was completing an online tax return which was straight forward so you had to say the service provided worked well enough and you had no opportunity to mention the shortcomings experienced other times. Pointless surveys that leave you annoyed and frustrated for participating in.

Thanks (1)
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By Paul Crowley
19th Aug 2021 18:22

The pilot findings seem a bit unreliable
Do you really believe a trust worthy basis of sampling was used?
Only an idiot volunteers, or chooses to be a guinea pig.

A bit like asking only bike clubs if if should be made compulsory to give way to bikers
You have not looked at non bikers opinions
But find overwhelming support for giving way to bikers

People who Volunteer for MTD do so because the like MTD
Their opinions are not representative of those forced into MTD at gunpoint

Thanks (7)
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By GHarr497688
19th Aug 2021 22:20

I deal with around 40 of the smallest business entities - all older and all non-computer literate and little knowledge of tax or accounts. All have been tested on computer systems and all failed. If we were to put the records on computer we would have insufficient resources , time constraints and extra costs , the risk of error would increase if clients attempted to use a computer. All of the above are in direct contravention of the aims set down for MTD by HMRC some are to improve accuracy , reduce costs and save man hours. How on earth can MTD go ahead given that no commentators can see any positives in MTD and yet HMRC pay for it's own research supporting its own aim and conclusions. Are we living in Russia ?

Thanks (9)
Replying to GHarr497688:
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By alialdabawi
23rd Aug 2021 13:09

Well, our leader is Boris...

Thanks (0)
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By Winnie Wiggleroom
20th Aug 2021 13:27

Why would anyone choose to pilot this, whats in it for them?

Which brings me onto a broader point - if HMRC are so convinced that this will close the tax gap why do they not offer financial incentives to cover the cost of implementation?

Thanks (4)
Replying to Winnie Wiggleroom:
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By Jimess
20th Aug 2021 17:17

Incentives were offered to cover the cost of implementation of Self Assessment when it was first introduced. For a very small minority the incentive more or less covered the extra costs, but for the majority it was a sticking plaster over the wound, particularly as current year basis was introduced at the same time accelerating tax bills. The incentives didn't make anyone any more compliant, but it just softened the blow a tiny bit for those who were. The introduction of the late filing penalties and late notification penalties were a shock to some taxpayers who had lapsed into a comfortable routine of their own before self assessment was introduced, but people are used to the penalty regime these days so HMRC do not have such a big stick to beat the drum with for MTD.

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Replying to Jimess:
By SteveHa
23rd Aug 2021 15:26

Jimess wrote:

I.....but for the majority it was a sticking plaster over the wound, particularly as current year basis was introduced at the same time accelerating tax bills.

And you know, if they had never done it the public purse would be in a better state now than it is. What, with the pandemic impacting business across almost the whole spectrum, and profits (and therefore the tax take) being depleted as a result, PY basis would have bought UK Gov a 12 month window before tax income reductions kicked in.

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