MTD for ITSA: Need to boost pilot usersby
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.
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.
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 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.
You might also be interested in
Paul Aplin was for many years a tax partner with an independent West Country firm. He is a past president of ICAEW, a former Chair of the ICAEW Tax Faculty, a member of CIOT Council and the Tax Technology Committee of CFE. He is a non-executive director of three companies, a member of HMRC’s Admin Burdens Advisory Board and the OTS Board....