MTD: Government’s long-term plan for more data

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Rebecca Cave talks to Richard Asquith about the true drivers of MTD for VAT. Is there more to it than the goal of eliminating human errors in VAT returns? 

Richard Asquith is Avalara’s VP in global indirect tax and has been keeping a close eye on the government’s Making Tax Digital for VAT programme. In this interview, he tells AccountingWEB consulting tax editor Rebecca Cave why HMRC is going to all this trouble to change its VAT data delivery mechanism, and where he sees the system ultimately ending up.

Rebecca Cave (RC): HMRC has repeated said the aim of MTD for VAT is to eliminate the errors introduced when someone manually types VAT return figures into the online form on the HMRC web portal. Is the real reason for MTD just to iron out a few transposition errors?

Richard Asquith (RA): Its true, HMRC’s main goal for MTD is to end manual interventions which can introduce errors to the VAT filing process. HMRC says these errors create over £600m in VAT miscalculations. However, after close investigation, most of these ‘unintentional’ errors turn out to be in the businesses’ favour!

RC: Why are these errors introduced by the current methods of completing a VAT return?

RA: The problem stems from the fact that only just over one in ten VAT registered businesses use the current XML-based data upload function in their accounting software to submit their VAT return automatically to HMRC. Most businesses login in manually to the current VAT portal and manually key in the numbers.

Some people are just resistant to the necessary change to move to full automation. However, many others need to make manual adjustments to the VAT totals outside the accounting software, perhaps in a spreadsheet. This does explain some of the reluctance to move to automatic filing of the return using accounting software.

RC: As the MTD-filed VAT return will only supply HMRC with the same nine boxes of VAT data, how will MTD solve the error problems?

RA: You are right, it is an enormous upheaval to deliver what HMRC already receives in terms of data. Instead of making the well-trusted XML upload mandatory for all VAT returns, HMRC is instead introducing a new format for data submission. This will require upgrades to all commercially available accounting packages and also to all in-house developed software.

RC: Why is HMRC going to all this trouble to change the data delivery mechanism?

RA: A closer look at the new reporting format being imposed by HMRC gives a big clue as to what’s coming next. Plus, if you a look around Europe and beyond, there are further clues to HMRC’s future plans to gain unprecedented access to companies’ accounting records.

RC: Is this why HMRC is insisting on data being submitted through an API?

RA: The technical reason is that the Application Programming Interface (API), which receives the VAT return data into HMRC’s computer servers and returns responses, can handle a lot more data much faster than the XML process. The API works using JSON files, which are already in computer code. This means huge amounts of data can the transmitted and returned in an instant.

XML, at over 20 years old, is frankly a dinosaur in computing terms. The XML method of submitting data needs a lot of tagging which uses significant computer memory, and it

requires a lot of retranslation by the computer servers. But the real reason for going down the API route is that HMRC wants more than just the current summary VAT data.

RC: What’s the long game here? Surely there must be some tax savings in HMRC’s sights?

RA: HMRC has its eyes on the continuingly stubborn VAT gap. This is the estimate of the amount of total VAT due, based on levels of national trade, less the amount of VAT actually collected. The latest estimate of the VAT gap is £13.3bn, from figures released in October 2018. This showed an increase of £1.3bn over the previous reporting year. The European Union, by contrast, has managed to cut its own VAT gap by €10bn to €147.1bn in its latest published figures.

HMRC has concluded that it needs more data from taxpayers to identify whether the gap is created by honest errors or deliberate fraud. That is why it is forcing the investment by all VAT-registered businesses in API reporting. Eventually, the API pathway will enable HMRC to receive the mass of invoice-level detail from businesses that it needs to tackle the VAT gap.

RC: How and when will this come about?

RA: The switch from XML to API reporting under MTD from April 2019 is just the warm-up. If that goes to plan, and once all accounting records have a full digital journey (after the one-year soft-landing phase), then the data demands could be widened.

I believe that full ledger transaction reporting will be requested around 2021. Any transactions involving a VAT element will be stipulated: general ledger, sales, purchases, stock and fixed assets. Ultimately, the API could also carry the burden of delivering bank account-level transactions to provide tax settlement details.

When this level of data is provided by all parties in the transaction chain, HMRC, using its hugely powerful analytical software, will be able to independently check everyone’s version of each and every tax transaction. This will help highlight errors or fraudulent activities such as missing trader fraud, and it will mean HMRC will probably know taxpayers’ businesses better than their FD or CFO.

RC: All this is sounding very “Brave New World”, will it really happen?

RA: I’m afraid it will, and it is already the reality in some countries. Spain and Hungary now require live or near-live reporting of sales invoices to process immediate checks and identify fast-moving frauds.

RC: This gives the tax authority has a huge amount of power, could HMRC ultimately control who gets paid out of which businesses?

RA: Yes, it could go one step further to pre-approval of invoices, as much trailed in Brazil and in Italy from 2019. In these countries, the tax authorities can now block suppliers’ invoices from being issued if they do not like the look of the VAT treatment.

RC: How long will it take for HMRC to have the same power?

RA: I estimate that within five years HMRC will want to have killed off the VAT gap. With MTD it will have the power to achieve this, but we will all have surrender the keys to our accounting records, in real time.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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24th Jan 2019 14:59

Well I can only speak for myself and my supposed share of this gap. My actual share is NIL.

I have had 11 tax enquiries, mainly VAT, in the last 6 years across my 142 clients, most of whom are VAT registered. HMRC sought just over £445k in extra tax, mainly VAT.

They achieved £105.00, £70.00 of which I wanted to contest - we had a good case - but the client has had enough by then and just paid.

So from my own viewpoint this is an utterly pointless exercise on the part of HMRC.

Maybe if they had not been busy sacking so many high quality VAT staff then the gap would by much lower by now. But no doubt this is heresy in HMRC HR department, last seen interviewing monkeys at London Zoo for jobs as "tax inspectors".

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24th Jan 2019 15:13

I agree this is a pointless exercise. My firm has had numerous visits and apart from one nothing was found wrong . The clients that was found to have errors was for underdeclaration of cash. We have made disclosure for some clients and this were the computer allows the VAT and Net to be the same ( one of the large software house ) others are were the client has claimed VAT on everything because the computer says Yes and another were the client was zero rated and forgot to reconcile so claimed VAT back for a year. These were all computer errors through unchecked worked. I rest my case.

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24th Jan 2019 15:56

Curious, so the UK tax gap is much lower than the EU average? UK economy is about 16% of the EU's so not really sure what the issue might be there about us being worse than the rest of the EU.

The "tax gap" itself, is, having spent far too much time discussing this stuff in the past 12 months absolute bobbins.

The computational method is based on random enquiries, and a very small sample of them,
They look at the preceding quarter, and find the errors. As anyone who has ever taken part in a tax investigation will know, HMRC will only find "shortfalls" and not "overpayments", and is often wrong if you can be bothered to challenge them. Its usually a cost issue vs just agreeing and moving on.
Those errors are totted up.
And extrapolated.

With
1, No account for error correction that would have occurred anyway in the next Q (most 'doh' errors are picked up next time around)
2. No accounting for year end adjustments that would have been made, ie self correction (again this is where problems in year are picked up)
3. No recognition that business will agree to £100 or so just to get the tax inspector out of the office given many will keep on looking until they find something, no matter how dubious.
4. No recognition that in B2B business, failure to charge VAT correctly, is VAT neutral if customers are VAT reg'd.

Tax FRAUD is not tackled with MTD, or any amount of data. That has got to mainly be "missing sales" fraud, so its not in the system, so you cant find it.

The main reason HMRC stopped doing large volumes of VAT inspections is they didn't ever find enough to make it worth their while. It used to be the case that every VAT reg business would get a check within 1-2 years of starting up, and larger business would get one annually.

but there was little to find, so they stopped bothering.

But apparently the computer will find it. Of course it will.

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to ireallyshouldknowthisbut
24th Jan 2019 16:18

excellent

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25th Jan 2019 11:23

Looking at the countries where the tax authorities require verification of invoices, I can't help but think that there will be two sets of computer systems (or one computer system and a set of books), one for the tax man and the other for the business . Plus ca change ….…

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By Mallock
25th Jan 2019 12:37

We had one VAT enquiry for a client where they came in with a real attitude looking for £30 or £40K - the reason was that the VAT Return to the year end showed a different figure to the VAT liability in the accounts.

The client was on cash accounting for VAT but with large debtors and creditors being brought in at the year end along with the accompanying VAT.

It took many phone calls before someone in the VAT office recognised the issue and accepted there wasn't a problem.

I don't see this intrusion going down too well with some clients and don't like the whole big brother feeling myself.

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27th Jan 2019 17:50

Remember Business Records Checks (BRC) anyone? That was the last Great White Hope to remove the supposed tax gap, brought in with great fanfare and at much expense.

Of course if the tax gap really existed, BRC should have found it easy peasy. After all, per the HMRC launch publicity BRC was the equivalent of launching a precision guided missile at a target the size of the Soviet Union, only a North Korean missle could possibly miss!

Results - HMRC proved to us all what utter numpties are at the helm of their ship, and after loads of BRC visits which found zilch the whole thing was dropped - with zero publicity whatsoever from the HMRC Spin Department.

I expect 2019 -2020 to be a repeat of this stupid process. I have warned my clients on Xero, QBO etc. who will be submitting at transaction level that they are at increased risk of enquiry once the HMRC abacus inevitably adds 2 beads to 2 beads and gets 5 beads.

As with BRC, I expect these enquiries to get increasingly deperate once they start to come back with zilch and the top brass numpties realise they have bought a pup yet again.

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to mr. mischief
28th Jan 2019 18:39

Re the BRB, the final report on this comprehensively demolished HMRC's case for doing them.

To quote from their own report:

"Customers in this research were largely confident in their record keeping, were attitudinally compliant and not reporting need of any support. This confidence has been reinforced by the lack of issues with record keeping or tax returns (raised either by HMRC or e.g. accountants) that customers have experienced to date. This was especially so for businesses that had been in operation for a long time, and those represented by an agent."

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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