MTD horror story: Small business makes £19,000 of VAT errors

Distressed man
iStock_PeopleImages_AW
Share this content

Neil Warren reveals how a small business adopting new software to comply with MTD for VAT made £19,000 of VAT errors on its first MTD return.

I had a bet with myself as to when I would get my first VAT query from an accountant where a client had made a mess of a VAT return submitted under MTD. I expected to have received at least one horror story by the end of April, relating to the March VAT period which many businesses had signed up to submit as part of the MTD pilot scheme.

However, I lost my bet – the first horror tale did not arrive until 16 May.

New software

The client had upgraded to new software to comply with MTD and was enthusiastic about its apparent simplicity: “I only have to press a button,” he said, “and the VAT return goes to HMRC without me having to do anything at all. It’s incredible.” 
 
The problem was that the new software was set up to calculate the client’s VAT return based on the cash accounting scheme, but the client had always calculated his returns based on an invoice basis. He didn’t spot the problem when submitting the VAT return. It only came to light a couple of weeks later. What did this mean in practice? 

Errors

The client had made the following errors:
  • Output tax had been duplicated on sales debtors at the end of December 2018, ie where output tax had already been included on that return and was therefore paid again on the March return when the customers paid their bills.
  • The same problem occurred with input tax, a duplication of input tax. 
  • Output tax had not been paid on unpaid sales invoices at the end of March 2019, or input tax claimed on unpaid purchase invoices. 

The errors with the final bullet point were not an issue if the client adopted the cash accounting scheme (which he was eligible to do), but the first two bullet points were errors which had to be corrected.

The figures

The business had overpaid output tax by £14,000 and overclaimed input tax by £5,000, ie total VAT errors of £19,000 had been made, with a net overpayment of £9,000. 
 
The good news is that because this net error is less than £10,000, it can be included on the next return as an error correction for the period to 30 June 2019. Alternatively, form VAT652 could be submitted to HMRC to correct the errors, and that may speed up the repayment process.

Penalty concern

However, the accountant’s main concern was that HMRC might treat the duplicated input tax claim as a ‘careless error’ and raise a penalty in the future if it was corrected on the June VAT return. Should the client still complete form VAT652 and tick the box to say that the error has been corrected on a return, so giving full disclosure for penalty purposes?
 
My advice to the accountant was to not worry about penalties in this scenario: the issue has been caused by a software problem, and not careless behaviour by the taxpayer, illustrated by the fact that he had overpaid VAT overall. Although HMRC has said that MTD will not change its policy or process on inaccuracies in VAT returns, the taxpayer in this instance should have a reasonable excuse for the error. However, the mistake does need to be promptly corrected after it was discovered.
 
HMRC has said that it will adopt a light touch or “soft-landing” for penalties relating to the digital links for the transfer or exchange of information between software programs. This soft-landing will apply for the first 12 months after MTD becomes compulsory, so until April 2020 for businesses who must comply from April 2019, and until October 2020 for a business who must comply with MTD from October 2019. 

Learning points

All tax or accounting software has to be set up with proper parameters, and that did not happen here. Perhaps encourage clients to pay you a bit extra to review their first VAT returns submitted under MTD, if new software is involved. 
 
Any errors found as a result of MTD issues should be dealt with as soon as possible, per VAT Notice 700/45.  
 
This story confirms the fears of many advisers that MTD may increase rather than reduce VAT errors, at least in the short term until the system has bedded down.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

Please login or register to join the discussion.

avatar
21st May 2019 17:22

.

Thanks (0)
avatar
21st May 2019 15:31

It's not a software problem is it? It's carelessness not to have checked the parameters when going onto a new system.

Thanks (9)
avatar
to johnjenkins
21st May 2019 15:41

If taxpayers don’t understand our complex tax system then mistakes will happen as pressing button takes the thinking element away especially when products are marketed and the impression is give that Hmrc endorse the products . Using phrases liked ‘click of a button’ , ‘all you Taxes done’ will lead to careless habits .

Thanks (9)
avatar
to GHarr497688
21st May 2019 16:31

Although I take your point, the onus is on the tax payer or Accountant to make sure that any new system is set up correctly. Again phrases are not spoken by the software. We all know it's not about a celebrity trimming a dog or someone sending an invoice via his phone and the money is in the bank by the time he gets home. We've got MTD for the under £85k threshold to come in a few years. Just think of the penalties that will create.

Thanks (5)
to johnjenkins
22nd May 2019 09:04

So presumably, using your login, software developers were wholly culpable when some calculations were wrong because of the infamous Intel bug?

Thanks (0)
avatar
to SteLacca
22nd May 2019 09:47

What login are you referring to?

Thanks (1)
to GHarr497688
21st May 2019 16:41

There are many complex areas of VAT. Whether you are on cash accounting or invoice accounting is not one of them.

A quick review of the figures before submitting should have picked up this error. Since this was a new system to the business in question, you would think a check on the first return would be simple common sense.

It is a foolish business person that allows themselves to be blinded by hype.

Thanks (2)
to GHarr497688
22nd May 2019 10:23

Nonsense if the client is doing his own VAT he must have known he was doing it on a cash basis and not invoice.

If tax payers don't understand the tax system, they shouldn't be trying to do it themselves.

He has failed to check his numbers before he sent it the software is only as good as the people using it.

With cloud accounting you should have more regular input from the external accountant to check its set up right and looks reasonable.

As for letting them mess it up and then charge them over the top to correct it at the year end, that is terrible way to look after clients and will see the relationship will be a short one.

Thanks (4)
avatar
to Glennzy
21st May 2019 17:25

Agreed I am wrong - charge people to much - encourage bad records keeping - none compliant - I am an awful Accountants . Let me hand you the gun !!

Thanks (0)
to GHarr497688
22nd May 2019 08:48

GHarr497688 wrote:

Agreed I am wrong - charge people to much - encourage bad records keeping - none compliant - I am an awful Accountants . Let me hand you the gun !!

So you're not even going to try to engage in the discussion then? Instead you're going to make sweeping statements that grossly misrepresent what others have said.

Many of your arguments seem to be based on business owners being blind idiots that trust software completely. In my experience, successful business owners either make an effort to understand their software or engage someone else who does.

If the accountant had made the error and the client had trusted them, that would be more understandable. Are you really saying that blindly trusting new software to magically produce correct figures is sensible behaviour?

Thanks (2)
avatar
to stepurhan
22nd May 2019 09:42

I’m not but clients will . Everyone is not the same in life unfortunately .

Thanks (1)
By k743snx
to GHarr497688
22nd May 2019 10:40

Those blo££y silly happy-clappy MTD ads which are currently airing on radio are fostering these beliefs. They make it all sound so simple and push-buttony.

Thanks (8)
to k743snx
22nd May 2019 12:15

k743snx wrote:

Those blo££y silly happy-clappy MTD ads which are currently airing on radio are fostering these beliefs. They make it all sound so simple and push-buttony.

I agree: this "it's all done at a touch of a button" nonsense is going to fuel more of these errors. If it is/was so easy, why are we accountants even here?

MTD is a waste of time and effort as many accountants have said from the start, because the tax system is too complex, all businesses are different, an expense for one client may be disallowable for another, capital vs. revenue expenditure, FRS, limited traded status, entertainment, VAT on cars, fuel scale charges etc. etc.

And these are the things that we know and do every. Most client don't know half of this and so will attempt to claim back IPT on insurance, "VAT" on bank charges, insurance, govt services, DVLA payments etc. I've even seen a client claiming back "VAT" on wage payments thanks to using software.

Trouble is very many clients are blinded into thinking that the software is right and so just reclaim VAT where it isn't levied.

The whole MTD thing as it stands is a farce.
HMRC should been trying to simply the tax system first and stop having so many exceptions and complexity. Then automation will work.

Thanks (9)
avatar
to rockallj
22nd May 2019 14:00

I have met qualified accountants who believe that cash accounting means you claim 1/6 of every payment made back as VAT even when no VAT was charged in the first place. This is NOT an isolated incident. Most of them do not see the need for us to receive the purchase invoices when the client is on cash accounting for this very reason.

Thanks (1)
avatar
to johnjenkins
22nd May 2019 10:05

I think that is a bit harsh. I doubt most of my clients know the difference between cash accounting and invoice accounting.

Thanks (5)
to snickersinatwix
22nd May 2019 10:10

Then they need to learn the difference or stop doing VAT returns. It's an important conceptual step that has to be understood, and that hasn't changed with MTD.

Thanks (4)
avatar
By NDK
to snickersinatwix
22nd May 2019 10:27

Then they shouldn't be preparing and submitting VAT returns, regardless of how it is done.

Thanks (2)
avatar
By NDK
to snickersinatwix
22nd May 2019 10:27

Then they shouldn't be preparing and submitting VAT returns, regardless of how it is done.

Thanks (2)
21st May 2019 17:51

This case highlights one key feature of HMRC's data set (obtained from VAT investigations, largely arising just after the VAT return is filed when flagging an error) the client has self corrected.

Whilst this is an overpayment in this instance, it could have gone the other way.

HMRC's view of errors (which we are told is why MTD exists) is that they are much more numerous in their head than in reality.

In the "real world" VAT errors are self corrected either in the next Q, or at the year end, when something like this would have clearly been scooped up in the VAT rec.

This case also highlights one of the key points made about MTD to the House of Lords select committee. All software does is creates different types of errors than manual systems.

Generally in my view, it over reports purchase VAT due to system defaults adding VAT to cost which normally have VAT on them, but might not, so you have to take it out. Manual systems you tend to have to add it in.

There is also the general system issue of "trusting the computer" which can lead to error as in this case.

What I want to know is; following MTD (say 12 months in) what evidence is there of reduced error and the higher VAT collection touted by those promoting MTD? I would strongly bet there wont be any, and "lessons will be learned" etc etc etc.

Thanks (6)
avatar
21st May 2019 18:51

I think some comments here are being a bit harsh on the taxpayer.

Had the taxpayer prepared his return manually, even had there been a change of approach, then the error would probably have been picked up because that's the way the mind works.

Unfortunately, most people don't understand how accounting software works (and why should they?), so they tend to treat the program as a black box which can't be checked and is therefore just trusted. I know they *should* check but the fact of the matter is that they don't.

Of course, in HMRC's dream world where the GIGO principle simply doesn't exist, this sort of problem (and I'm sure there are going to be lots more) is distinctly off message and probably won't even be acknowledged as an issue.

As well as HMRC blindness, however, software vendors are massively at fault here for creating what is going to be a humongous expectations gap, but I seriously doubt they'll ever get taken to task for their almost blatant misrepresentations.

Thanks (16)
avatar
to adam.arca
21st May 2019 19:35

You are spot on with your views / Thanku

Thanks (4)
to adam.arca
22nd May 2019 10:14

adam.arca wrote:

Unfortunately, most people don't understand how accounting software works (and why should they?), so they tend to treat the program as a black box which can't be checked and is therefore just trusted. I know they *should* check but the fact of the matter is that they don't.

That attitude from the taxpayer is exactly why it's a careless error and not an inherent problem with the software or with MTD.

If you don't understand what you're doing, stop doing it, don't just blindly file the return and hope it's not wrong.

Thanks (4)
avatar
to Duggimon
22nd May 2019 10:40

This article shows just how unaware some business owners are about how they should be dealing with their finances on a daily basis. The current adverts for software are totally misleading. As has been said, many don't know the difference between cash accounting and standard accounting for VAT. The person inputting the data should know the rules, and often they don't.
Businesses should also engage someone to make sure that their software is set up to suit their particular type of business and that the business owner regularly studies the appropriate reports. To find out there are gaps in this knowledge after the year end is absolute folly. Unfortunately, many business owners do not regard the book-keeping as important enough to dedicate much time to.

Thanks (5)
avatar
By nicdell
to Duggimon
22nd May 2019 10:40

It is an inherent problem with both the software and MTD.

It is an inherent problem with MTD because software is required to comply with the statutory requirements and it is an inherent problem with the software because the way the software works is impenetrable for most people so they are required to trust the outputs. Surely no accountants prepare a set of accounts manually to check that their accounting software is producing a correct set of accounts.

If taxpayers were previously getting the right answer using manual processes, then errors post MTD must lie at the door of the requirement to use software instead, and of the shortcomings of the available software.

Thanks (3)
to nicdell
22nd May 2019 11:20

If the software can't do cash accounting, then the problem is indeed with the software. That's not what happened, what happened is that the software could do it, but wasn't set up correctly. That's not a software problem, that's a user problem.

Thanks (2)
avatar
By nicdell
to Duggimon
22nd May 2019 11:43

Obviously.

However, why is the user using a method that they don't understand rather than using a tried and tested method which they were comfortable with and which gave the right result?

And why was it possible for the user to make the mistake? If they were getting it right before, they knew what scheme they were using so it must have been a lack of clarity in the way the software presented the options to the user that lay behind the error.

It's always simple when we know how and it's unnecessary and a grave mistake to sneer at people who don't (yet) know how.

Thanks (3)
avatar
to nicdell
22nd May 2019 12:23

I would ignore his comment - seems like the pompous old school accountant that nobody likes .

Thanks (2)
to nicdell
22nd May 2019 15:08

nicdell wrote:

It's always simple when we know how and it's unnecessary and a grave mistake to sneer at people who don't (yet) know how.

I'm not sneering at anyone, I'm saying that the error outlined in the article is, by definition, a careless error because it's careless to use software you don't understand to file a return.

How the taxpayers and accountants deal with the problem is the biggest issue that MTD poses but the problem is not one of faulty software and the error made by the taxpayer is not a built in consequence of the new rules.

The problem is that whatever way you swing it there is a big cost to a business for complying with MTD if they don't already use compliant systems. For some the best solution will be to engage an accountant when previously this was unnecessary, for others it will be to learn new skills. Either option has a cost that is unfair on the taxpayer.

The third solution of blindly filing without the required degree of understanding or care is no solution at all and is a careless error by the taxpayer, and for that I have little sympathy. I have plenty of sympathy with regard to the necessary steps to avoid these errors though.

Thanks (0)
avatar
to Duggimon
23rd May 2019 09:37

Duggimon wrote:

adam.arca wrote:

Unfortunately, most people don't understand how accounting software works (and why should they?), so they tend to treat the program as a black box which can't be checked and is therefore just trusted. I know they *should* check but the fact of the matter is that they don't.

That attitude from the taxpayer is exactly why it's a careless error and not an inherent problem with the software or with MTD.

If you don't understand what you're doing, stop doing it, don't just blindly file the return and hope it's not wrong.

Pre MTD, I would have agreed with you. If you chose to use software when manual entry was also available, then you'd have to take what was coming if you got it wrong in what could be considered a careless way.

Now, however, when just about every numpty (in the nicest possible way) is forced to use a computer, then these errors are going to happen in droves and I don't think it's viable to argue that they're all careless simply because every minute setting hidden away God knows where wasn't properly thought through or even found.

The careless error here lies with HMG / HMRC in their complicit silence and with the software industry in their non ethical claims. If the Revenue propaganda and software advertising said "we think digitalisation will be fantastic in the long run but we're very sorry that it's going to cost you more money right now as you'll almost certainly need to employ an accountant to use it properly and avoid what for you will be unknown unknowns," then that would be fair enough (although I personally still wouldn't agree with the underlying drive but that's another matter completely).

If, however, all the man in the street knows about MTD is that you need software and that all you need to do with it is grin stupidly at your phone, then is that not a mis-selling scandal just waiting for the first ambulance chaser?

Thanks (4)
avatar
By Dandan
to adam.arca
22nd May 2019 14:06

adam.arca wrote:

I think some comments here are being a bit harsh on the taxpayer.

I totally agree with you.

Ironically, even accountants can fail terribly when it comes to dealing with cash accounting vs invoice accounting.

Accountants understand the principles but very few would know how to transfer a business that uses cash-accounting for VAT from one software to another. I am often called upon to tidy the mess of a colleague who did not understand how to bring individual unpaid invoices from one system to another in order not to mess up the VAT on the new software when using cash accounting for vat.

When I make an issue of it , I get the usual response from colleagues: "we do accounts production and tax. We are not bookkeepers". If we are not then what is it that accountants do ?

Thanks (1)
avatar
By AW71
21st May 2019 20:02

B-b-but the "comedian" on TV said the software does everything for you and you don't need to think about keeping your books.

Thanks (11)
avatar
to AW71
22nd May 2019 10:07

I think the software makes the tea too?

Thanks (6)
avatar
to AW71
23rd May 2019 14:07

Those adverts really irritate me! Surely Trading Standards should be brought in as they are making out that 'Pete the Plumber' can be an accountant overnight - I wouldn't dream of doing my own plumbing so why would he expect to be a tax expert by just taking a photo and pushing a few buttons?! These ads are causing a lot of the problems and are frankly ridiculous!!

Thanks (0)
avatar
By Matrix
21st May 2019 22:37

I can’t believe he didn’t spot the increase in VAT due before filing but I can believe that it happened.

I have one client who has mucked up the flat rate scheme on QB, how this can be possible I don’t know.

Another client moved to QB and put in all the opening client/supplier balances and then put in my opening balances. They only gave me access to QB at the end of the first year so I have only now told them that the VAT creditor is way out. I have no idea if the VAT returns are right, I have handed it back to them and their bookkeeper. I will not be able to prepare the accounts until it is sorted.

I agree with Glennzy’s post except the last paragraph - if you are only engaged to prepare annual accounts and not VAT returns, then you may not see the returns until the end of the year. However I have learned from these two clients that an accountant has to be involved in putting in the opening balances /the VAT set up (some bookkeepers don’t understand balance sheets).

Thanks (5)
avatar
to Matrix
22nd May 2019 09:46

One size does not fit all . If a client is averse to paying the Accountant , is not computer and Accounts literate then MTD presents a real risk that Vat could be paid incorrectly . I am unsure why so many can’t see this . All clients are different .

Thanks (6)
to GHarr497688
22nd May 2019 10:18

If clients are averse to learning how to prepare and file VAT returns and averse to paying someone else to do the returns for them then their returns will be wrong.

This is not earth shattering news but is in fact so blindingly obvious that I'm not sure why you'd mention it, nobody is disagreeing with you on that point.

What many are disagreeing with you on is that this is a problem specifically with MTD. It has in fact always been true.

Thanks (2)
to Matrix
22nd May 2019 10:25

For me, you have to be involved in the first 6 weeks of the setup. The software works on repetition, so if recurring entries are setup correctly that will follow on through the year if errors are made they will also occur throughout the year.

On jobs where we are engaged as year end accountants (so not doing VAT returns) we still go into the software regularly through the year to nip errors in the bud and it gives excuse to catch up with the client.

It doesn't cost the client extra as we find the time spent in year comes off what we need to do if we did it 1 hit at the year end.

If someone was just starting up now with cloud software I certainly would not wait until 12 months was up before I looked at it.

The cloud gives us access we never had with sage, however I do see many accountants using cloud in the same way they did as desktop software, logging in 4 times a year to do the VAT etc which for me is not a good way of doing it, although at the other end of the scale my clients do not need (or pay for if it is a premium service) daily bookkeeping, which I see many accountants now offer/market as their key service.

I have a few clients come to me after buying QBO from the adverts with no external involvement and hash it right up.

Thanks (2)
avatar
to Glennzy
22nd May 2019 16:01

I had a client in his 20's - very sure of himself went on to Xero - told him to let me check it all out after a few months - found out he claimed VAT on every single item - posted everything to Sundries - bearing in mind I had spent hours training him up he took offence and went to get his accounts done somewhere else who said his records were perfect . The firm was one of the big boys who are desperate for clients . How is that fair ?

Thanks (2)
to nodrogbir
23rd May 2019 12:25

That's why find and recode was invented. I guess it depends on how his [***] up was communicated to him if he took offence and went elsewhere.

The other firm maybe did not see it as that much of an issue to repost the general expenses to the correct headings as it is [***] easy with find and recode.

Thanks (0)
avatar
to nodrogbir
23rd May 2019 14:12

I had someone like that - made a complete mess of it, had no idea how to deal with CIS tax and started to 'claim input VAT' on items towards the year end when he wasn't even VAT registered! The problem with him was he had oodles of confidence so talking to him you felt he knew what he was doing but once I took a look I realised he hadn't a clue!!

Thanks (0)
avatar
By Matrix
to Glennzy
22nd May 2019 20:09

I will not let either happen again, even if it means quoting higher or losing the job. If the software is set up correctly and monitored I agree we benefit. If not then it is so time consuming.

There was nothing I could do for my two QB messes this week. One is a new client where the accountant sent me same day prof clearance and had never logged into QB, just not interested. I am charging them for my bookkeeper to sort opening balances/bank rec out but won’t charge for sorting out FRS.

The other one has a bookkeeper and they only gave me the QB login at year end. The bookkeeper is very capable but prefers Sage, I doubt they would pay me to sort it out.

None of my clients do their own VAT returns, they either have bookkeepers or use cloud software and I file.

Thanks (0)
avatar
By SXGuy
22nd May 2019 10:16

All this could have been sorted by software simply having a walk through set up wizard at the start of any new package being used.

Rather than relying on the user to adjust the settings on the fly, a set up wizard would have asked the question "are you using cash accounting or invoice accounting?" at that point, if the tax payer didn't know what it meant, they would have saught to find out.

Software providers love to advertise how easy their software is, but fail to guide the user through the initial set up.

Thanks (2)
to SXGuy
22nd May 2019 11:07

Xero and FreeAgent pretty much do a walk through when setting up as you suggest, takes a few minutes to setup correctly.

Not sure about the others.

Thanks (3)
avatar
22nd May 2019 10:17

I think this chap will be the start of many - the software does it all for you ....... as we all know, that is not the case, however, it can be difficult for people to understand this concept as they try to save themselves money!

Thanks (9)
avatar
22nd May 2019 10:22

Those of us who stuck to our spreadsheet guns have been predicting this would happen since the advent of MTD.

Don't say you weren't warned that the view from the cloud would not be pretty !

Thanks (6)
avatar
to L Haldane
23rd May 2019 12:14

Nothing wrong with the software. Your argument is like "if we but stuck to horse and wagon there would not be pollution". Silly stuff. Rest of the world is going digital.

Its the adverts saying just push a button and all sorted which is part of the problem. Small business owners actually believe it! Then not wanting top pay accountants.

Thanks (0)
avatar
22nd May 2019 10:22

Yet again...we find someone who thinks that software eliminates the need for someone who understands the task, how to do it and how to check it. Software assists in processing transactions and collating data, that's all

Thanks (8)
avatar
22nd May 2019 10:23

Some clients just think "oh that's a good idea", go ahead and buy and set up an accounting package with absolutely no reference to the accountant and leave us to sort it out at the end of the day. I had two clients who did this and had no idea what they were doing. As I have found out (painfully), once the VAT returns have been filed through the software it can be impossible to change the transactions. One involved an error with a bank transaction and cannot even be journalled out.
If clients speak to me first I ask them to please talk to me about the software they want to use and I will help them through the setup process but they don't all do that.

Thanks (2)
avatar
to Homeworker
22nd May 2019 10:34

They can’t force taxpayers to employ Accountants . A few Awebers endorsing MTD need a reality check .

Thanks (2)
to GHarr497688
22nd May 2019 11:26

Show me one person endorsing MTD.

Pointing out that your terrible posts are either exaggerations or outright wrong is not the same as endorsing MTD.

Thanks (0)

Pages