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MTD: Is it a trick or treat?

by
31st Oct 2016
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Many accountants are wondering what is the real reason behind Making Tax Digital (MTD). Is there a hidden agenda? A second thought is often – how can I make money out of this change to the tax system?

Trick

Is MTD an elaborate trick to make taxpayers pay tax on a quarterly basis? Or, is MTD a means to improve HMRC’s targeting of tax investigations and thus reduce the amount of tax lost through deliberate or careless error?

I have attempted to define HMRC’s rationale for MTD. This is not easy as there a number of justifications for MTD stated in the consultation documents, and they don’t all stand up to scrutiny.

Accelerate tax payments

This point is denied by HMRC. Although there is a MTD consultation about voluntary pay-as-you-go tax payments, the Government has pledged not to change the payment dates for taxes within this Parliament (ie before 2020). Under MTD taxpayers will be encouraged to pay income tax more frequently, but pay-as-you-go tax won’t be compulsory – yet.

Large companies already pay corporation tax quarterly, and it would be a short step to extend the CT instalment regime to all companies. This will be something to watch for when the MTD consultation documents concerning companies are released in 2017. The current MTD proposals only deal with unincorporated businesses. 

More data

The MTD quarterly updates will provide HMRC with more data about each business, which it will be able to analyse to determine a typical profit profile for each business sector. HMRC could then use those business profiles to identify the outliers and target tax investigations more accurately on those businesses which stray from the norm. This reason is not stated in the MTD consultations.

Return on investment

This is a clearly stated justification for MTD. HMRC want to see a return on their investment of £1.3bn already made into digital services. This is a clear benefit of MTD for the Government, but not for the taxpayer.

Reduce the tax gap

HMRC believe that MTD will reduce errors made by taxpayers, and increase the amount of tax paid by those taxpayers. This assumes that all current errors reduce tax payable rather than increase it (ie reduce declared revenue and increase expenses). HMRC’s reasoning is that the elimination of errors will always reduce under-reporting of income and will not reduce the under-reporting of expenses.

However, if an error is a randomly generated genuine mistake, and not a deliberate misstatement, then the likelihood of an error understating income or expenses must be about equal. If HMRC think that real time reporting of transactions will reduce deliberate errors, that is another matter, but that reasoning is not addressed by HMRC in the consultation documents.

Control over tax affairs

Another justification for MTD is to give taxpayers greater control and confidence over their tax affairs and more certainty. This goal seems to rely entirely on the accounting software working miracles and replacing the expert advice currently provided by the tax advisers and accountants.

No more tax returns

MTD will apparently remove the need to do a personal tax return. This is an illusion as checking and completion of personal tax data will always be required. The tax return goes online and is renamed the personal digital tax account - but it is still a tax return.

Treat

How will your practice benefit from MTD? Do you envisage increased fees to help clients make quarterly updates and to train them to use accounting software?

Replies (17)

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Tornado
By Tornado
31st Oct 2016 11:31

You summary is good but involves logical thinking. Andrew Tyrie, in the 25th October 2016 Inquiry, implied a less logical and much simpler answer in that HMRC have been given an enormous budget to spend and they are just coming up with fanciful ways to spend it. As simple as that.

For me at least it does explain the inexplicable and juvenile approach to MTD. Kids with a credit card at their disposal and virtually no spending limit.

I can think of much better ways to spend 1300 million pounds which would benefit the community many times more than MTD.

Thanks (12)
Chris M
By mr. mischief
31st Oct 2016 15:34

With 100% confidence MTD will INCREASE ERRORS in year 1. I have about 20 clients who maintain excellent records on Excel or by hand. Very high degree of accuracy, the only way the accuracy can go from this very high level is down.

Moreover, there is always a risk in moving to a new system. The best example I can give from my own career was when my employer went on to SAP in 1999 or so. This was en employer with over 100 staff in finance, many of them fully qualified, and over 100 in the SAP implementation team.

Well with 5 months to go before the first SAP year-end we identified that the profit and loss account did not quite tie in to the balance sheet. The difference was £95m. With a load of hard work - the error was caused by capital projects settling to revenue and vice-versa - we got rid of the difference in time for the audit.

So to recap very large companies with lots of very well qualified and experienced staff can at times make a right Horlicks of moving from one accounts system to another. In my view if MTD goes through, with all the cost pressures on our client bases to have a go at DIY, we'll see lots and lots of this sort of thing.

Thanks (11)
FT
By FirstTab
31st Oct 2016 21:35

Thank you. Helpful information on MTD. The article outlines the key issues well.

I have not read much on MTD. The same applied to AE consultations. I was okay since I had no option but to go with it.

Thanks (1)
Jennifer Adams
By Jennifer Adams
01st Nov 2016 10:25

A new client has just left my office. Limited company, payroll of 1, VAT, CIS = a good job.
He proudly told me that he uses a spreadsheet for his bookkeeping - "is that OK?"
>> I hadn't the heart to tell him...

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Replying to Jennifer Adams:
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By RobertD
01st Nov 2016 10:34

JAADAMS wrote:

A new client has just left my office. Limited company, payroll of 1, VAT, CIS = a good job.
He proudly told me that he uses a spreadsheet for his bookkeeping - "is that OK?"
>> I hadn't the heart to tell him...

I'm sure if you had told him about dividends tax, AE and MTD he'd have gone straight to the Job Centre

Thanks (8)
Replying to RobertD:
By chariot4info
04th Nov 2016 12:16

I have spoken to a few clients both new and old, and have been pleasantly surprised by their reactions to MTD.

One existing client who has used paper records for years actually admitted to me that he and his wife use "Quicken" to manage their household. A move to QuickBooks for his business would not be a hard sell.

Success or failure can be measured in my opinion. Over time clients will evolve just like when self-assessment was first introduced. The biggest issue for most will be how much extra it will cost.

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By draccserv
02nd Nov 2016 10:36

Humorous, but alas true.

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By North East Accountant
02nd Nov 2016 11:05

Personally I think MTD is being introduced because of the following;

Back in 2006 HMRC got details of offshore bank accounts from 302 financial institutions and got circa 400K names and addresses. Comparing this to circa 10K declared on Tax Returns lead to Offshore Disclosure Facility, New Disclosure Opportunity, LDF etc.

It gave HMRC the taste for getting info direct and they were obviously appalled at how much people were not declaring the correct income. As they couldn't cope with the volume it lead to these numerous disclosure opportunities - Plumbers, Let Property Campaign etc to get people to come clean.

This lead HMRC to realise that it is far easier and more lucrative to get the information at source, (offshore coming onboard with Common Reporting Standard) and go back to HMRC assessment of liabilities rather than Self Assessment and then enquire where income missed off by taxpayer.

MTD is for the bits where the information is at the business and there is no easy other way to get this information.

HMRC can then turn into a compliance machine with Connect pinpointing taxpayers for investigation with the real purpose of MTD on page 36 at 5.9 of the condoc "Bringing tax into the digital age"

"HMRC will use the data in the updates to build a better understanding of each business. This data provision will help HMRC to provide support and assistance to those businesses who need it (yeah - right). In turn this enables HMRC to more easily identify those businesses who deliberately do not comply with their tax obligations and to focus its efforts on them"

So folks once you get MTD bedded in you can look forward to a never ending stream of enquiries, which will be a shock to the system after years of very few or virtually none.

Thanks (4)
Replying to North East Accountant:
Tornado
By Tornado
02nd Nov 2016 12:26

"HMRC can then turn into a compliance machine with Connect pinpointing taxpayers for investigation with the real purpose of MTD on page 36 at 5.9 of the condoc "Bringing tax into the digital age""

I have first hand experience of HMRC using Connect information and it was a joke. The HMRC Officers clearly had no idea what to do with the 'raw' data presented to them which, it turned out, was riddled with errors and inaccuracies.

If HMRC want to rely on this type information then they need to ensure that their staff are fully trained in interpreting it.

As with all data, it is no use the system identifying millions of possible instances of 'unexpected data' when there is no one to do anything with it. I feel sure that Self Assessment has been identifying possible errors for years but there is only so much that one member of staff can do. It would work much better if there were hundreds of thousands of additional HMRC staff.

And therein lies the rub .... more digitalisation will require significant increases in HMRC staff if the system is going to work properly.

Why not just give in now and work with Accountants and other Agents more closely to create a more efficient way to administer Tax?

Thanks (0)
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By HLB
02nd Nov 2016 11:09

£1.3bn is a figure I have seen time and again. That's an awful big number. What on earth are they spending it on and with whom? Has anybody any knowledge or ideas?

Thanks (2)
Replying to HLB:
Tornado
By Tornado
02nd Nov 2016 12:27

Yes, 1300 Million Pounds !

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By johnkcound
02nd Nov 2016 11:13

It's all about real time information for paying Universal Credit.
Simples!

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By SXGuy
02nd Nov 2016 11:26

What makes people think that if a client doesn't want to do his own recording keeping now that he's going to want to do it after MTD? Are we all forgetting about these once a yearers who dump a load of paperwork in a carrier bag in front of you and ask you to prepare accounts and submit their return? What will change their will or want to use an accounting package? Nothing. So it will be up to us to chase them every quarter for a smaller carrier bag of receipts and use our own software on their behalf. I'm still unclear as to whether we can submit figures on their behalf or not but if we can't, I can see it being a real pigs ear explaining how they have to do something they already pay us to do now. Yes fees will go up, a small firm like ours can not cope with all the yearly clients every 3 months unless we employee more staff and as a result will have no choice but to pass that cost on.

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By Nick Graves
02nd Nov 2016 11:48

A bunch of over-educated fools read George Orwell's 1984 at a third-rate uni and (having never even heard of Ludwig von Mises, let alone read his treatises as to why totalitarianism will always result in economic collapse, as the Berlin Wall did...) and thought collectively 'now there's a good idea!'.

Next topic...

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By JCTS
02nd Nov 2016 12:16

MTD, surely is leading to PAYE type system for self employed.
Clients will not want to pay more, for a quarterly service, especially very small businesses, who @£ 10000 p.a. t/o are only just scraping by, not even on living wage equivalent, and therefore errors will be more, they at present employ a tax agent , to get correct figures. Tax is not simple .

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Replying to JCTS:
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By johnjenkins
02nd Nov 2016 13:58

Got it in one JCTS.
There can only be one reason for Quarterly figures and that is to then put the smaller SE on to RTI. Perhaps HMRC should be asked why they don't do this in 2020 instead of fannying around with quarterly crap. At least then we will know what we are dealing with and can prepare for it properly.

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By LAC47
02nd Nov 2016 14:58

Very good points Rebecca and a good follow up to your recent AccountingWeb webinar which was also excellent.
Thanks. Laurence Cohen

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