Director of Tax www.rossmartin.co.uk
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MTD: Let’s have simplified expenses

9th Feb 2017
Director of Tax www.rossmartin.co.uk
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Nichola Ross Martin has a refreshing view: “Let's be more positive about MTD: quarterly reporting can work. You just need to simplify the process.”

Four returns

Under HMRC’s current plans for Making Tax Digital (MTD) the self-employed and landlords will, with some exceptions, be mandated to submit an additional four online tax returns per year. A year-end submission will be used to tie up loose ends, make tax claims and adjustments.

Concession

Following consultation HMRC has climbed down (a little) on its proposal that taxpayers will have to submit their sales and expenses data each quarter electronically.

Appreciating that the app and MTD-compliant software market is as yet underdeveloped, HMRC has conceded that it will allow the use of spreadsheets for bookkeeping, and the option of simplified reporting of income and expenses, as we have currently under self assessment. I note that HMRC has not yet published its data sets and so we don’t even know what data they really want to be submitted under MTD.

This concession does not survive scrutiny, as the major issues for most of our three million clients and the more than two million unrepresented taxpayers likely to be affected by MTD, are that HMRC is expecting everyone to:

  1. learn to use new apps and software
  2. do all their bookkeeping on a daily basis

It will work

I like disruptive technology and MTD can work. In time, decent broadband, Wi-Fi and battery life permitting, most folk will learn to operate a smart phone or PC, and apps and software will improve (I’m actually working on that). However, what is it with the requirement to do daily bookkeeping? Only large companies do that.

Most people understand that it is easier and quicker to enter data in batches and this is why so many bookkeepers work part-time. I can record 365 receipts faster in one batch than I can record one receipt per day in 365 different batches (even using a spreadsheet with macros). What logical or economic reason is there that leads HMRC to ask a self-employed individual to do all their bookkeeping daily?

Focus on sales

Recording of sales is different to the recording of expenses. Tax fraud, or in HMRC speak, ‘the tax gap’ is made up between the difference between that what is reported, and what is really earned but not reported. The real mischief in the case of the unorganised tax criminal is not the expenses mis-claimed, it is the income undeclared.

It therefore follows that in designing a fool-proof system for MTD, we should focus on income and not on expenses. This element of MTD will make the biggest impact on the UK economy.

Most people can manage to add up their sales or income. For most small business this will be one total per quarter, unlike expenses which are split into different categories with different rules for tax, all which will need to be reviewed when it comes to the fifth return under MTD,  for the year end.

Two steps

I suggest a two-step new alternative proposal for MTD reporting:

1. Reporting of sales income quarterly, in summary (as currently anticipated) 

2. Reporting of expenses by allowing a choice of two options, either:

  • Reporting expenses quarterly in summary (as currently anticipated) or
  • Allowing a NEW option: no quarterly reporting of expenses, you make one claim annually on the year end return

Step one requires a total of invoices raised or cash received, whether originally kept as a hand-written list or on a spreadsheet. This one act of reporting will focus attention on record keeping, it will serve as a nudge and hopefully reduce that tax gap.

Step two gives those who are less numerate or not technologically savvy the option of annual expense reporting. Ideal if you are slow at data entry, lose your phone, prefer to keep your receipts in a big bag, want to report expenses as an annual event on a spreadsheet, or even do this in a paper cash book.

VAT model

In terms of reporting, we already have an easy to use template: it is called VAT online filing.

Less than 8% of VAT registered businesses use their own accounting software to file their VAT returns. HMRC’s VAT online is easy to use. One later issue for MTD (when it rolls out to include VAT) is that a lot of software is currently incapable of making the adjustments we need for VAT and so we have to calculate our VAT returns on spreadsheets anyway.  

Simplified MTD reporting, using a system like HMRC’s VAT online will be a painful experience for most non-VAT registered business. If you only have to report the top line and not worry about the expenses until the year end, life will be much easier, and rather than becoming a nation of bookkeepers we can focus our resources on growing our businesses.

 

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Replies (56)

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By Jo Nokes
09th Feb 2017 14:06

Much too simple; HMRC will never go for it!

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joe
By Smokoe Joe
09th Feb 2017 16:42

It still wont bridge the tax gap, cash to pocket will never go on the system, whether daily, weekly, monthly or annually.
The two most effective ways of stopping unreported sales are
1 - get rid of cash, all transactions will be traceable (and is pretty much possible now, phones can be used to take card payments etc.)
2 - reduce tax rates so that less incentive to evade. In London £42k barely pays the mortgage of a modest semi.

Thanks (1)
Replying to Smokoe Joe:
Stepurhan
By stepurhan
10th Feb 2017 16:21

Smokoe Joe wrote:
1 - get rid of cash, all transactions will be traceable (and is pretty much possible now, phones can be used to take card payments etc.)

This idea has been mooted before. Ignoring for the moment any resistance to this move, there are two main barriers.

1) Not everybody has a phone sufficiently advanced to take payments.

2) Even with such a device, you need a reliable signal to contact banks for authorisation.

Whilst uptake of smart-phones has spread, the first problem is still a major one. Some people don't have mobile phones at all. Many who do have deliberately stuck with basic models because they only want to use them as phones.

The second problem is the more serious one. Unless a secure signal can be guaranteed across the country, the plan is a complete non-starter even if you give everyone phones. My home town, which is a moderately large town, is still riddled with signal black spots.

Thanks (6)
Replying to stepurhan:
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By EnglishRose
12th Mar 2017 09:27

Same here. Even where I am (outer London ) as no mobile mast near we have poor mobile signal. Cash will need to stay for many people.

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blue sheep
By NH
09th Feb 2017 17:52

This article sort of misses the whole point.

We all know that trying to remember what happened last week is hard enough never mind a year later. To be accurate and of any use book-keeping should be done each week or month. This is not a difficult thing to do using bank feeds etc.
Cloud based book-keeping systems are designed to be used every day, every week or every month, when they are used properly they give the business meaningful information, make them more efficient and yes, give them a better idea of what the tax bill is likely to be.
That is the point of the MTD project.

Thanks (0)
Replying to NH:
Nichola Ross Martin
By Nichola Ross Martin
13th Feb 2017 11:03

NH wrote:

To be accurate and of any use book-keeping should be done each week or month. This is not a difficult thing to do using bank feeds etc. Cloud based book-keeping systems are designed to be used every day, every week or every month, when they are used properly they give the business meaningful .

I think you have missed the point of the article! Why on earth do your bookkeeping every day? Every bookkeeping systems is designed to be accurate and computer based ones are designed to automate the process. Whether you chose to do it each day is down to you and won't affect how the software works. It won't help you determine your tax bill, despite the hype.
So far I have found just one self employed individual who is enthusiastic for regular contact with HMRC, this is only because his income y0-y0s and he has difficulty finding work.
In the old days I would simply say to all my clients, save 20% of what you invoice and that will pay your tax bill and give you a little more for a rainy day. Will it be any easier if I look at my phone and see that this week I save £185.15, next week I save £352.63..etc? With daily bookkeeping you can save tax daily! What fun, what a joy! There will be a weird moving total. That would just muddle the hell out of me.

Thanks (2)
Replying to Nichola Ross Martin:
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By EnglishRose
12th Mar 2017 09:29

Exactly. Everyone works in different ways. I do my accounting daily actually but don't do it digitally. We also have poor signal at times - something the NFU talked about at the recent select committee hearing on digital tax. Some people just can't - eg they may have a 3 week business trip abroad and be somewhere without signal. It should not matter how often people do the records as long as they submit the correct information ( particularly income) to HMRC.

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Replying to NH:
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By newby
13th Feb 2017 20:02

I have been using cloud software and find it slow and difficult to use. When self-employed individuals are working long hours the last thing they want to do is the book-keeping at the end of the day/week which is why they give it to other people to do. Business owners/self-employed should not be told how to run their business by government or NH.

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Replying to newby:
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By BryanS1958
21st Feb 2017 11:03

I agree, I have a very fast cable connection and cloud accounting is still much slower than the equivalent desktop product. There is a minor benefit with bank feeds, but in a lot of cases it is possible to import bank feeds to desktop too. Also desktop products such as QuickBooks have better switching between views, etc.

Thanks (1)
Replying to NH:
RLI
By lionofludesch
19th Feb 2017 11:17

NH wrote:

This article sort of misses the whole point.

We all know that trying to remember what happened last week is hard enough never mind a year later. To be accurate and of any use book-keeping should be done each week or month. This is not a difficult thing to do using bank feeds etc.
Cloud based book-keeping systems are designed to be used every day, every week or every month, when they are used properly they give the business meaningful information, make them more efficient and yes, give them a better idea of what the tax bill is likely to be.
That is the point of the MTD project.

I think you've missed the point that most small businesses can find out what they need to know on a day-to-day basis by sticking a bank card in a cash point. They don't need to write up their books every day and they won't do it.

Thanks (1)
Replying to lionofludesch:
blue sheep
By NH
19th Feb 2017 11:27

sticking a bank card in the wall doesnt tell you how much profit you have made or what your tax is likely to be.
I have lost count of the amount of clients over the years who have left the return to the very last minute only to find the tax bill is much more than they have budgeted for, the usual response is "how can I owe that I havent got anything left in the bank, I didnt make any profit"
MTD will stop that if it is used properly instead of finding workarounds as this article suggsts.

Thanks (0)
Replying to NH:
RLI
By lionofludesch
19th Feb 2017 11:36

NH wrote:

sticking a bank card in the wall doesnt tell you how much profit you have made or what your tax is likely to be.
I have lost count of the amount of clients over the years who have left the return to the very last minute only to find the tax bill is much more than they have budgeted for, the usual response is "how can I owe that I havent got anything left in the bank, I didnt make any profit"
MTD will stop that if it is used properly instead of finding workarounds as this article suggsts.

They don't care. They just want to know if they've got enough money to pay Asda.

MTD won't stop anything of the sort. They'll still dispute the profit they've made.

Thanks (1)
Tornado
By Tornado
09th Feb 2017 22:53

Why is there a need to report quarterly?

What is the reason for this?

One annual report, as with Self-Assessment, does the whole job in one go and is likely to be much more accurate than 5 reports that might aggregate to the correct result in the end.

Thanks (12)
Replying to Tornado:
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By Eric T
10th Feb 2017 09:35

If only life were so simple. Unfortunately, people in business do things that require more complex accounting - such as -

entering into HP or lease agreements,
getting engaged in foreign currency transactions,
lending and borrowing money
signing complex legal agreements

The more complex areas of accounting reflect the more complex arrangements people make in their personal and business lives.

The only way to make accounting simple is to make life simple. Unfortunately, this is AD 2017, not AD 1017.

Thanks (2)
Replying to Eric T:
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By ShayaG
13th Feb 2017 18:42

The interest payment on the HP has to be > £500 per year not to qualify as allowable under cash basis (assuming no other interest in the business).

All the items on your list are increasingly less common with lower turnover businesses. As business grows, so will the requisite administration.

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Replying to Tornado:
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By david5541
11th Feb 2017 12:47

Tornado wrote:

Why is there a need to report quarterly?

What is the reason for this?

One annual report, as with Self-Assessment, does the whole job in one go and is likely to be much more accurate than 5 reports that might aggregate to the correct result in the end.


he he he nicola ross martin can afford to cast judgement on the requirements of MTD how many small clients does she have? one drawback- "the software market is still relatively underdeveloped" clients most affected will just not play ball with this quangoistsic empire building idea of hmrc, when they should be putting the winners, who already use offshore tax havens under more scruitiny.....
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Replying to david5541:
Nichola Ross Martin
By Nichola Ross Martin
13th Feb 2017 11:16

On the topic of small clients, I showed HMRC the sort of bookkeeping that we deal with - a note book full of stapled receipts. Client's computer skills so bad that they tried and tried and failed to get their Government Gateway, totally unable to file online, smart phone - you are joking!

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Replying to Nichola Ross Martin:
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By ShayaG
14th Feb 2017 17:42

A book of stapled receipts can be summarised on an Excel spreadsheet - laziness is not the same as incapability.

As regards the genuinely computer illiterate (as well as those who don't speak English, or who cannot read), I believe HMRC should be sympathetic within the boundaries of what is fiscally possible - for example by offering a contract to local libraries or post offices to run drop in centers - but that ultimately the expectation by HMRC that the tax payer uses the internet is not unrealistic.

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By feelingthestrain
10th Feb 2017 12:04

I actually read Nichola's comments a few days ago on her website just before I emailed Jacob Rees Mogg and Andrew Tyrie who are both interested parties on the Treasury Select Committee.

My representations to them were not with the goal to destroy MTD (I think HMRC have gone too far to allow that to happen now) but rather to move the goalposts to make it workable:

1. My old chestnut of a preferred option is to allow three months to file the quarters update which is then more workable for accountants and, perhaps, would solve a lot of our December/January nightmares because we'd have decent data from clients by June/July leaving us a six month window to January.

2. To follow Nichola's approach that a minimum requirement would be to submit income data quarterly with the option to submit expense data annually. Again this is something which seems achievable.

3. To ensure that the threshold is lifted to the VAT registration level. At present we prepare VAT returns for about 70 clients - we could double that with extra staff because at least it's spread evenly and at that level of turnover most clients are running a "proper" business in the sense that they are more likely to work with us e.g. remove the carrier bag clients from MTD.

My overall conclusion was to ask what do HMRC really want? Is it accurate data that can be of some use or are they really looking to fill the alleged tax gap with penalties? I pushed the point that in my opinion (with our firm submitting over 300 returns last year) the current proposals are completely unworkable and will fail very very quickly.

I also added the fact that HMRC's view that perhaps agents would review the quarterly update within the one month window was unrealistic because if an issue then comes up there is no time to resolve it so what do you do then? Answer submit incorrect data - which is a complete contradiction to their alleged goal.

The proposals as they stand should, for our own sanity, paralyse us from believing we have any chance of proper and meaningful quarterly involvement with our clients meaning they submit "rubbish" (you could call it fake data for the value it would probably be), and then we have 10 months to re-work it e.g. business as usual for us and time wasting for our clients through the year.

My advice to all contributors is to be bombarding HMRC, the Treasure Select Committee and the Lords Economic Committee with our opinions - it takes no longer than writing a