MTD: Let’s have simplified expenses
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.”
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.
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:
- learn to use new apps and software
- 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.
I suggest a two-step new alternative proposal for MTD reporting:
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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.
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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Nichola Ross Martin FCA, heads up www.rossmartin.co.uk a unique practical tax database with Virtual Tax Partner support for accountants.