Without sufficient care MTD could be a disaster

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This is one of the conclusions from the House of Commons Treasury Committee report on HMRC’s proposals for Making Tax Digital (MTD).

The Treasury Committee report, which was published on Saturday, shines a light through the many holes in the MTD proposals, not least the paper-thin cost and benefit arguments.

The committee focused its attention on the proposals contained in the main MTD consultation document: ‘Bringing Business Tax into the Digital Age’. The other related proposals for HMRC powers, penalties, tax payments and new cash basis reporting will be examined by the committee as part of a larger inquiry into MTD.

Digital future

The committee supports the idea of digitisation of the reporting of tax, but it says the mutual trust between HMRC and taxpayers could be eroded if HMRC rushes into dealing with individuals in a faceless and automated way before they are ready for it.

The report makes suggestions to mitigate concerns about MTD, but it says if those suggestions are not acceptable to government, pressure will increase for MTD to be voluntary scheme. The committee expressed a large number of reservations about MTD, including the following:

Exemption threshold

The committee recommends that the government should publish its reasons for the low exemption threshold of £10,000. Its own view is this turnover threshold is far too low. As most taxpayers with such a turnover would not pay tax, there would be no advantage for either HMRC or the business of submitting quarterly reports. The committee said: “To impose MTD on them would palpably be absurd.”

The report recommends that the entry threshold for MTD should be aligned with the VAT threshold, saying: “We heard no strong evidence for setting it at a lower level.”

Timescale

The report points out that the current MTD proposals have ignored the Carter principle (established by Lord Carter in 2006 when developing online services) and the government’s own digital service standard. The later has 18 principles including: “Test the service from beginning to end with the minister responsible for it.”

A key recommendation from this report is that the MTD processes and systems must be adequately piloted end-to-end. This means undertaking an empirical assessment of likely compliance costs and benefits over an entire reporting cycle of 12 months, plus nine months to complete the end of year reconciliation. The committee also stressed the MTD pilots should reflect the role of tax agents. It asks the government to explain the pilot process that it envisages for agents.

In view of the time needed to undertake and evaluate the necessary pilots the committee is recommending that commencement of MTD should be delayed until at least 2019/20.

Costs and benefits

The cornerstone of HMRC’s rational for introducing MTD is that it will help to reduce the tax gap by £945m, including £625m in the first full year. However, the committee is not satisfied that the government’s calculations of extra tax revenue are based on reasonable assumptions. The report says any errors removed by digital recording will be as much in the taxpayer’s favour as the exchequer’s, and it is plausible that the new method of record keeping will increase errors.

Government argues that businesses may benefit from a requirement to keep records and submit information digitally. But the committee has yet to see the evidence to support the view that the benefits to business would outweigh the costs of buying software and accounting support to comply with MTD. It goes further to claim the government has not factored in the costs of MTD for businesses, which will reduce their taxable profits, and hence cut the tax they pay. In other words, even if the tax yield were to rise, the return to the whole economy could be negative.

Free software

The committee has asked the government to define what is means by “free software” and who will be able to use it. The report calls for the government to ensure that there is a functioning market to produce free software that doesn’t contain disruptive marketing material. The government should ensure that access to the software will remain free.

Further reading

The 48-page report is worth reading in full (PDF version), to understand the range of concerns presented by the professional bodies and business groups who gave oral evidence over two days. The committee also took written evidence from 35 named individuals and organisations.

Keen to keep up with digital tax developments? Sign up for our free monthly MTD digest

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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16th Jan 2017 09:58

In other words. It's an entire clusterf*** waiting to happen and should go back to the drawing board.

IE exactly what nearly all us accountants have been saying from the start.

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to andyjdicker
18th Jan 2017 14:35

I think that's the objective. This is HMRC

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By RobertD
16th Jan 2017 10:32

Now that the reality of this ill thought out scheme has been recognised by the select committee attention should be turned to the shortcomings of the HMRC and Treasury ministers who obtusely champion it. Messrs Harra, Gauke, Ellison and co should be held to account. I note that HMRC's initial lame response is that they have exempted the smallest businesses and have consulted (not listened) at every step. Still reading from the hymn sheet.

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16th Jan 2017 11:49

I'm pleased they mention the continued use of spreadsheets too. For a lot of clients, nothing beats the simplicity of analysing on spreadsheets, then preparing the accounts on Taxfiler before completing the Return. No other solution would be faster than this

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By Tornado
to cstwragby
18th Jan 2017 13:40

There is perhaps a perception by those ignorant about these things, that spreadsheet accounting is about some entries in a few headed columns on a single worksheet. Whilst indeed this is OK for many people, many of my clients use comprehensive accounting 'software' written in spreadsheets and sometimes linked with macros. These are all adapted to suit the business of the client and provide any kind of ongoing, monthly, quarterly or annual information required simply by adding to the appropriate reporting links. These clients run substantial businesses and generally send us the their completed "spreadsheet" each month that we check through, amend and repair as necessary and send back to them to carry on with.

This system is easy, cheap and accurate.

If MTD was just about quarterly reporting into a template then we could do that today with the minimum of cost and disruption. The mandatory requirement to use 'recommended' software is unreasonable and unnecessary, particularly as HMRC have given no reason for this requirement.

As cstwragby says, there are already fast and easy solutions in place and the juvenile and arrogant attitude of the HMRC MTD Team in trying to introduce the mandatory use of specified software is totally unacceptable.

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By Tornado
16th Jan 2017 12:19

Pushing on with the January Tax Returns, it brings home the huge diversity of income that some people have such as Rental Income, Joint Rental Income, Several Employments, Self- Employment, One-Off provision of services abroad (such as steward at international games), royalties, etc, as well as capital gains and reliefs for EIS investments to name just a few.

The current Self-Assessment format deals exceptionally well with all of this and as the Returns are being completed after the tax year end, the chances of arriving at the correct tax liabilities is far greater than trying to submit quarterly figures. It really is an absurd idea to do away with the Tax Return. All financial information is based on universally accepted assessment periods and to try and introduce an ongoing assessment system is beyond belief.

I also note that different types of income I deal with in different ways which I have developed over the years to make processing of information easier and quicker. I doubt if there will be adequate mandatory software EVER that can cope with such diversity in the same way. This is where the Self-Assessment system is so good as generally it can already deal with most circumstances, digitally as well, albeit at a year end and not ongoing.

I also realise a lot of the clients I deal with will be completely unable to deal with mandatory software and I simply will not have the time to a) teach them how to use it and b) sort out the mess that they are bound to get into. I simply refuse to work for nothing just to please the Government.

The bottom line here is that HMRC and the Software suppliers will have to sort out the training and helpline queries and probably I, and other Accountants, will simply avoid taking on these type of clients and indeed, offload them well before the mandatory requirements come in. I believe from the HMRC plans, however, that is is precisely what HMRC want so good luck to them.

Great for me, all I have to do is direct people to the HMRC helplines for software training and instructions on how to complete their quarterly statements whilst I take a well earned break in the sun.

Perhaps MTD is a great opportunity after all. I will have no responsibility to clients if they are dealing directly with HMRC.

One final point to note is that MTD is supposed to be about tax administration and not about taxation policy. Taxation Policy is generally based on annual periods whilst MTD is trying to introduce the collection of tax on an arbitrary basis. How can that possibly work and why would you want a tax administration system that was completely at odds with tax policy and fiscal policy in general.

Three cheers for Andrew Tyrie. The man who never gives up.

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16th Jan 2017 12:19

And how does the system work with the queries we get at this time of year from prospective clients who never registered but have their paperwork ready?!

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By Tornado
16th Jan 2017 14:17

As an aside, IRIS apparently have plans to stop developing PAYEMaster and are offering an alternative. The catch is that not only is the new software more expensive, it is not even Cloud Based.

How does this fit into the MTD Dream. The answer is that it does not.

I am not having a dig at IRIS but it clearly demonstrates that giants such as IRIS are nowhere near ready with software to deal with MTD and after all this time, OpenTax still does not work properly for 2016 Tax Returns.

The Government really do need to carefully consider if satisfactory software is going to be available for MTD within 5 years let alone 1 year.

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By Tornado
18th Jan 2017 13:44

As another aside, (what an interesting day), I phoned the Agent Line last week to find out why a client's tax payments were not being applied to the earliest years first. The didn't know and said it would be referred to another department. I asked how long before they would get back to me and I was told 5 days. Sure enough, I get a phone call today just to tell me they are still working on it and I would hear from them again. I didn't bother to ask how long.

How hard can it be to reallocate payments. Surely this kind of thing is already digitally enabled.

EDIT : 18/01/2017 : Still nothing from HMRC. Perhaps their Abacus has lost a bead and they are waiting for a new one.

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By Locutus
to Tornado
16th Jan 2017 14:48

Tornado wrote:

As another aside, (what an interesting day), I phoned the Agent Line last week to find out why a client's tax payments were not being applied to the earliest years first. The didn't know and said it would be referred to another department. I asked how long before they would get back to me and I was told 5 days. Sure enough, I get a phone call today just to tell me they are still working on it and I would hear from them again. I didn't bother to ask how long.

How hard can it be to reallocate payments. Surely this kind of thing is already digitally enabled.

I had a similar thing the other day with RTI. Net debt for the PAYE month was nil, but for some reason the system couldn't automatically allocate the liability with the payment for exactly the same amount, until I called HMRC to tell them to do it.

The entire history of HMRC and IT is that it often doesn't work properly when implemented and takes years to iron out the wrinkles.

It is not even entirely clear why they want to impose MTD. The "closing the tax gap" argument is nonsensical, as errors (if they are genuinely errors) are just as likely to occur both ways. I suspect the real reason is to aid universal credit and to eventually enable quarterly collection of tax.

What will inevitably happen is that many agents will just be forced to submit estimated figures most quarters and some taxpayers that find digital too difficult will find it hard to get any tax agent to act for them at a price they are prepared to pay.

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16th Jan 2017 15:16

With or without sufficient care, MTD will be a disaster.

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17th Jan 2017 11:06

I think we can all agree that moving to digital records in principle is a good idea, especially if this is a voluntary option for tax reporting.

Whether we like it or not, MTD is here to stay. I just hope HMRC consider this report. The only way to save this is to postpone the introduction and after the postponement make it a voluntary process.

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17th Jan 2017 14:24

@stuart, I do not agree that movement to digital is a good idea in general.

it may be a good idea for some client, and they can chose to do that if they wish.

What is a bad idea is mandation of one type of record keeping. not least as they completely stops future innovation.
If manual columnar accounts booked were mandated, then spreadsheets would never have taken hold.....

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18th Jan 2017 10:16

Very useful article, thanks.

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18th Jan 2017 10:22

As all in the accountancy world know without much effort or thought, this is ill conceived. The ideal if fine, but why make it compulsory straight away. HMRC cannot get the basics right just now, how on earth are they going to do this without an almighty mess is beyond me.

Ease into it and move tax payments forward if they want more money in faster

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By DMBAcc
18th Jan 2017 10:47

It beggars belief that with everything else going on in the economy we have had this ludicrous (I thought better than use the words I'm really feeling here) distraction. Sleepless nights worrying how my successful small clients could weather this storm just because of some idiot in HMRC who thought it might be a good weeze to upset the peasants. I am fuming!!!!!!!!!!!!!!!!!!!!!

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18th Jan 2017 10:59

I went on the first meeting in London about agent strategy and I thought wow this is something that could really work. I asked loads of questions and got a bit of crap but mainly the system was thought out, if not adequate. So, I said, what's stopping the progression. Lack of funds was the answer. My point now is, look what HMRC have managed to do with all the money they ever wanted - MTD. Money To Decimate.

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18th Jan 2017 11:05

Must have been the 'state the bleeding obvious' committee that came up with this.
We who should be consulted BEFORE the stupid ideas department comes up with these things could have told them this before they spent millions getting to this stage.
In fact, next time, pay us at the start- we're cheaper and more reliable than whoever came up with this rubbish.
It's on a par with Section 24. Mind you, Section 24 made it on to the statutes so they will probably push on with this stupid idea too.

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to Ian McTernan CTA
18th Jan 2017 11:41

I think you find that it has already been named the NUMPTY Department!

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18th Jan 2017 11:15

Interestingly enough, I noticed that there was a list of contributors towards the end of the report and checked to see who had taken the trouble. Needless to say my own contribution to HMRC's MTD consultation was not mentioned despite the fact it was e-mailed before the close date. I take this as evidence that HMRC is not listening or simply deleting what they do not want to see.

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By RPTAS
18th Jan 2017 11:57

I deal with mainly small self employed sole traders and pensioners. I have been in the taxation world for 40 years.
MTD will be the biggest disaster HMRC has ever faced for some very simple reasons.
1. The general public's perception of the organisation could not be any lower.
2. The general public's understanding of personal taxation is extremely low, by which I mean about 99% haven't the faintest idea.
3. Most people have better things to do than spend their life considering IT.
4. It means looking at their tax affairs more than once a year, which is a complete pain to them anyway.
I'm sure there are many other reasons as well. Come 2020 I'll be 75. Reckon that'll be a good time for Trexit

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By Tornado
to RPTAS
18th Jan 2017 13:57

As you say, why would tax be of over-riding interest to the vast majority of people when there is so much else to do. It may be what HMRC are doing all day but it is certainly NOT what 45 million people and 5 million businesses are doing all day and it is those numbers of people at least who are going to be affected by MTD ...... by 2020.

Trexit does look appealing, especially if we can leave our clients in the supportive hands of HMRC who will provide software support and free advice all day long ..... for 50 million people and businesses.

I hope the 1,300 million pounds allocated to MTD is going to be enough.

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By Oppco
18th Jan 2017 12:27

Having checked a number of cases on HMRC's website for 'information to help you complete your tax return' and found so much wrong (Class 2 NIC, State Pension, PAYE coding notices and so on) I too am jumping ship this year

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18th Jan 2017 13:00

I understand the logic of aligning the MTD quarterly accounting turnover limit with the existing VAT threshold. Logically, however, the relevant limit should not be the registration threshold but that for the VAT annual accounting scheme, i.e. £ 1.35m.

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By RobertD
18th Jan 2017 14:14

Anyone watch the Institute for Government discussion on Better Budgets? Jane Ellison mentioned the TreasCom MTD report and that she would reflect on and "respond to the spirit in which they (recommendations) have been made as constructively" as she can. Her speech included "steady measured approach", "listening" and "clear direction". The woman is clearly delusional.

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By Tornado
to RobertD
18th Jan 2017 14:42

Based on her earlier responses to doubts about MTD, her knowledge of the situation extends only to the Glossy HMRC Brochure on the subject.

Perhaps Ms Ellison will now look more closely at the problems and advise our Chancellor that he could damage his new image if he supports this project in its present form.

Whatever Theresa did to him to get him well and truly on side with Brexit she needs to do again with MTD and make him see sense. (The mind boggles).

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By RobertD
18th Jan 2017 14:17

.

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18th Jan 2017 14:33

Tax gap reduction? What planet are these numpties from. they have no idea how much they have lost from SA and still can't admit that isn't working let alone this RTI nonsense where the electronic submissions are different from the paperwork and different from the amounts received in the bank. Then it's the clients fault for completing his return correctly with the information he has.
Unfortunately you have to apply the spin on this, in that, they are not after the missing tax that was due but the difference between their spending plan and the tax they collect which needs to be met by the honest making mistakes in HMRC's favour. Not what we interpret the meaning as.

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18th Jan 2017 15:00

I hope HMRC listen to Andrew Tyrie and the Treasury Committee for everyone's (including HMRC's) sake.

Just because someone can post something on facebook, instagram etc doesn't mean that they can comply with ALL their tax and legal obligations from an app

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By Tornado
18th Jan 2017 15:24

I wonder if there is actually some liberal 'reverse arrogance' working here in that the MTD Team have decided that they don't know what MTD is all about so it will not actually matter if no one else does.

For sure the complexity of the scheme will encourage a significant increase in mis-information being submitted to HMRC but so what, who cares, there will not be enough HMRC staff to detect and deal with this (or have the incentive to deal with this) anyway so we all win .... don't we?

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18th Jan 2017 16:05

Thank God for common sense. The dumbness , absurdity , error ridden proposals and general negativity in James Harra's wet dreams of MTD have been revealed in the Treasury Committee Report. Sadly we haven't heard the end of the matter and the escalating cost of pursuing Harra's ideology will continue ; costs which could have been put to better use in the creaking HMRC administration and the pathetic service Harra's diminishing staff now provide.
Harra may have been appointed a Companion of the Order of Bath in the 2015 New Years Honours but Harra's remaining time in the Revenue with the grand title of 'Director General of Customer Strategy & Design' is best spent by LISTENING to customers and DESIGNING an efficient system that his staff can cope with.
Otherwise , it is suggested that Harra should take an early Bath.

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18th Jan 2017 16:32

All good stuff!!
Harra, as I haven't heard from you about visiting my office can I come to your office please with a cross-section of my clients?

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By Tornado
to david wilks
18th Jan 2017 16:50

Apparently there is going to be a year long MTD Trial starting on the 6th April 2017 involving 400,000 people. (Yes, it is true but I won't be one of them unless I am offered a seriously good incentive, say £20,000).

I doubt if he will have time to fit you in but keep trying.

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to Tornado
18th Jan 2017 18:23

Thanks Tornado.
I wouldn't mind having a go but would want more than £20k plus free software, training, 10 more staff(all paid for), mainframe computer and an airoplane for the flying pigs.
Harra, can you fit me and my clients in after January please and after the filing deadline of 19th of February. Ta

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19th Jan 2017 18:12

Its going to be great. I am dancing.

a).Treble the clients fees,
b). a heap of accountants retiring ( more clients)
c) a lot cant cope ( more clients)
d) and the ones who say they wont pay more go elsewhere and either no one wants them or they have to pay 4x fees there too so come back ie no client attrition.

e)Hire a heap of AAT trainess to take pictures of receipts on apprenticeship wages using the free software

f)...and order the Bentley.

Lets hope they dont make it the vat limit or nothing will change because (I trust) no ones stupid enough to operate as a sole trader above the VAT limit.

But then....what do I know

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By Tornado
21st Jan 2017 13:44

And another thing .... why do we have to put up with a system that measures tax over a year that ends on 5th April?

I know the historic reasons for this, but in this digital age, surely this ridiculous date should be ditched so that we can all work more effectively to the 31st March or perhaps another month end that is more suitable.

Millions of words on MTD but it looks as though the obvious has been missed.

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22nd Jan 2017 16:00

If it is true that MTD is going to be tested on 400,000 taxpayers then I want details on how that sample is constructed. It needs to be genuinely representative of the population as a whole.

So for example my first question to HMRC will be "of the 400,000 sample, how many filed their 2016 tax return after 31 Dec 2016?"

The answer needs to be "about 200,000" in order to properly reflect how SA16 returns have been filed in practice.

Nothing from the MTD team so far gives you any confidence that they have come from any department other than the Numpty Department. So my fear on the 400,000 is that the sample will be weighted heavily towards early tax return filers who are already on software. Never trust anything HMRC says is my consistent tax policy, and I have never had one single cause to regret that policy yet.

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07th Feb 2017 07:50

I have been asked for further information from the assistant to the Finance Committee in the House of Commons, following my submission to them last year.

I have given her a couple of extra case studies highlighting why I scored HMRC 1 out of 10 in last month's agent survey, and why there is no way a 1 out of 10 tax service is in a fit state to implement MTD.

Engaging with HMRC is a total waste of time, I find pretty much only the threat of a Tax Tribunal gets them to act properly. So with MTD it was always going to be a waste of time bothering with HMRC, it is the politicians we can get to stop this nonsense if it is anyone.

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