Chris Mattos, editor-in-chief of Tax Adviser magazine, summarises the initial findings of an experiment he conducted to test the time it takes to compile records using paper, PCs and smartphone apps.
It started with some stories. Firstly there was John the plumber on YouTube and then there was Eve the carpenter who featured in the consultation document. Like the fairy tales of The Brothers Grimm they brought concern to many.
The stories had been developed to explain HMRC’s Making Tax Digital (MTD) plans to fundamentally change the way that taxpayers interact with the tax department. HMRC explained that MTD will help small businesses become more efficient which should result in them benefiting from cost savings.
All about Eve
Let’s hear about Eve. Eve used to keep her receipts and paperwork in a drawer, pulling it all out once a year when completing her return.
It took a lot of time to find, sort, categorise and enter in one go, Eve had forgotten what some receipts were for, and was aware that some receipts for both income and expenses were either not kept or lost during the year.
There is absolute sense in this. Ask a small business about its finances close to the filing deadline and you get a blur – most of the January headaches come from a lack of memory of what passed over a year ago.
Back to Eve. With the app on her smartphone, she is now able to capture her receipts closer to real time either at the checkout or when she gets back to her van. Most of the time she quickly photos her receipts when she gets them, capturing them within her software which stores an electronic image in the cloud storage.
Some stores that she uses to buy materials send her an electronic receipt, which she is quickly able to file in her software. When captured in her software, her app populates automatically with amounts recognised from each receipt. In these cases she is prompted to confirm that all amounts are business-related and for those that are, what expense categories they come under.
For those amounts not automatically recognised, for example because the printing is not clear or the receipt has been damaged, Eve can easily add any missing information in the app.
Here the screams start. What of the practicalities? Why the promotion of a listing approach when double entry bookkeeping has worked for centuries? What about all the many other priorities on a small business owner has on their to-do list? Does this really save time? What if the technology isn’t up to it?
Many points of concern were being highlighted by the professional bodies in their responses to the MTD consultation exercise.
Like many I made an effort to prepare a response from the perspective of the small businesses I advise in practice. I felt that it was important to go one step further to the theoretical arguments with a study of the potential effect of the proposed changes.
We put together these three ingredients to test different tax-processing scenarios:
A gap year student (with no experience of bookkeeping or tax) to be our ‘Eve the carpenter’
A set of invoices and expense receipts for three businesses, already sorted into the proposed sections suggested by HMRC; and
The tools to record the transactions – an old style paper cash book, a PC (with Excel and access to super-fast broadband) and an iPhone.
Our MTD input study showed a considerable average difference in timings between the methods, notably that using an app to digitise the accompanying paperwork was nearly 40% slower than recording just the transactions in Microsoft Excel.
Handwritten entries even outpaced the mobile app, by about 20%
We found high error rates in the auto-recognition function of the software used, as high as 50%, and there was a high need of a manual override to get the correct recording.
Using the app produced some discrepancies in the recording of expenses.
The main focus of this project was to assess the time taken to record the full account details. HMRC states that digitising should speed up the process and make it easier, but our results show that a digital record of the backing documentation can add to the time and costs to keep records.
In addition, the listing methodology takes away the ability for businesses to to double check their figures, for example by carrying out a bank reconciliation.
You can read more about the study on the Tax Adviser website.
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