Editor-in-chief Tax Adviser Magazine
Columnist
Share this content

'Tax Adviser' puts MTD apps to the test

6th Jan 2017
Stopwatch - tax time & motion study
iStock_Stopwatch_Mari
Stopwatch - tax time & motion study

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:

  1. A gap year student (with no experience of bookkeeping or tax) to be our ‘Eve the carpenter’

  2. A set of invoices and expense receipts for three businesses, already sorted into the proposed sections suggested by HMRC; and

  3. 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.

Initial conclusions

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.

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

Replies (23)

Please login or register to join the discussion.

avatar
By adam.arca
06th Jan 2017 13:39

And....?

Firstly, well done for actually putting the Revenue hype to the test. It's absolutely no surprise to me, nor I should guess most practitioners, that going down the "app route" actually increases, very markedly, bookkeeping time rather than reduces it as in the Revenue's imaginary world. Mine was gut feel, however, albeit based on decades in practice at the sharp end. Yours is practical evidence.

But what are you going to do with that evidence (as the article doesn't say)? You are going to share this with the Revenue, aren't you? What is your position on MTD? Are you broadly in favour and this was an effort to help fine-tune, or are you opposed and this was an effort to derail?

Thanks (4)
Replying to adam.arca:
Chris Mattos
By Chris Mattos
06th Jan 2017 13:58

Hi Adam

The full report was submitted as a response to the consultation and I know that it has been noted by HMRC.

As I say in the article some aspects of what is being suggested do make sense and I am broadly in favour.

Kind regards

Chris

Thanks (4)
Replying to adam.arca:
avatar
By yvetten
09th Jan 2017 12:37

I can confirm Chris's full report was shared with HMRC towards the end of last year.

Yvette Nunn
Joint Chairman ATT Technical Committee
Chairman Tax Adviser Sub-committee

Thanks (4)
avatar
By Matrix
07th Jan 2017 18:44

I read it in Tax Adviser. It was really good to have an article about small businesses for a change.

I need to read up on the listing approach since this seems like a huge issue. What does this mean? A taxpayer just submits unreconciled bank transactions?

I was involved in the CIOT response and carried out the survey but was more interested in the additional cost to clients and the threshold. So I have not focussed on this listing issue.

Thanks (2)
Replying to Matrix:
Chris Mattos
By Chris Mattos
10th Jan 2017 10:08

Hi Matrix

In the MTD consultation:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

The transactions that would be required to be shared with HMRC are described as follows:

5.4. We have listened to business concerns about updating transaction level data to HMRC and therefore confirm that the update of income and expenditure will be only summary data.

No mention of balance sheet items and then there is further reference to an Annex which summarises the categories that would be included:

5.10. Businesses over the VAT threshold already complete Self Assessment tax returns detailing and categorising their income and expenditure. But they currently submit less detailed VAT returns. Under MTD, quarterly updates will cover both taxes and one option might be for the dataset for each update to be standardised, for example, on the Income Tax return model mentioned in Chapter 3 and an example of which is shown in Annex A.

You can find Annex A at page 78 of the PDF and you will find that there is no mention of balance sheet items such as fixed assets or stock.

This is the reason for my concern that a small business records their transactions one after another but doesn't have a sense check that everything is included - e.g. a bank reconciliation.

Kind regards

Chris

Thanks (1)
Chris M
By mr. mischief
07th Jan 2017 19:35

ALL the clients I have who've come to me on cloud systems - which admittedly is only 4 as I probably put off a lot of cloud people by describing such systems as "generally pants" in public - have incurred significant extra expense to get me to sort out book-keeping howlers.

One came to me from one of the largest 20 practices in the country. The accounts showed the directors being £25k overdrawn, and this had led to them looking to leave.

Well I did some hard yards on the historic VAT return and found £30k of input VAT not claimed due to the director - a £150k per year IT expert! - not understanding how to run the VAT, and what I considered to be a major weakness in the software, since fixed when I raised it with the company.

DR HMRC £30k CR Directors' Loan £30k it does not get any better than this in your first 3 months with a new client.

ALL of these systems are slow. Repeat ALL. All of them have weaknesses not seen in the more established market offerings such as VT and Sage.

This is a time bomb and if MTD goes through we the profession must ensure the bomb explodes in HMRC's faces.

Thanks (14)
avatar
By Matrix
07th Jan 2017 20:46

When cloud software works then it is great for the business owner and their advisers. I agree that when it is not used properly then it is virtually impossible to sort out. I have clients with transactions missing from the bank feed which take ages to rectify and they just don't get how it all works or is supposed to work. It will all be painful.

Thanks (1)
By ireallyshouldknowthisbut
09th Jan 2017 09:45

Chris,

What an excellent idea, actually testing stuff to see if the theory fits to the practice.

And it turns out, my theory - its more work - does. And HMRC's theory - its magically less - is shown as rubbish for micro clients.

However, given 'experts' are no longer valued members of society I imagine your efforts are futile.

My own rule of thumb in the office is anything under 250 transactions a year - do in excel.

Thanks (4)
By cfield
09th Jan 2017 10:49

HMRC only hear what they want to hear when it comes to MTD, so I doubt if these findings will influence them one jot. They will simply assume it is the big bad accountancy profession panning their pet project yet again.

Thanks (4)
avatar
By coleprice
09th Jan 2017 11:34

Excellent stuff. I suspected this would be the result but great to have it quantified.

I did download Camscanner some months ago, (recommended by one of the cloud-based systems), and my first couple of attempts to record and file a purchase invoice took about 10 minutes each. Experiment discontinued.

I've since started to put some larger clients onto Quickbooks with a view to training them and myself over the next few months. The bank auto download is great (better than I expected) but only where all of the following are true:
1) Client rigourously keeps separate business bank and credit card accounts.
2) Receipts and payments analysis varies little each month, so that the initial set up captures say 90% of all normal transactions thereafter.
3) Client is organised enough to keep a date-ordered file of the supporting documentation, either electronically in the first place, or for later scanning, or simply left as a paper record.

The point is though, that where items 1 and 3 above are true, then paper cash book records or Excel have always provided accounts at least as accurate as the best a cloud-based system can do, giving the lie to HMRC's assertion that digital is necessarily more accurate, let alone quicker, as Chris' experiment elegantly demonstrates.

Where the condition attached to (2) above is true, then there is certainly a speed benefit, but always providing that (1) and (3) are also true. It also arguably may allow faster processing and manipulation of management information where the client is interested in anything more than turnover, profit, tax and cash flow - (but in my experience few small businesses are).

Oddly enough, about an hour before the AW post came through, I signed up for a short Bank Receipt webinar on Wednesday to have a look at their 1Tap app for small self-employed businesses. Will report back...

Thanks (4)
Adrian Pearson
By Adrian Pearson
09th Jan 2017 12:09

@coleprice

I'd be interested in hearing your thoughts on 1Tap. I did same webinar a few weeks back and was pretty unimpressed. The app itself is nice but 1Tap/Receipt Bank do not understand what accountants actually do at year-end time, and need, in my view.

In a follow-up sales call, the young lady just kept banging on about the fact that they had solved my primary pain point - dealing with a bag of receipts at the end of the year. When I tried to explain that very few accountants will accept that situation from very few clients and that's not the way we work, she seemed to think what I was saying was heretical. 1Tap are on a mission but I don't think they understand the people they are trying to preach to.

Thanks (8)
Replying to Adrian Pearson:
avatar
By coleprice
09th Jan 2017 13:40

Hi Adrian

Will come back via AW on Wednesday.

Thanks (0)
Replying to coleprice:
Adrian Pearson
By Adrian Pearson
13th Feb 2017 11:05

How did you get on?

Thanks (0)
avatar
By NYB
09th Jan 2017 12:18

I run a small payroll buisness, an EBay business (declared), part time employment, a couple of pensions. I would not have a clue where to start. Mainly with the EBay transactions which involves amounts in, Ebay amounts, Paypal amounts, postage amounts - mainly on a daily basis. I consider myself fairly intelligent in these matters but ............ Why do HMRC think that small business is there for them. People are struggling to make a living and lets face it many don't have any acumen to operate via the software.

Thanks (7)
Chris M
By mr. mischief
10th Jan 2017 10:32

This whole thing reminds me off a period in my career when my company - £1bn sales - went on SAP. SAP has a module for automatically calculating profits on long term projects, I was seen as a total Luddite for continuing with my spreadsheet profit model.

This element of my business had about £30m in fixed price sales per year, and in another division of about the same sales they went for the SAP automated approach up to their necks.

Roll the clock forward 2 years. My numbers were robust and flagging up issues whilst they were small ones, the other division had switched on SAP and switched off their brains and was reporting "write-offs" and "provisions" by the bucketload.

It wasn't just the finance implosion, other factors too, but the whole fixed price area of that other business was rolled into my area, at which point I found a few unexploded time bombs which had also been missed as SAP did not have them in its little model.

Technology is a tool, not an excuse for switching off your brain. Having a fancy new software system and switching off your brain is how HMRC operates, no self-respecting accountant can ever follow suit.

Thanks (9)
avatar
By Ian McTernan CTA
10th Jan 2017 10:33

My experience of these apps that record receipts etc is woeful. I had a client who thought it was wonderful and thought they were doing a great job- right up until I got to check it all and told them it was going to cost twice as much to fix all their errors than if they had just brought it all in a paper bag! End of that app for them.
I do have some clients on QB online and generally it takes longer to review and fix all their entries than if I had just done it myself, although the gap closes after 3-5 years as they learn more by experience.
Trying to force everyone on to some sort of reporting system is going to be one big mess. The ones I feel sorry for is those unrepresented taxpayers who will no doubt end up paying way too much tax or face an enquiry and have no clue how to retrieve the information to give to HMRC.
Or as someone was heard to say 'I didn't realise I needed to keep receipts any more as I thought the app kept them all'. But the app disappeared. HMRC enquiry. No records. Big tax bill.

Thanks (2)
avatar
By KateR
10th Jan 2017 17:41

I think it was a great idea to test HMRC claims regarding book-keeping apps. But why did you use a gap-year student who, although having no experience of book-keeping or tax, was no doubt very familiar with apps. Why not try it with someone like my Brian the builder, in his 60s with minimal experience in using a computer. These are the sort of people for whom MTD will mean Making Tax a Disaster.

Thanks (2)
avatar
By DianaC
10th Jan 2017 11:08

It would be great if HMRC employees actually understood their own systems. I am in dispute with them at present because they cannot understand that VAT returns based on actual cash received or spent are different from end of year statutory accounts! Also their online reporting system has so many errors in it that I have no access to fix that I have given up. They never respond to requests or complaints.

Thanks (0)
avatar
By swatt66
10th Jan 2017 11:32

Great to read an "emperor's new clothes" approach to getting things done quickly. There was a phase a few years ago when tradesmen, estate agents and other professionals turned up with ipads.
Bashing off transactions in excel seems to be the quickest, although lacking in rigour.
It is a shame HMRC will not work with front end excel templates so that accountants could cross-link their data which arrives in so many formats. It is beyond most humans to cross-link in iXBRL.
Accountants spend their time transcribing: viewing data in one location and typing it in at another location.
However, I am sure many accountants enjoy the moment when the online filing uploads a hefty chunk of tax return in a few seconds.

Thanks (0)
Julie Stacey
By Pingsquitch
10th Jan 2017 12:08

I would be very concerned about the accuracy of the app. Most of my clients use a phone purely for making calls. I note you mention using Excel with "super-fast broadband". I live in rural North Devon and trying to get things through to HMRC can be likened to watching paint dry! Unless there is a vast improvement in broadband speeds, I can envisage all sorts of problems; i.e. in the past I have received acknowledgements from Government Gateway, but apparently this does not mean that HMRC have received the document? How does one know if it has actually arrived? What are the penalties if HMRC maintain that it hasn't?

Thanks (0)
avatar
By farrcorfe
10th Jan 2017 17:00

Don't forget that the eventual cost of £1.75 BILLION to get MTD up and running will have to be recouped from the taxpayer and HMRC cannot do that just by hiking up the personal tax bills as they already have had extra personal tax by way of dividend tax to go someway toward paying for the reduction in CT. Fines ('penalties') will be the Revenue's way of getting this money as their penalty culture is now an important feature of the tax system. Shame on them.

Thanks (0)
avatar
By AndrewV12
12th Jan 2017 11:21

Extract above
'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'.

Sounds familiar, but why does she not write up a cash book or spreadsheet on a regular basis, some clients do some do not, has anyone ever asked her to write up her records on a quarterly basis, I bet not.

Thanks (0)
avatar
By AndrewV12
12th Jan 2017 11:24

Just goes to show you, 'Keep it simple and uncomplicated' is the best approach, most times anyway.

Thanks (0)