The MTD tech approach: Bank account and ledger in one
Bringing together banking and bookkeeping tools could bring more discipline to clients’ record keeping, with a new breed of software promising to bridge the gap between recording and reconciliation. With MTD ITSA imminent, can vendors do enough to persuade accountants and clients to move their key cash relationships for the sake of efficiency?
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"Providing that is, they can persuade their clients to move the key cash relationship from their existing banks and onto a new platform" ... and there you have it (the foundational fallacy).
Why would you do this (with all the ensuing heartache, from transferring/renegotiating overdraft facilities to informing/transferring all your client/supplier DDs etc) ... in return for such a nebulous benefit?
And suggesting that MTD ITSA is the driver for making this change ... despite neither supplier having anything to offer in that space yet (and one of them not appearing overly committed).
It's like me saying that you should transfer all your business to me because I'm thinking (or even hoping) to have a methodology which might bring you benefits eventually (or might not - who knows)!
I'm pretty sure I saw 'Foundational Fallacy' on the John Peel stage at Glastonbury last week...
I'd describe their sound as slightly derivative of early Hawkwind (around the time of Space Ritual), but with frequent nods in the direction of Isaac Asimov's philosophy!
Nice one. It would've seemed quite unexceptional in 1967, but may be perhaps more frighteningly apposite in 2022. Anyway I like it when a phrase comes together!
So we now add to the cost of MTD, the cost of operating a business bank account. No wonder the banks are jumping on the MTD bandwagon as, like the software industry, it's a cash cow.
I guess my somewhat hidden point, as always, was that anything that helps (preferably the agent AND the taxpayer with assisting HMRC as an added extra) is obviously a good thing.
But this willingness by so many to then label each such 'thing' as the golden key for all is equally obviously misguided. Indeed it verges on the dangerous if it encourages even one person to make a decision that is antithetical to their or their business' well-being.
My gripe is less with the messenger than with those (step forward the comms functions in software companies, banks and govt) who deliberately use the 'story' to obfuscate the reality so long as it makes their own lives easier.
Most of my clients are farmers in digitally-excluded Wales. Cheques still rein supreme. The banks may well think that bank feeds solve MTD, but there's way more to MTD than that. Almost every farm expense needs sub analysing between different categories. Most bank receipts are net of expenses (eg livestock auction fees, milk processor charges etc) so need grossing up. Then there's the complexity of farm private usages: farmhouse(s - most of my clients are partnership), multiple vehicles, different income streams that need accounting for differently under MTD ITSA (eg rental property). And don't forget herd basis, 2-year and 5-year farmers averaging, loss relief restrictions and so on. We then find that bank feeds are trivial and be almost no help at all.
This type of client makes up 90% of my client base. They're still expected to comply with MTD even though it doesn't work for them unless they spend considerable time/money attempting to comply.
I don't think there is ANY solution for "this type of client" ie the typical self-employed, digitally-challenged, very-busy-and-hardly-have-enough-time-as-it-is-without-having-to-take-on-more-pointless-tasks-just-to-satisfy-the-unrealistic-whims-of-ex-chancellor-George-Osbourne. Is there ANY mainstream solution for typical farming partnership, a mainstream solution that automates herd basis, farmers' averaging, farmhouse expenses etc?
The theory of MTD is sound. However in practice it doesn't work. The reason is very simple. You cannot go from "low tech" to high tech" just like that.
Do not yet have any clients with either bank
People still use cash and cheques
You can deposit cash with most digital banks (and certainly with Countingup) at any post office or paypoint outlet. Combined that's something like 30k branches/locations.
The ability to do something is not an effective response to an expressed lack of interest in doing that thing.
If Paul's clients are using cash (at least some of the time) then that must be because they're happy to do so.
Suggesting that they find a PO to visit (so that your App will undoubtedly then provide more comprehensive figures) is not in itself a benefit to the sole trader - which is exactly the overall problem with MTD.
If referring to completeness of records rather than the capability for a client to desposit cash into their current account then there's the functionality to journal in any non-bank transactions.
I'd be very interested to speak to anyone on this topic (please pm me to arrange) as I simply want to listen to keep improving the experience for both client and accountant. If you've got ideas I'd love to hear them.
The banking Apps, in my opinion are of limited use. The biggest issue with all of this is getting clients to understand things like drawings are not wages and HP repayments are not van leasing and any other accounting anomalies that we would analyse out of the P & L as a matter of course but the client thinks they are allowable for profit. I have a couple of clients who use Counting Up. They show me a three line account on their phone when they bring their books in and say - "that's my profit this year" - invariably it is incorrect and I have to explain over again the difference between profit and loss account items and balance sheet items, that the banking App only records whatever goes through the bank account so you have to add in Paypal receipts/payments and cash jobs/payments and anything else that does not hit the bank account. I have to reiterate the fact that the beers down the pub with their co-workers when working away, or their grocery shopping payments are not allowable costs, nor are the payments for personal clothing, holidays, or anything else they may pay through the business account that is not a business expense. It doesn't matter how many conversations you have with some clients, they still do it.
We come back to the whole point. There is no need for mandatory MTD. It doesn't solve any problems regardless of what HMRC think. As for nudging people in the right direction, natural progression would eventually achieve the purpose.
Fantastic to hear you've got a couple of clients using Countingup.
If your clients have granted you secure access to Countingup you can log in on the web and journal in any transactions so that the P&L they see in the app reflects any external/non-cash items.
I'd be keen to better understand how you work with your Countingup clients so we can improve the experience for both of you. PM me if you'd like to do that.
Thanks, Tim (Founder, CEO Countingup)