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Coconut tax categorisation app
Coconut app

The MTD tech approach: Tax categorisation engines

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With 4.2m taxpayers due to be brought into MTD for income tax in 2024, the biggest unanswered question is what tools will help them file? Richard Sergeant examines a new app category that aims to plug this gap.

24th May 2022
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Accountex 2022 was full of messages and technology aimed squarely at the MTD ITSA challenge. But one of the biggest issues of all was barely addressed: keeping things simple for sole trader clients.

Many accountants are looking to the major ledger providers for answers. As Sam Mitcham of SJCM pointed out on one Sage panel: “I’d love to be able to have all my clients on one bit of software, but I’m not sure that’s going to be possible and we’re going to have a number of options for clients.”

So, choice is needed. But with every developer offering their own brand of MTD solution, it might help to break different approaches down into some useful categories. This article sets the scene by examining software that sets out to catalogue as much of the initial data as possible.

Tax categorisation tools

This group of solutions takes data directly from bank and credit card statements and applies what it believes to be the most appropriate categorisation for that line item. Providing the bank data is up to date, the tricky part of collating and analysing is done within the app and the accountants’ portal. 

Crucially, the software allows you to apply your professional judgement to override these categorisations, pinpoint business rather than personal expenses and generally apply a discerning eye. 

The appeal here is that it is a solution that generally doesn’t ask the client to change or do much differently. Providing they are using a bank, even for putting in cash takings, then the transactions are pulled through automatically.

Automated data, not tax knowledge

Two prominent providers in this area are Coconut and Untied, and both take a similar approach: they’re there to help with bringing in data, but not to complete the process. 

Coconut managing director Sam O’Connor told AccountingWEB: “We believe in control and workflow, which is about automating the things we can automate and then using that to enable really efficient workflows. So we can make things better, easier and improve the overall experience. However, we do it without accountants ever losing oversight.”

Untied’s managing director Kevin Sefton concurred: “The system should offer suggestions, but it shouldn’t make decisions it's not certain on. We can set rules, but it’s up to the client and accountant to decide how things should be treated.”

Simple features and reporting

While categorisation tools provide basic invoicing and requests for payments, they play down the need for the extra functionality and reporting that might come prepackaged with some of the major players in the bookkeeping space. 

“Most self-employed people will know how much cash they have and will benefit from the app giving them an idea of their tax estimate, but they really don’t need a balance sheet, detailed profit and loss or cashflow statement. There’s very little value in providing this if it’s not understood or in fact not needed,” Sefton said.

This view will be shared by many, especially if the initial battle will be to just get clients started. Whatever the merits of being able to monitor business performance, tax position and cash management, this is still a tough case to make when clients face inevitable cost increases and more (presumably unwelcome) regular interaction with HMRC. 

Too many features may just make the job that bit harder, to begin with.

Filing and reporting

For MTD ITSA, categorisation holds the key to producing meaningful figures that can be filed, according to O’Connor. “The real efficiency comes in the quarterly reporting and we are highly effective here because the data is generally very structured. Getting this working well is where we have focussed a lot of time and it’s here that the idea of filing at ‘a click of a button’ lives,” he said.

However,this is only part of the story: additional income and allowances are needed to create the end of year statements. Untied and Coconut may be winning customers when it comes to compiling structured data and building efficiencies into the quarterly reporting process, but the year-end crystallisation will need more unstructured data from the clients too.

However, O’Connor thinks these apps will play a role here too: “We’re continuing to invest in areas that will help, for example making it easier to determine the right amount that can be apportioned to things like utilities and then creating the correct expense.”

Both solutions offer APIs, so linking to tax prep apps is likely to be high on the agenda and should be a given in the growing climate of interoperability. But both apps should have sufficient capacity to consider bringing direct end of year and confirmation filing into the mix.

Are they ready?

Without question, these tax categorisation engines are ready in principle and keenly positioned to help make simple clients profitable for MTD. With little technical set-up or training required, the level of client participation can be kept to a minimum – although both of these vendors would stress that this is not an excuse for them to abdicate responsibility.

With Coconut costing £7.50/month and Untied £9.99/month for their premium products (check their pricing pages for details of annual plans and partner pricing), this may seem like quite a jump for some sole trader clients.

Replies (25)

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By Ian McTernan CTA
24th May 2022 14:31

'Without question, these tax categorisation engines are ready in principle and keenly positioned to help make simple clients profitable for MTD.'

Any way you look at it, it's not going to be cheap or pretty.

Let's take someone with 15k of reportable income, 10k profit.

Cost of software they haven't previously used: £120 per annum.
Cost to fix the dozens of errors made on categories, split etc and file 4 quarterly reports ; £480 (I'm being extremely low on this, will probably cost the firm a lot more than that).
Cost to file 5th and include final adjustments say £360.

Current cost say £360.

So an extra £600 for zero benefit for the client. So either you offer a discounted service (not profitable) or cut corners somewhere. Or just file any old rubbish for the 4 quarters...

Good luck persuading a client they need this as they clearly don't. Zero benefit to them, despite HMRC trying to say there is.

I wonder how many will just ignore it until the penalties start getting issued (especially the ones who don't have agents and don't want to pay one!).

Let's not even get started on the vastly increased workload and shortened deadlines and the huge staffing issues this creates.

Thanks (5)
Replying to Ian McTernan CTA:
Richard Sergeant
By Richard Sergeant
25th May 2022 15:33

I'm in total agreement that this is a tough, tough sell AND going to put practices under pressure to sort out....and run....profitably...for ever.

But, I would suggest that if one wants to service these clients moving forward, a way has to be found, and yes their costs will go up.

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Replying to rsergeant:
Glenn Martin
By Glenn Martin
25th May 2022 23:45

Well said Sarge.

Ultimately this is going to happen whether you like it or not so you need to deal with it and come up with a way that you can make it work at price the clients will pay.

I would also be keen to know how many of the 4.2m self employed this will effect work full time self employed for £10k per year which is half the minimum wage.

Regardless of MTD if you are honest advising those people they would be better off in employment, which they would be with pensions and paid holidays, along with the flexability now for many with WFH etc.

I suspect that MTD will drive many back into employment which is maybe the real driver for HMRC to do this.

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Replying to Glennzy:
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By JD
26th May 2022 11:37

''Ultimately this is going to happen whether you like it or not so you need to deal with it'' - This is what they said about joining the euro.

Just because it seems inveitable does not make it right or that the self employed (or us as professionals) do not have a choice. There is nothing wrong withpaper records. If there are not clear benefits to the self employed, we as professionals have a responsbilty to object. It is reasonable to make a clear decision/choice as to whether this mass-surveillance/enforced digitalisation of a population - 1984 sytle, of which MTD is a part, is something we are going to accept.

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Replying to JD:
Glenn Martin
By Glenn Martin
26th May 2022 13:52

MTD for VAT was predicted to be the end of the world as we know it by many on this platform, the reality was another non event easily managed like the millenium bug and several end of the world events predicted before.

Government want the data they don't need to provide a benefit to the self employed although there is many benefits for small business having better records, most of which are ignored on this platform, as its easier to resist change than provide clients with better lives and more time to enjoy themselves.

Yes we can object but how successful have accounting bodies in changing the course of this.

If you want to survive you will have to adapt your business to make it work, already I have heard of estate agents bringing in resource to deliver the filings for landlords for increased management fees as they see the opportunity to provide an enhenced service to their clients but most on this platform don't seem to like earning fees.

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paddle steamer
By DJKL
24th May 2022 14:34

Wonder how many extra Mars bars and Coffees will now get slotted within MRE?

And good luck with any software analysing my Amazon purchases from mere bank statements: professional publications, ironmongery, covid mats/hand cleaner/dispensing equipment/signs, signage generally, non slip tread overlays re boat gangways and 1001 other assorted items including teapots and even the odd office chair.

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Replying to DJKL:
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By Hugo Fair
24th May 2022 23:49

Sounds like you run an office with an excitingly artistic/creative vibe ... which thus ensures daily contentment from the workers.
Rees-Mogg would be proud of you ... I think? :=)

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Replying to DJKL:
By Charlie Carne
26th May 2022 11:39

This only applies to non-VAT registered sole traders, so no VAT to split out and the categorisation is essentially between personal and business. The exact category on the SA103 is realistically a choice between repairs and office costs (as Amazon is unlikely to fit the other boxes 11 to 19 on the SA103) and, if it's wrong on occasion, who cares, as businesses that size only have to file a single cost figure in box 20 of the SA103, so HMRC won't care if some are misallocated (assuming that you haven't treated disallowable as allowable).

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By snickersinatwix
26th May 2022 09:31

So if my client currently only has a smart phone and no computer and pretty much no idea when it comes to technology, can I not claim an exemption for him from this utter nonsense on the grounds that:

1. he can't afford to buy a computer just to report his £15k income which by the time we have deducted expenses results in pretty much no tax.

2. Even if he could afford to buy a computer he has no idea how to use a computer so it would be a disaster and most definitely wont result in less errors on his return.

I am certainly planning on trying because I have quite a large number of these nonsense cases.

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Replying to snickersinatwix:
By Charlie Carne
26th May 2022 11:43

The new apps work on a smart phone, so no need for a PC if you don't have one. If they don't have a smart phone or PC, they may well fit the digitally exempted categories.

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Replying to charliecarne:
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By snickersinatwix
26th May 2022 12:02

I am aware that there are apps for smart phones but please don't tell me that someone who has NO IDEA how to use most technology can adequately keep their records on a smart phone. that is an absolute nonsense.

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Replying to snickersinatwix:
By Charlie Carne
26th May 2022 14:02

Which is why I said "if they don't have a smart phone or PC, they may well fit the digitally exempted categories."

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Replying to charliecarne:
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By Hugo Fair
26th May 2022 15:05

It's not just a matter of *having* a smart phone ... it's whether the individual understands the mobile environment (as well as the particular app) and how to control it. And that's not as many people as they'd like to think!

I know of more than one person who has clicked on various options (as prompted) during activities like the phone's Auto-cleaning routine - only to find that 6+ months of data is irrevocably lost. Backup, what backup?

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By johnjenkins
26th May 2022 10:18

Firstly, it's certainly not going to happen in April 2024.
Secondly, it's not going to be a turnover of over £10k.
Thirdly, the more high tech stuff they come out with, the more afraid people will be of using it.
Fourthly, HMRC will not have enough staff to control whatever smelly stuff that might be generated.
Richard, you can get a mortgage "in principle". Doesn't mean to say you'll get it when you go through all the "nitty gritty".

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By lordburnside
26th May 2022 10:43

Is the purpose of all this is surely to facilitate the checking of clients records. If its all online the VATman and Inspector can investigate more taxpayers from the comfort of his own desk. No doubt there is a program he will have to highlight dubious expenses, incorrect tax codes etc. Maybe highlight cash availability, fiddling etc.

Its going to be a pain and it will take a couple of year to settle in. I will not have the time to help my small clients and say 100 people sending me stuff by email every month will be a nightmare. I am working beyond my retirement age already so maybe I will get rid of some and double the fees for the others seems a plan.

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By NewACA
26th May 2022 11:24

Am I missing something here??

I have always failed to understand why accountants want to do a sole trader's tax return from a bank feed/bank account, as opposed to obtaining sales and purchases data/documentation. There are numerous issues with doing the tax return off bank transactions:

1. There is a high risk the client is not going to keep the required legal income and expense documents if you are not checking them. A bank transaction is not legal evidence from HMRCs perspective of a sale or purchase, it is rather the payment of the sales purchase, not evidence of the actual purchase/sale that might have been on a different day. However, if you the agent or client has done the bookkeeping off the invoice and purchase records, then you know the records are kept. If you do the bookkeeping off the bank, and then try to match with purchase sales invoices, that will treble the bookkeeping time - you might as well just have done it off the purchase/sales to start with. By getting the client to give you the sales/purchases info or get them to do the bookkeeping themselves off those records, you are training him/her to keep the necessary legal documentation. It ensures you have not claimed an expense without the requisite legal documentation. This makes the client safe from a £3k/year fine for not keeping proper records.

2. You are doing 25% more bookkeeping for no reason, as perhaps 25% of the bank transactions are neither income or expenses, but such things as: drawings, loans, personal items etc etc that are not required for a tax return.

3. Using bank transactions assumes you are making use of the cash-basis for the tax return. However, the cash-basis is not actually the cash-basis, but a mixture of cash and accruals accounting. HMRC doesn't want to lose money, so there are accruals adjustments that are expected to be made, even on the cash-basis. This makes it more complicated that just sticking everything on the accruals basis to start with.

4. With a bank transactions, you need to ask the client for more information: eg What has that you bought from Amazon? Can you send me the invoice for the car you purchased? All that can be avoided if you only did the tax return off the legally required documentation to start with.

5. There are times when not all the transactions are in the bank. EG: a client fills the petrol tank, go to the till and the bank card isn't working. He cannot take the petrol back out of the car, so naturally he/she has to use a different bank account to pay for it.

Now, I can understand why you need the bank transactions if the client is substantial, say a pub for example, and needs a proper P&L and Balance Sheet for commercial reasons, so that they can sell the pub one day for example, and keep track of what is owed to suppliers, but for small-fry sole traders, that is simply overkill in my opinion, and not required for a sole trader tax return. Small sole traders just want their tax returns done, not P&L and Balance sheets that neither understand nor care for. In any case, where a P&L and balance sheet is required, you would enter the sale and purchases and then the bank only after that, so you still need to do the bookkeeping firstly from the sales and purchases documentation.

All five of the above problems are avoided and the bookkeeping completed much quicker if it is done off receipts and invoices. If a trader has a lot of invoices, say 100 sales a day from a till or online sales facility, he is well within his rights according to HMRC to use a summary total of the sales for each day, either a z-reading off at till, or similar daily sales report from an online sales portal.

Can someone tell me what I am missing?

Thanks (2)
Replying to NewACA:
Glenn Martin
By Glenn Martin
26th May 2022 13:56

Your argument falls down very quickly if he does not provide you with all his sales invoices or purchase receipts. Get me tax down throw a few sales invoices away.

Coconut allows you to tag the receipt to the bank transaction very simply.

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Replying to Glennzy:
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By Hugo Fair
26th May 2022 14:59

"throw a few sales invoices away" (and presumably pocket the cash payment) ... or, in the digital world, achieve exactly the same by running a Revolut or Curve virtual account (other brands available) under a different name.
These are extremely easy to set up but don't tend to ring the same warning bells as bitcoins et al ... instant, secure & seamless - just not part of the business' digital set of records!

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Replying to Glennzy:
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By NewACA
26th May 2022 15:31

Thanks for your reply Glen.

I would imagine that a client that cannot be bothered to send all his purchases and receipts, he isn't going to be diligent at tagging every bank sale with a sales invoice and every purchase with a purchase invoice either. Equally, if the client hasn't kept the paperwork (or its digital equivalent) he is not entitled to tax relief on such expenditure in any case and so the bank transaction shouldn't be allowed on his tax return. I think a client is more likely to keep paperwork if he is told to by his accountant than go through the process of setting up a new bank account, setting up a bank feed, tagging all the transactions. only using that bank account and so forth.

Just my opinion, maybe I'm wrong.

Thanks (1)
Replying to NewACA:
Glenn Martin
By Glenn Martin
26th May 2022 16:29

Its not a case of the client been bothered you state that the only way to do accounts is to list all the sales and purchase invoices. There is no check of completeness to that unless you check against money received etc through the banking system. If he has lost a sales invoice whether by accident or deliberately how do you know its complete.

Covid has all but removed cash from the economy for most businesses. To deliver MTD for clients at a price they can afford they will have to move on what they are doing now.

I am assuming you have not looked at coconut as it has functionality to add manual cash payments etc to those from your bank feed etc and is very good.

For MTD I would have no issue with telling all clients that this is our system, you must have a business account, you must do x and y if you expect to only pay£x.

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By Charlie Carne
26th May 2022 12:27

Good article, Richard. I had a demo of Coconut this week and it looks very good. It already handles sole traders and, apparently, small landlords will also be covered very soon.

The biggest hurdle that I foresaw in moving the smaller sole trader clients to MTD was their reluctance to switch from using their personal bank account for business. Coconut (and, presumably, the others in this space) obviate that need.

As for quarterly filing under MTD, this is simple, as HMRC don't require the in-year data to be accurate*. They only require that the records be kept digitally, so using an app like these will satisfy that need. It's only the final end of period statement that needs to be accurate and that will require a similar level of review by the accountant as under the current system for filing an SA103 BUT, under MTD, the client's data will already be in an app, which will make it very much easier for us to review after the year-end than bits of paper or random emails containing various versions of an annual spreadsheet (so many of my clients send me a spreadsheet and, just after we've started working on it, they send an updated version containing items they forgot, so we have to start all over again!). I, therefore, don't foresee a big problem with MTD for clients like this, as these apps will help. The only significant obstacle is cost and I'm sure that cheaper (or even free, ad-supported) options will be released by 2024, which will suit the smaller or price-sensitive clients.

*If the client mis-categorises the data in-year (or does not get around to allocating all items by the end of each quarter), this does not make the quarterly updates invalid or risk a penalty because accuracy in-year is NOT a requirement. For accountants who argue that this makes the quarterly updates pointless, you may have a point, but you can't argue both that the work each quarter is too onerous and, at the same time, that it's not accurate enough to be useful (as that takes almost no time to file).

For many clients, the in-year figures will be so approximate that the tax estimate generated by HMRC will be almost meaningless, but so what? So long as we tell our clients not to rely on those tax estimates if they don't take care to be accurate in-year (until we review it in detail after year-end), they are in no worse a position than now. But we get digital data to work with at the year-end, so our task is easier. Coconut offers a feature whereby it generates its own very rough estimate of tax due based upon a percentage of turnover (ignoring costs). As it is the accountant that sets the level of that percentage, they can guide the client to put aside more than enough cash for their future tax bill as, for many clients that small, turnover will provide a reasonable basis for a very rough tax estimate.

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Mark Telford Chartered Accountant
By Mark Telford
26th May 2022 16:05

Another reason not to deal with clients this small.

Not worth moaning and bleating about it.

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By Peter-S
26th May 2022 17:05

So if my client issues a hand written invoice but gets said invoice paid in to his bank account, either directly or by banking a cheque or cash and then has a bank feed app to help him file quarterly he is magically keeping digital records as far as HMRC reporting requirements are concerned despite the fact that he has changed nothing in his accounting 'system'. It possibly fails the requirements of the small print but I doubt he will care. So the app is a solution to a problem that only exists because of a new penalty regime.

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Replying to Peter-S:
By Charlie Carne
26th May 2022 18:27

No. He needs to raise an invoice in the app, which will take him less time than writing a paper invoice. Only the VERY digital-phobic will find this too complicated and they will likely be excluded if they have legitimate reasons for their phobia. For everyone else, they can be trained on the basics in 10 minutes (or less).

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Replying to charliecarne:
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By Hugo Fair
27th May 2022 18:19

"Horse meet water. Water meet ... oh where's that dratted animal got to now?"

Even the MILDLY digital-phobic (and plenty who are not phobic but simply have zero interest in 'things digital') constitute a rather substantial %age of the group of taxpayers due to face MTD ITSA - see today's Ipsos report commissioned by HMRC + https://www.accountingweb.co.uk/any-answers/youre-not-on-your-own-but-th...

I'm sure you know your clients (and good luck to you), but who's going to deal with the 2m+ taxpayers who have been identified as "Capable but Disengaged" or "Cautious and Lack Confidence" or "Resistant and Less Capable" and who currently only use spreadsheets if they use any software at all?

The fear is that this isn't about whether individual agents can eke out a living (or even grow their business) ... but about a system that is both intrinsically unfair and apparently doomed to widespread non compliance.

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